LeapFrog 2004 Annual Report Download - page 90

LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
The tax provision includes accruals for possible future assessments that may result from the examination of
federal, state or international tax returns. These accruals may be adjusted if there are changes in circumstances,
such as changes in tax law, tax audits, or other factors, which may cause management to revise its estimates. The
amounts ultimately paid on any possible future assessments may differ from the amounts accrued and may result
in an increase or reduction to the effective tax rate in the year of resolution.
Comprehensive Earnings
Comprehensive earnings are comprised of gains and losses on the translation of foreign currency
denominated financial statements.
Stock-Based Compensation
The Company generally grants stock options to its employees for a fixed number of shares with an exercise
price equal to the fair value of the shares on the date of grant. As allowed under the Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the Company has
elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB 25”) and related interpretations in accounting for stock awards to employees. Accordingly, no
compensation expense is recognized in the Company’s financial statements in connection with stock options
granted to employees with exercise prices not less than fair value. Deferred compensation for options granted to
employees is determined as the difference between the deemed fair market value of the Company’s common
stock on the date options were granted and the exercise price.
Stock-based compensation arrangements to nonemployees are accounted for in accordance with SFAS 123
and EITF No. 96-18, “Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring,
or in Conjunction with Selling Goods or Services,” using a fair value approach. The compensation costs of these
arrangements are subject to remeasurement over the vesting terms as earned.
For purposes of disclosures pursuant to SFAS 123, as amended by SFAS 148, “Accounting for Stock-Based
Compensation—Transition and Disclosure,” the estimated fair value of options is amortized over the options’
vesting period. The following table illustrates the effect on net income (loss) and net income (loss) per common
share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation
(in thousands, except per share amounts):
Year Ended
December 31,
2004 2003 2002
Net income (loss) as reported .............................. $ (6,528) $72,675 $43,444
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects ............... 886 1,389 1,053
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of related
tax effects ........................................... (7,747) (6,100) (4,027)
Pro forma net income (loss) ............................... $(13,389) $67,964 $40,470
Pro forma net income (loss) per common share:
Basic ................................................. $ (0.22) $ 1.19 $ 1.02
Diluted ................................................ $ (0.22) $ 1.13 $ 0.80
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