LeapFrog 2012 Annual Report Download - page 64

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LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
acquire shares of the Company’s Class A common stock, are exercisable or convertible, as applicable, over a
period not to exceed ten years, and are most commonly assigned four-year vesting periods.
The Company is authorized to issue up to a total of 33,950 shares of Class A common stock for any of the
types of awards authorized under the 2011 EIP, 2002 EIP or NEDSAP. The Company also has an ESPP under
which it is authorized to issue up to 2,000 shares. At December 31, 2012, the remaining availability for future
grants was 9,335 for stock-based awards and 1,146 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 recorded as a non-cash charge to employee compensation expense with a
corresponding 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 assumptions underlying the calculation of grant-date fair value of the stock options using the
Black-Scholes 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 expect to 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. Effective January 2012, the Company updated the forfeiture rate to 14.6%.
The assumptions used in the Black-Scholes option valuation model and the weighted-average grant-date fair
value per share for the years ended December 31, 2012, 2011 and 2010 were as follows:
Years Ended December 31,
2012 2011 2010
Estimate of fair value for total awards using
Black-Scholes ............................. $11,711 $4,075 $2,169
Expected term (years) ......................... 4.49 4.86 5.64
Volatility .................................. 74.3% 58.5% 56.5%
Risk-free interest rate ......................... 0.7% 1.7% 2.3%
Expected dividend yield ....................... —% —% —%
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