LeapFrog 2006 Annual Report Download - page 149
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Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to publicly held
companies for compensation exceeding $1.0 million paid to certain of a company’s executive officers. The
limitation applies only to compensation that is not considered to be performance based. We received stockholder
approval in June 2004 to amend the 2002 Equity Incentive Plan to include certain provisions that will allow us to
qualify performance share grants as “performance-based” compensation under Section 162. In addition, grants of
stock options will qualify, provided that the grants have exercise prices of no less than 100% of fair market value
on the date of grant and do not exceed a calendar year limit for the executive officer that is set forth in the 2002
Equity Incentive Plan. We generally intend to grant stock options and performance shares to our executives in a
manner that satisfies the requirements for qualified performance-based compensation to avoid any disallowance
of deductions under Section 162(m).
While total cash compensation for our executives did not exceed $1.0 million for any individual executive,
the Compensation Committee believes it is appropriate for us to retain the flexibility to pay actual total cash
compensation above $1.0 million if warranted based upon exceptional company and individual performance, and
thus from time to time we may pay compensation to executives that is not deductible, including grants of time-
based restricted stock.
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