LeapFrog 2005 Annual Report Download - page 154

approved by our stockholders where such amendment requires stockholder approval under applicable law or
stock exchange requirements. The board of directors may in its sole discretion submit any other amendment to
the Director Plan for stockholder approval.
Termination or Suspension of the Director Plan. The board of directors may suspend or terminate the
Director Plan at any time. No stock awards may be granted under the Director Plan while the Director Plan is
suspended or after it is terminated.
Federal Income Tax Consequences of the Director Plan.
The following is a summary of the principal United States federal income tax consequences to participants
and LeapFrog with respect to participation in the Director Plan. This summary is not intended to be exhaustive,
and does not discuss the income tax laws of any city, state or foreign jurisdiction in which a participant may
reside.
Options.No taxable income is recognized by a participant upon the grant of a nonstatutory stock option.
Upon exercise of a nonstatutory stock option, the participant will recognize ordinary income equal to the excess,
if any, of the fair market value of the purchased shares on the exercise date over the exercise price paid for those
shares. Generally, LeapFrog will be entitled (subject to the requirement of reasonableness and the satisfaction of
a tax reporting obligation) to a corresponding income tax deduction in the tax year in which such ordinary
income is recognized by the participant. Slightly different rules may apply to optionees who are subject to
Section 16(b) of the Exchange Act.
However, if the shares acquired upon exercise of the nonstatutory stock option are unvested and subject to
repurchase by LeapFrog in the event of the participant’s termination of service prior to vesting in those shares,
the participant will not recognize any taxable income at the time of exercise, but will have to report as ordinary
income, as and when LeapFrog’s repurchase right lapses, an amount equal to the excess of (i) the fair market
value of the shares on the date the repurchase right lapses, over (ii) the exercise price paid for the shares. The
participant may, however, elect under Section 83(b) of the Code to include as ordinary income in the year of
exercise of the option an amount equal to the excess of (i) the fair market value of the purchased shares on the
exercise date, over (ii) the exercise price paid for such shares. If the Section 83(b) election is made, the
participant will not recognize any additional income as and when the repurchase right lapses.
Upon disposition of the stock, the participant will recognize a capital gain or loss equal to the difference
between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary
income upon acquisition (or vesting) of the stock. Such gain or loss will be long-term or short-term depending on
whether the stock was held for more than one year.
Restricted Stock Awards.Upon receipt of a restricted stock award, the participant will recognize ordinary
income equal to the excess, if any, of the fair market value of the shares on the date of issuance over the purchase
price, if any, paid for those shares. LeapFrog will be entitled (subject to the requirement of reasonableness and
the satisfaction of a tax reporting obligation) to a corresponding income tax deduction in the tax year in which
such ordinary income is recognized by the participant. Certain different rules may apply to recipients who are
subject to Section 16(b) of the Exchange Act.
However, if the shares issued upon the grant of a restricted stock award are unvested and subject to
repurchase by LeapFrog in the event of the participant’s termination of service prior to vesting in those shares,
the participant will not recognize any taxable income at the time of issuance, but will have to report as ordinary
income, as and when LeapFrog’s repurchase right lapses, an amount equal to the excess of (i) the fair market
value of the shares on the date the repurchase right lapses, over (ii) the purchase price, if any, paid for the shares.
The participant may, however, elect under Section 83(b) of the Code to include as ordinary income in the year of
issuance an amount equal to the excess of (x) the fair market value of the shares on the date of issuance, over
(y) the purchase price, if any, paid for such shares. If the Section 83(b) election is made, the participant will not
recognize any additional income as and when the repurchase right lapses.
43