LeapFrog 2003 Annual Report Download - page 58

Knowledge Universe to build, through a combination of internal development and acquisitions, leading
companies in areas relating to education, technology and career management and the improvement of individual
and corporate performance. Knowledge Universe has formed, invested in or acquired, and in the future may
form, invest in or acquire, other businesses that are involved in these and related areas, which businesses may be
operated under the control of Knowledge Universe independently of us. Conflicts of interest between Knowledge
Universe and its controlling owners and other affiliates and us may arise, and such conflicts of interest may not
be resolved in a manner favorable to us, including potential competitive business activities, corporate
opportunities, indemnity arrangements, registration rights, sales or distributions by Knowledge Universe or its
affiliates of our common stock and the exercise by Knowledge Universe and its controlling owners of their
ability to control our management and affairs. Our certificate of incorporation does not contain any provisions
designed to facilitate resolution of actual or potential conflicts of interest, or to ensure that potential business
opportunities that may become available to both Knowledge Universe or its other affiliates and us will be
reserved for or made available to us. Pertinent provisions of law will govern any such matters if they arise.
The limited voting rights of our Class A common stock could negatively affect its attractiveness to
investors and its liquidity and, as a result, its market value.
The holders of our Class A and Class B common stock generally have identical rights, except that holders of
our Class A common stock are entitled to one vote per share and holders of our Class B common stock are
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
Bcommon 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, 2003, there were outstanding under our equity incentive plans options to purchase a
total of approximately 6.5 million shares of Class A common stock. Contemporaneous with our July 2002 initial
public offering, we registered approximately 17.4 million 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.
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