LeapFrog 2011 Annual Report Download - page 75

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LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
The Company is authorized to issue up to a total of 24,000 shares of Class A common stock for any of the
types of awards authorized under the 2011 EIP, 2002 EIP or 2002 Non-Employee Plan. At December 31,
2011, the remaining availability for future grants was 9,535 for stock-based awards and 1,361 for the ESPP.
Valuation of Stock-based compensation
The Company calculates employee stock-based compensation expense based on those awards ultimately
expected to vest and reduces compensation expense as necessary for estimated forfeitures. Stock-based
compensation expense is a non-cash charge to employee compensation expense and a credit to additional
paid-in capital.
Stock Options
Stock-based compensation expense is calculated based on the fair value of each award on the grant date. In
general, the fair value for stock option grants with only a service condition is estimated using the
Black-Scholes option pricing model. The fair value for stock option grants with both a service and market
condition is estimated using the Monte-Carlo simulation.
The assumptions underlying the calculation of grant date fair value of the stock options using the
Black-Sholes option pricing model comprise:
• Volatility: Expected stock price volatility is based on the Company’s historical stock prices over
the most recent period commensurate with the estimated expected term of the stock options.
• Risk-Free Interest Rate: The risk-free interest rate is based on the yield of the treasury security at
grant date with a maturity closest to the expected term of the stock option.
• Expected Term: The expected life of the options represents the period of time the options are
expected to be outstanding.
• Expected Dividend: The dividend yield is zero as the Company does not pay dividends.
• Annual Forfeiture Rate: When estimating pre-vesting forfeitures, the Company considers voluntary
termination behavior as well as potential future workforce reduction programs. Through
August 2010, the Company reflected the impact of forfeitures for stock options in expense only
when they actually occurred based on analyses showing that the majority of all stock options vested
on a monthly basis. Beginning September 2010, based on a shift in granting practice toward more
options with longer vesting periods, the Company applied a forfeiture rate of 11% based on
historical experience.
The underlying assumptions of a Monte-Carlo simulation are very similar to the Black-Scholes option pricing
model in that they are both distributions of future stock price scenarios. However, a Monte-Carlo simulation
allows for more customized modeling than the Black-Scholes formula which utilizes a few simplifying
assumptions allowing it to be a closed-end formula.
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