LeapFrog 2005 Annual Report Download - page 88

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
Stock-Based Compensation
The Company’s stock-based compensation programs include stock awards, restricted stock units,
performance-based equity awards and employee and non-employee stock options. For stock awards and
restricted stock units, the market value of the awards at the time of grant is recorded in “Deferred Compensation”
and is amortized to compensation expense on a straight-line basis over the vesting period. The vesting periods are
generally three and four years, respectively. The costs of performance-based share awards are accrued based on
achieving pre-established financial measures. Stock-based compensation arrangements to non-employees are
accounted for using a fair value approach. The compensation costs of these arrangements are subject to
re-measurement over the vesting terms as earned. The Company also grants stock options to certain of its
employees for a fixed number of shares with an exercise price generally equal to the fair value of the shares on
the date of grant. The Company uses the intrinsic value method to account for stock options. Accordingly,
compensation expense is only recorded for those stock option grants whose exercise price is less than the fair
value of the shares on the date of the grant.
The Company recorded $11,692 and $1,523 in 2005 and 2004, respectively, in deferred compensation for
new awards under its stock-based compensation programs. The Company recognized $2,685, $2,116 and $2,203
of expense for stock-based compensation during the years ended December 31, 2005, 2004 and 2003
respectively.
Effective June 1, 2005, the compensation committee of the board of directors unanimously approved the
acceleration of the vesting of out-of-the-money, unvested stock options held by then-current employees. The
acceleration only applied to those options with an exercise price of $17.43 per share or higher, and granted on or
before October 1, 2004. The weighted average strike price of the accelerated options was $24.90 and the accelerated
options represented 28.5% of then outstanding stock options. The closing price of Class A common stock on June 1,
2005 was $11.07 per share. The decision to accelerate vesting of these options was made to avoid recognizing the
related compensation cost in the consolidated statement of income in future financial statements upon the
effectiveness of SFAS 123R. As of June 1, 2005, the Company estimates that the maximum future pre-tax
compensation expense that would have been recorded in the consolidated statement of operations and instead will
not be recorded, based on the implementation date for SFAS 123R of January 1, 2006, is approximately
$15.7 million. The impact of this acceleration is reflected in the pro forma footnote disclosure below.
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 proforma impact of the stock-based compensation determined under the fair value method, as
presented below, has been changed for 2004 and 2003 to correct errors identified in the original calculations.
This change resulted in an increase of $1,791 in proforma net loss for the year ended December 31, 2004 and a
decrease of $1,933 in proforma net income for the year ended December 31, 2003.
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