LeapFrog 2010 Annual Report Download - page 128

Restricted Stock Awards
Generally, the recipient of a restricted stock award will recognize ordinary compensation income at the time
the stock is received equal to the excess, if any, of the fair market value of the stock received over any amount
paid by the recipient in exchange for the stock. If, however, the stock is not vested when it is received (for
example, if the employee is required to work for a period of time in order to have the right to sell the stock), the
recipient generally will not recognize income until the stock becomes vested, at which time the recipient will
recognize ordinary compensation income equal to the excess, if any, of the fair market value of the stock on the
date it becomes vested over any amount paid by the recipient in exchange for the stock. A recipient may,
however, file an election with the Internal Revenue Service, within 30 days of his or her receipt of the stock
award, to recognize ordinary compensation income, as of the date the recipient receives the award, equal to the
excess, if any, of the fair market value of the stock on the date the award is granted over any amount paid by the
recipient in exchange for the stock.
The recipient’s basis for the determination of gain or loss upon the subsequent disposition of shares acquired
from stock awards will be the amount paid for such shares plus any ordinary income recognized either when the
stock is received or when the stock becomes vested.
Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Tax Code and the
satisfaction of a tax reporting obligation, we will generally be entitled to a tax deduction equal to the taxable
ordinary income realized by the recipient of the stock award.
Restricted Stock Units
Generally, no taxable income is recognized upon receipt of a restricted stock unit award. The participant
will recognize ordinary income in the year in which the shares subject to that unit are actually issued to the
participant in an amount equal to the fair market value of the shares on the date of issuance. Generally, we will
be entitled to an income tax deduction equal to the amount of ordinary income recognized by the participant at
the time the shares are issued.
Stock Appreciation Rights
Generally, stock appreciation rights are subject to similar tax rules as nonstatutory stock options. This
means that, generally, no taxable income is realized upon the receipt of a stock appreciation right. Upon exercise
of the stock appreciation right, the fair market value of the shares (or cash in lieu of shares) received, less any
strike price paid for such shares, is recognized as ordinary income to the participant in the year of such exercise.
Generally, with respect to employees, we are required to withhold from the payment made on exercise of the
stock appreciation right or from regular wages or supplemental wage payments an amount based on the ordinary
income recognized. We will generally be entitled to an income tax deduction equal to the amount of ordinary
income recognized by the participant.
Section 162(m)
Compensation of persons who are “covered employees” of LeapFrof is subject to the tax deduction limits of
Section 162(m) of the Tax Code. Awards that qualify as “performance-based compensation” are exempt from the
limitations of Section 162(m), thereby permitting us to claim the full federal tax deduction otherwise allowed for
such compensation. The 2011 EIP is intended to enable us to grant awards that will be exempt from the
deduction limits of Section 162(m). Under Section 162(m), compensation attributable to stock options and stock
appreciation rights will qualify as performance-based compensation if, among other requirements, (i) such
awards are approved by a compensation committee composed solely of “outside directors,” (ii) the plan contains
a per-employee limitation on the number of shares for which such awards may be granted during a specified
period, (iii) the per-employee limitation is approved by the stockholders, and (iv) 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
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