LeapFrog 2003 Annual Report Download - page 130

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In 2000, we extended loans to four of our current executive officers for the purpose of purchasing stock
from us and paying associated expenses. The loans were evidenced by full recourse promissory notes bearing
interest at an annual rate of 6.62% and were due on the earlier of (1) December 31, 2006 or (2) ten days
following the later of an initial public offering or the expiration of the applicable lock-up period. The notes were
secured by the shares of Class A common stock issued in exchange for the notes. The amount of these
promissory notes exceeded the purchase price of the underlying stock by an amount necessary to cover the
estimated income taxes payable by the executive officer in connection with the stock purchases. We received
promissory notes from the following executive officers:
Name of Debtor Date of Promissory Note
Shares of Class A
Common Stock Held
By Us As Security Principal Amount of Note
Michael C. Wood ...................... June 30, 2000 609,756 $1,756,097
Robert W. Lally ....................... July 5, 2000 304,878 $ 878,049
Timothy M. Bender .................... July 6, 2000 152,440 $ 439,027
L. James Marggraff .................... August 1, 2000 235,285 $ 677,621
Each of these promissory notes was paid in full in January 2003.
In March 2001, we entered into an agreement with Knowledge Kids Network, Inc., in which Knowledge
Kids Network agreed to develop content and provide technical services in connection with LeapPad interactive
books. Sarina D. Simon, a member of our board of directors, is Chief Executive Officer of Knowledge Kids
Network. In 2003, we paid Knowledge Kids Network an aggregate sum of $122,000 in fees and costs under this
agreement. We had no accounts payable to Knowledge Kids Network at December 31, 2003.
Since September 1997, we have participated in health and welfare plans established by Knowledge Universe
and administered by Affinity Squared, Inc., which is an affiliate of Knowledge Universe. Knowledge Universe is
jointly controlled by Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken, who each own of record or
beneficially more than five percent of our voting securities. In 2003, we paid $201,000 to Affinity Squared in
fees and costs.
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. Accordingly, we have not filed separate income tax returns or paid income taxes in
those states, and those functions have been performed by another Knowledge Universe affiliate on behalf of all
members of the group. In July 2002, we entered into a tax sharing agreement with Knowledge Universe, Inc., a
Knowledge Universe affiliate, formalizing this arrangement. Under the agreement, Knowledge Universe, Inc.
agreed to prepare and file combined income tax returns in the relevant states and to pay any income taxes the
group may owe to such states, and we agreed to pay Knowledge Universe, Inc. a cash amount equal to what our
income tax liability to the relevant states, reduced to reflect the lost tax benefit, if any, for state taxes paid on our
federal tax return, would have been if we had been a stand-alone taxpayer. In 2003, we made payments to
Knowledge Universe, Inc. totaling $3,590,000 pursuant to the tax sharing agreement for the 2002, 2001 and prior
tax years. The liabilities computed under the tax sharing agreement were $0 in 2003, $2.7 million in 2002 and
$79,000 in 2001. In March 2004, Knowledge Universe notified us that as of April 2003, we were no longer a
“unitary” group of taxpayers due to Knowledge Universe no longer having voting control over us as of April
2003. We will be included in the combined state income tax returns filed by Knowledge Universe through April
2003. For all subsequent periods we will be filing our own state income tax returns.
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 also the transfer agent for our
Class B common stock. Stanley E. Maron, our assistant secretary and a member of our board of directors, is a
partner of Maron & Sandler. In 2003, we paid Maron & Sandler $6,000 for legal services rendered to us.
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