LeapFrog 2008 Annual Report Download - page 87

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LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
Equity Anticipations Securities (“LEAPS”), with expiration dates as far as three years in the future, and
competitor volatility. At June 30, 2008, management believed it now had sufficient historical financial market
data to calculate volatility based on LeapFrog market data only. As of July 1, 2008, competitor volatility was
dropped from the estimate and expected volatility was increased from 40% to 45%, based on management’s
evaluation of all the relevant factors.
For all three fiscal years, the calculation of the expected life of the awards was based on a simplified
calculation of expected life as explained in SAB 107 and SAB 110, as management did not believe it had
sufficient reliable historical data about employee exercise behavior to calculate the expected term due to
reductions in force.
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 reflects the impact of forfeitures for stock options in expense only when they actually occur
based on analyses showing that almost all stock options vest on a monthly basis. With regard to restricted stock
units, a forfeiture assumption of approximately 20% is currently being used. A zero forfeiture rate is used for
restricted stock awards. These assumptions reflect historical and expected future forfeiture rates.
Stock-based compensation expense related to RSUs and RSAs is calculated based on the market price of
LeapFrog’s common stock on the grant date. The total market value of restricted stock unit and stock awards
granted in 2008, 2007 and 2006 as measured on the grant date was $2,666, $5,465 and $6,637 in 2008, 2007 and
2006, respectively.
For the years ended December 31, 2008, 2007 and 2006, stock option exercises, net of income taxes paid by
the Company on restricted stock unit releases, used $216 in cash in 2008, while in 2007 and 2006 this activity
provided $1,915 and $4,059 in cash proceeds, respectively.
The activity in the Company’s stock option plan for the years ended December 31, 2008 and 2007 was as
follows:
Number
of
Shares
Weighted
Average
Exercise
Price
Average
Remaining
Contractual
Life in
Years
Aggregate
Intrinsic
Value
Outstanding at December 31, 2006 .......................... 9,130 $14.23
Grants .................................................. 1,733 8.34
Exercises ............................................... (212) 9.99
Retired or forfeited ........................................ (1,558) 16.48
Outstanding at December 31, 2007 .......................... 9,093 12.92 8.00 $—
Grants .................................................. 4,973 10.12
Exercises ............................................... (77) 5.34
Retired or forfeited ........................................ (5,870) 13.36
Outstanding at December 31, 2008 .......................... 8,119 $10.96 7.55 $—
Vested and exercisable at December 31, 2008 ................. 2,180 $13.66 6.53 $—
Vested and exercisable at December 31, 2007 ................. 4,164 $15.32 6.99 $—
F-29