LeapFrog 2005 Annual Report Download - page 89

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LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
The following table illustrates the effect on net income (loss) and net income (loss) per common share if the
Company 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,
2005 2004 2003
Net income (loss) as reported ............................. $17,500 $ (6,528) $72,675
Stock-based employee compensation expense included in reported
net income, net of related tax effects ...................... 1,617 886 1,389
Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax
effects .............................................. (5,931) (9,538) (8,033)
Additional stock based compensation expenses provided by the
acceleration of options, net of related tax effects ............ (11,636) — —
Pro forma net income (loss) .............................. $ 1,550 $(15,180) $66,031
Net income (loss) per common share as reported:
Basic ................................................ $ 0.28 $ (0.11) $ 1.27
Diluted ............................................... $ 0.28 $ (0.11) $ 1.20
Pro forma net income (loss) per common share:
Basic ................................................ $ 0.03 $ (0.25) $ 1.15
Diluted ............................................... $ 0.02 $ (0.25) $ 1.09
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,
2005 2004 2003
Expected life (years) .............................................. 4.0 4.0 4.0
Risk-free interest rate ............................................. 4.0% 3.1% 2.5%
Volatility factor ................................................. 39.38% 61.0% 68.7%
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 the Company’s employee stock options.
Prior to May 2, 2005, the Company used historic volatility in determining the value of the stock options. On
May 2, 2005, the Chicago Board of Options Exchange began trading options on the Company’s stock. Since
then, the Company has used the implied market volatility of the exchange-traded options to determine the value
of options. As a result of the change, the volatility factor and resulting determined value of the Company’s stock
options declined as compared to prior years.
F-13