LeapFrog 2008 Annual Report Download - page 85

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LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
inducement grants awarded to the Company’s Chief Executive Officer outside of the Company’s Plans upon his
joining the Company. Option holders eligible to participate in the Program tendered, and the Company accepted for
cancellation, eligible options to purchase an aggregate of 4,936 shares of the Company’s Class A common stock,
and issued stock options to purchase 3,669 shares of the Company’s Class A common stock in exchange. In
accordance with the terms of the Program, the number of shares subject to each new option grant was determined
using an exchange ratio designed to result in the fair value of the new option grant (at the time of grant) being equal
to the fair value of the eligible option grant tendered for exchange (at the time immediately prior to cancellation of
the eligible option). Accordingly, the Company did not incur any additional stock-based compensation expense
related to the Program.
The Company is authorized to issue up to a total of 24,000 shares of Class A common stock for any of the
types of awards authorized under the Plans. At December 31, 2008 the remaining available for future grants was
4,866 for stock-based awards and 1,433 for the ESPP.
The Company accounts for stock-based compensation in accordance with the provisions of SFAS 123(R) as
follows:
Stock Options:
• The fair value of each stock option granted is estimated on the date of the grant using the Black-
Scholes-Merton option-pricing model (“valuation model”). The total grant date fair value is recognized
over the vesting period of the options on a straight-line basis.
• The assumptions underlying the calculation of grant date fair value of the stock options comprise:
• The weighted-average assumptions for the expected life and the expected stock price volatility over
the expected life used in the model require the exercise of judgment. The expected life of the
options represent the period of time the options are expected to be outstanding. The Company
calculates expected life based on the guidance provided in the SEC Staff Accounting Bulletin
(“SAB”) No. 107—“Share-Based Payment” as the Company does not yet have sufficient historical
data on exercise behavior, post-vesting termination patterns, options outstanding and future
expected exercise behavior.
• Expected stock price volatility is based on a consideration of our stock’s historical and implied
volatilities. The risk-free interest rate used in the model is based on the United States Treasury yield
curve in effect at the time of grant with a term equal to the expected life of the option. The Company
calculates employee stock-based compensation expense based on awards ultimately expected to vest
and reduces compensation expense as necessary for estimated forfeitures. 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.
LeapFrog management reviews and updates its estimates of expected life, volatility and forfeiture
rates quarterly and adjusts the valuation model as necessary.
• The risk-free interest rate is based on the yield of the treasury security at grant date with a maturity
closest to the expected term of the stock option.
• The dividend yield is zero as the Company does not pay dividends.
F-27