LeapFrog 2003 Annual Report Download - page 47

Contractual Obligations
We conduct our corporate operations from leased facilities and lease some equipment under operating
leases. Generally, these have initial lease periods of three to ten years and contain provisions for renewal options
of five years at market rates. The following table summarizes our outstanding long-term contractual obligations
at December 31, 2003.
Payments Due by Period
Total
Less Than
1Year 1-3 Years 4-5 Years
More Than
5Years
(In thousands)
Operating Leases ................... $ 9,947 $4,284 $ 5,367 $296 $—
Royalty Guarantees ................. 12,477 4,503 7,912 62 —
Total ............................. $22,424 $8,787 $13,279 $358 $—
In January 2004, we and one of our subsidiaries entered into a ten-year technology license agreement with a
foreign company to jointly develop and customize our respective technologies to be combined in a platform and
related licensed products. The agreement calls for contractual payments by our subsidiary of $6.0 million in
license fees payable in 2004 and $11.0 million in advance royalties payable in 2005. Additionally, there are $1.0
million of engineering fees payable subject to attainment of specific milestones.
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. Each of these
promissory notes was paid in full in January 2003.
As of March 1, 2004, Knowledge Universe and its affiliates beneficially owned 31,636,962 shares of our
Class B common stock, which represents approximately 87% of the combined voting power of our Class A
common stock and Class B common stock. For more information, see “Risk Factors That May Affect Our
Results and Stock Price—Knowledge Universe, L.L.C., Lawrence J. Ellison, Michael R. Milken and Lowell J.
Milken, together control all stockholder voting power as well as our board of directors.”
In August 1999, we purchased a 19.9% ownership interest in Knowledge Kids Media Group, Inc., an
affiliate of Knowledge Universe, for $2.0 million. Knowledge Universe indirectly owns 80.1% of Knowledge
Kids Media Group. Knowledge Kids Media Group owns substantially all of the voting power of Knowledge Kids
Network, Inc. Sarina D. Simon, a member of our board of directors, is Chief Executive Officer of Knowledge
Kids Media Group and Knowledge Kids Network. In 1999 and 2000, we wrote off our entire investment in
Knowledge Kids Media Group. We have no obligation to provide additional funding to Knowledge Kids Media
Group, and we are not responsible for the repayment of any of the existing or future liabilities of the company.
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 $122,000, $658,000 and $1,371,000 in 2003, 2002 and
2001, respectively, in expenses for services from Knowledge Kids Network.
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
41
PART II