LeapFrog 2010 Annual Report Download - page 159
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Tax and Accounting Considerations
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to a public reporting
company for compensation exceeding $1 million paid to its chief executive officer and its three other most
highly-compensated executive officers (other than its chief financial officer). This limitation applies only to
compensation that is not considered to be “performance-based.”
Our 2002 Equity Incentive Plan includes various provisions designed to allow us to qualify stock options
and other equity awards as “performance-based” compensation under Section 162(m), including a limitation on
the maximum number of shares subject to awards that may be granted to an individual under the plan in any one
year. Our 2002 Equity Incentive Plan currently includes a limit of 3,500,000 shares as the maximum number of
shares subject to awards that may be granted to an individual under the plan in any one year. Generally, we
intend to grant stock options to our executives in a manner that satisfies the requirements for “performance-
based” compensation to avoid any deduction disallowance for these awards under Section 162(m).
The compensation committee believes that it is appropriate for us to retain the flexibility to pay
compensation that is not necessarily deductible if it deems such compensation to be in the best interests of our
company and stockholders. Accordingly, from time to time, we may pay compensation to our executives that is
not deductible, including cash bonuses and equity awards.
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