LeapFrog 2006 Annual Report Download - page 40

intangible assets with indefinite lives for impairment during the fourth quarter by comparing their carrying values
to their estimated fair values. As a result of this assessment, we determined that no adjustments were necessary to
the stated values.
Intangible assets with other than indefinite lives include patents, trademarks and licenses, one of which is a
ten-year technology license agreement entered into in January 2005 to jointly develop and customize our optical
scanning technology. The determination of related useful lives and whether the intangible assets are impaired
involves significant judgment. Changes in strategy or market conditions could significantly impact these
judgments and require that adjustments be recorded to asset balances. We review intangible assets, as well as
other long-lived assets, for impairment at least annually or whenever events or circumstances indicate that the
carrying value may not be fully recoverable.
Stock-Based Compensation
At December 31, 2006, we had stock-based compensation plans for employees and nonemployee directors
which authorized the granting of various stock-based incentives including restricted stock, restricted stock units
and stock options. The vesting periods for restricted stock and restricted stock units are generally three and four
years, respectively. We also grant stock options to certain of our 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. These options generally vest
over a four-year period.
Prior to January 1, 2006, we accounted for the stock-based compensation plans under the measurement and
recognition provisions of APB Opinion No.25, “Accounting for Stock Issued to Employees,” and related
Interpretations, permitted under Statement of Financial Accounting Standard No. 123, “Accounting for Stock-
Based Compensation” (“SFAS 123”). As a result, stock-based compensation was included as a pro forma
disclosure in the Notes to the financial statements.
Effective, January 1, 2006, we adopted the recognition provisions of Statement of Financial Accounting
Standard No. 123 (R), “Share-Based Compensation” (“SFAS 123(R)”), using the modified-prospective transition
method. Under this transition method, compensation cost in 2006 included the portion vesting in the period for
(1) all share-based payments granted prior to, but not vested, as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123, and (2) all share-based payments
granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R). Results for the prior periods have not been restated.
The fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes
option-pricing model. The total grant date fair value is recognized over the vesting period of the options on a
straight-line basis. The weighted-average assumptions for the expected life and the expected stock price volatility
used in the model require the exercise of judgment. The risk-free interest rate used in the model is based on the
assumed expected life. The expected life of the options represent the period of time the options are expected to be
outstanding and is based on the guidance provided in the SEC Staff Accounting Bulletin No. 107 on Share-Based
Payment. Expected stock price volatility is based on a consideration of our stock’s historical and implied volatilities
as well as the volatilities of other public entities in our industry. The risk–free interest rate used in the model is
based on the U.S. Treasury yield curve in effect at the time of grant and has a term equal to the expected life.
Restricted stock awards and restricted stock units are payable in shares of our Class A common stock. The
fair value of each restricted stock or unit is equal to the closing market price of our stock on the trading day
immediately prior to the date of grant. The grant date fair value is recognized in income over the vesting period
of these stock-based awards. The cost of our performance-based stock awards is expensed based on achieving
pre-established financial measures, including certain stock price milestones. We did not achieve the related
financial goals in 2004, 2005, and 2006, resulting in cancellation of the associated share grants. 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.
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