LeapFrog 2002 Annual Report Download - page 49

and Ubiquity became our indirect wholly owned subsidiary upon the execution of the quitclaim by Knowledge
Kids. As we provided the financing for the development efforts of Ubiquity, the funded amounts totaling $1.9
million in 2001 and $1.8 million in 2000 have been classified as research and development in the accompanying
statement of operations.
For federal income tax purposes we file a separate federal income tax return. Due to our status as part of a
related taxpayer controlled group with Knowledge Universe, Inc., certain tax benefits are limited. Since 1998, we
and certain other Knowledge Universe affiliates have filed combined state income tax returns in California and
other states in which we have been deemed to constitute a “unitary” group of taxpayers under applicable state
laws. In July 2002, we entered into a tax sharing agreement with Knowledge Universe, Inc. with respect to
certain state tax matters. In accordance with the agreement, we pay Knowledge Universe, Inc. amounts equal to
what our liability would have been if we had been a stand-alone taxpayer. The liabilities computed under the tax
sharing agreement for 2002, 2001, and 2000 and prior years, were $2.5 million, $1.1 million, and $0.3 million,
respectively. As of December 31, 2002, we had a payable to Knowledge Universe, Inc. of approximately $3.6
million related to the tax sharing agreement. See “Consolidated Financial Statements—Note 13. Income Taxes.”
The law firm of Maron & Sandler served as our primary outside general counsel from August, 1997 through
July 2002 and they continue to provide legal services to us. Maron & Sandler is the transfer agent for our Class B
common stock. Stanley E. Maron, our corporate secretary and a member of the Board, is a partner of Maron &
Sandler. In 2002, 2001 and 2000, we paid Maron & Sandler $320,000, $222,000 and $131,000, respectively, for
legal services rendered to us. In addition, Mr. Maron and other attorneys of Maron & Sandler hold interests in an
entity that holds non-voting units of a limited liability company that holds an equity interest in Knowledge
Universe. These non-voting units amount to a less than 1% economic interest in Knowledge Universe.
In 2002, 2001 and 2000 we purchased software products and support services from Oracle Corporation
totaling $280,000, $137,000 and $62,000, respectively. Lawrence J. Ellison, the Chairman and Chief Executive
Officer of Oracle Corporation, may be deemed to have or share the power to direct the voting and disposition,
and therefore to have beneficial ownership, of any shares of our capital stock owned directly or indirectly by
Knowledge Universe. Jeffrey Berg, a member of our board of directors, serves on the board of directors of Oracle
Corporation.
Knowledge Universe IT, an affiliate of Knowledge Universe, provided information management services to
us. In 2002, 2001, and 2000, $0, $83,000 and $52,000, respectively, was incurred by us for services provided by
Knowledge Universe IT.
Affinity Squared, Inc., an affiliate of Knowledge Universe, provides health and welfare plan administration
services to us. In 2002, 2001 and 2000, $267,000, $414,400 and $0, respectively, was incurred by us for services
provided by Affinity Squared, Inc.
In August 2000, we entered into a cross-marketing agreement with Knowledge Kids Network, in which we
have an indirect minority ownership interest. Knowledge Kids Network is an affiliate of Knowledge Universe.
Under this agreement, we agreed to insert promotional materials of and references for Knowledge Kids Network
in its product packages, promotional advertisements and website in exchange for various placements on and
referrals from Knowledge Kids Network’s KidsEdge.com website. No value was recognized from the advertising
barter transaction, as the fair value of the advertising surrendered in the transaction was not determinable.
Historically, we have not entered into such transactions for cash or other consideration.
In March 2001, we entered into an agreement with Knowledge Kids Network, in which Knowledge Kids
Network, an affiliate of Knowledge Universe, agreed to develop content and provide technical services in
connection with LeapPad interactive books. We incurred $658,000 and $1,371,000 in 2002 and 2001,
respectively, in expenses for services from Knowledge Kids Network.
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