LeapFrog 2002 Annual Report Download - page 61

entitled to ten votes per share on all matters to be voted on by stockholders. The holders of our Class B common
stock have various additional voting rights, including the right to approve the issuance of any additional shares of
Class B common stock and any amendment of our certificate of incorporation that adversely affects the rights of
our Class B common stock. The difference in the voting rights of our Class A common stock and Class B
common stock could diminish the value of our Class A common stock to the extent that investors or any potential
future purchasers of our Class A common stock attribute value to the superior voting or other rights of our Class
B common stock.
Provisions in our charter documents and Delaware law may delay or prevent an acquisition of our
company, which could decrease the value of our Class A common stock.
Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it harder
for a third party to acquire us without the consent of our board of directors. These provisions include limitations
on actions by our stockholders by written consent and the voting power associated with our Class B common
stock. In addition, our board of directors has the right to issue preferred stock without stockholder approval,
which could be used by our board of directors to effect a rights plan or “poison pill” that could dilute the stock
ownership of a potential hostile acquirer and may have the effect of delaying, discouraging or preventing an
acquisition of our company. Delaware law also imposes some restrictions on mergers and other business
combinations between us and any holder of 15% or more of our outstanding voting stock. Although we believe
these provisions provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate
with our board of directors, these provisions apply even if the offer may be considered beneficial by some
stockholders.
Our stockholders may experience significant additional dilution upon the exercise of options.
As of December 31, 2002, there were outstanding under our equity incentive plans options to purchase a
total of approximately 10.2 million shares of Class A common stock.
Contemporaneous with our initial public offering, we registered 17,407,983 shares of Class A common
stock issuable under our equity incentive plans, which includes the shares issuable upon exercise of all of our
options outstanding as of the date of our initial public offering as well as options to be granted in the future. To
the extent we issue shares upon the exercise of any of these options, investors in our Class A common stock will
experience additional dilution.
Sales of our shares could negatively affect the market price of our stock.
Sales of substantial amounts of shares in the public market could harm the market price of our Class A
common stock. We had approximately 55.9 million shares of Class A common stock outstanding as of March 11,
2003, assuming the conversion of all outstanding Class B common stock into Class A common stock, and
assuming no exercise of our outstanding options. Of these shares, substantially all of the 10.35 million shares
sold in our initial public offering, which includes the underwriters’ over-allotment shares, and 8.3 million shares
that have entered the public float since our initial public offering, are freely tradable without restrictions or
further registration under the Securities Act of 1933. The remaining 37.2 million shares are restricted securities
as defined by Rule 144 adopted under the Securities Act. These shares may be sold in the public market after the
date of our initial public offering only if registered or if they qualify for an exemption from registration under
Rule 144 or Rule 701 adopted under the Securities Act. We cannot predict the effect that future sales made under
Rule 144, Rule 701 or otherwise will have on the market price of our Class A common stock.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We develop products in the United States and market our products primarily in North America and, to a
lesser extent, in Europe and the rest of the world. As a result, our financial results could be affected by factors
such as changes in foreign currency rates or weak economic conditions in foreign markets. Because almost all of
56