LeapFrog 2004 Annual Report Download - page 91

LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing
model. The following weighted average assumptions were used:
Year Ended
December 31,
2004 2003 2002
Expected life (years) ....................................... 4.0 4.0 4.0
Risk-free interest rate ...................................... 3.1% 2.5% 4.4%
Volatility factor .......................................... 61.0% 68.7% 70.0%
Dividend yield ........................................... 0% 0% 0%
Option valuation models require the input of highly subjective assumptions. Because the Company’s
employee stock options have characteristics significantly different from those of traded options, and because
changes in the subjective assumptions can materially affect the fair value estimate, in management’s opinion the
existing models do not necessarily provide a reliable single measure of the fair value of its employee stock
options.
The weighted-average fair value of options granted, which is the value assigned to the options under this
disclosure policy for December 31, 2004, 2003 and 2002 was $10.86, $15.66, and $7.33 per share, respectively.
Impairment of Long-Lived Assets Other Than Goodwill
Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. Recoverability of assets is measured
by comparison of the carrying amount of the asset to the net undiscounted future cash flows expected to be
generated from the asset. If the future undiscounted cash flows are not sufficient to recover the carrying value of
the assets, the assets’ carrying value is adjusted to fair value. The Company regularly evaluates its long-lived
assets for indicators of possible impairment.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R requires
employee stock options and rights to purchase shares under stock participation plans to be accounted for under
the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method
prescribed by APB Opinion No. 25, and allowed under the original provisions of SFAS No. 123. SFAS No. 123R
requires the use of an option pricing model for estimating fair value, which is amortized to expense over the
service periods. The requirements of SFAS No. 123R are effective for fiscal periods beginning after June 15,
2005. SFAS No. 123R allows for either prospective recognition of compensation expense or retrospective
recognition, which may be back to the original issuance of SFAS No. 123 or only to interim periods in the year of
adoption. The new standard will have a material impact on the amount of earnings we report for interim periods
beginning after June 15, 2005. We are currently determining the impact that SFAS No. 123R will have on our
results of operations and financial position for 2005 and beyond. We are currently evaluating the transition
methods.
In November 2004, FASB issued FAS 151 “Inventory costs.” FAS 151 clarifies the accounting for abnormal
amounts of idle facility expense, freight handling costs, and waste material (spoilage). The statement requires
that those items be recognized as current-period charges regardless of whether they meet the criterion of “so
abnormal.” In addition, the statement requires that allocation of fixed production overheads to the costs of
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