LeapFrog 2006 Annual Report Download - page 122

Potential Limitation on Company Deductions. Section 162(m) of the Code denies a deduction to any
publicly held corporation for compensation paid to certain covered employees in a taxable year to the extent that
compensation exceeds $1 million for a covered employee. It is possible that compensation attributable to stock
awards granted in the future under the Equity Plan, when combined with all other types of compensation received
by a covered employee from us, may cause this limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified “performance-based compensation,” are disregarded for
purposes of the deduction limitation. In accordance with Treasury Regulations issued under Section 162(m) of
the Code, compensation attributable to stock options and stock appreciation rights will qualify as performance-
based compensation if such awards are granted by a compensation committee comprised solely of “outside
directors” and the plan contains a per-employee limitation on the number of shares for which such awards may
be granted during a specified period, the per-employee limitation is approved by the stockholders, and the
exercise or strike price of the award is no less than the fair market value of the stock on the date of grant.
Compensation attributable to stock options or stock appreciation rights with exercise or strike prices less
than fair market value on the date of grant, stock bonus awards, restricted stock awards and restricted stock unit
awards will qualify as performance-based compensation under the Treasury Regulations issued under
Section 162(m) only if (i) the award is granted by a committee comprised solely of outside directors, (ii) the
award is granted or becomes vested (or exercisable) only upon the achievement of an objective performance goal
established in writing by the committee while the outcome is substantially uncertain, (iii) the committee certifies
in writing prior to the granting or vesting (or exercisability) of the award that the performance goal has been
satisfied and (iv) prior to the granting or vesting (or exercisability) of the award, stockholders have approved the
material terms of the award (including the class of employees eligible for such award, the business criteria on
which the performance goal is based, and the maximum amount, or formula used to calculate the amount,
payable upon attainment of the performance goal).
EQUITY COMPENSATION PLAN INFORMATION
The following table shows certain information concerning our Class A common stock to be issued in
connection with our Equity Plan, our Director Plan and our Employee Stock Purchase Plan as of December 31,
2006:
Plan Category
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)(1)
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities reflected
in column (a))
(c)
Equity compensation plans approved by
security holders ...................... 9,741,063(2) $13.66 3,555,556(3)
Equity compensation plans not approved by
security holders ...................... 650,000 $15.90 —
TOTAL .............................. 10,391,063 $13.80 3,555,556
(1) Does not include exercise price for performance-based stock awards as such awards do not have an exercise
price.
(2) Includes 166,395 performance-based stock awards granted under our Equity Plan, which may be issued if
certain performance measures are met. Currently none of the awards are vested.
(3) Includes 1,239,564 shares reserved for issuance under our Equity Plan, 807,778 shares reserved for issuance
under our Director Plan and 1,508,214 shares reserved for issuance under our 2002 Employee Stock
Purchase Plan.
Recommendation of the Board of Directors
The Board of Directors Recommends A Vote in Favor of Proposal Two.
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