LeapFrog 2010 Annual Report Download - page 75

LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
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, 2010, the remaining available for future grants was 3,558
for stock-based awards and 1,391 for the ESPP.
Valuation of Stock-based compensation
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
expense is a non-cash charge to employee compensation expense and a credit to additional paid-in capital.
Stock Options:
Stock-based compensation expense is calculated based on the fair value of each award on the grant date. In
general, the fair value for stock option grants with only a service condition is estimated using the Black-Scholes
option pricing model. The fair value for stock option grants with both a service and market condition is estimated
using the Monte-Carlo simulation.
The assumptions underlying the calculation of grant date fair value of the stock options using the Black-Sholes
option pricing model comprise:
• Volatility: Expected stock price volatility is based on the Company’s historical stock prices over the
most recent period commensurate with the estimated expected term of the stock options.
• Risk-Free Interest Rate: 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.
• Expected Term: The expected life of the options represents the period of time the options are expected
to be outstanding. Due to reductions in force, the Company does not yet have sufficient reliable
historical data on exercise behavior, post-vesting termination patterns, options outstanding and future
expected exercise behavior, and, as a result, it calculates expected life using a simplified method.
• Expected Dividend: The dividend yield is zero as the Company does not pay dividends.
• Annual Forfeiture Rate: When estimating pre-vesting forfeitures, the Company considers voluntary
termination behavior as well as potential future workforce reduction programs. Through August 2010,
the Company reflected the impact of forfeitures for stock options in expense only when they actually
occurred based on analyses showing that the majority of all stock options vested on a monthly basis.
Beginning September 2010, based on a shift in granting practice toward more options with longer
vesting periods, the Company applied a forfeiture rate of 11% based on historical experience.
The underlying assumptions of a Monte-Carlo simulation are very similar to the Black-Scholes option pricing
model in that they are both distributions of future stock price scenarios. However, a Monte-Carlo simulation
allows for more customized modeling than the Black-Scholes formula which utilizes a few simplifying
assumptions allowing it to be a closed-end formula.
65