LeapFrog 2004 Annual Report Download - page 149

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We are reporting the following related party transactions that involve Knowledge Universe, LLC and
Lawrence J. Ellison, as we were a subsidiary of Knowledge Universe in 2002 and through April 2003. From April
2003 through April 2004, Lawrence J. Ellison and entities controlled by him, Michael R. Milken, Lowell J. Milken,
and Knowledge Universe (which is controlled by Messrs. M. Milken, L. Milken and Ellison) and its affiliates
owned a majority of our voting shares. From April 2004, we have been a subsidiary of Mollusk Holdings, LLC, an
entity controlled by Lawrence J. Ellison, which owns a majority of our voting shares. In April 2004, Knowledge
Universe, LLC changed its name to “KU LLC” and in October 2004, KU LLC changed its name to “Krest LLC.”
• In 2004 we purchased software products and support services from Oracle Corporation totaling $406,000.
As of December 31, 2004, Lawrence J. Ellison, the Chief Executive Office 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 approximately 16,750,000 shares of our Class B common stock, which represents
approximately 54% of the combined voting power of our Class A common stock and Class B common
stock. For a more complete discussion of Mr. Ellison’s beneficial ownership of our common stock, see
“Security Ownership of Certain Beneficial Owners and Management.” Jeffrey Berg, a former member of
our board of directors who resigned in February 2005, serves on the board of directors of Oracle
Corporation.
• In August 1999, we purchased a 19.9% ownership interest in Knowledge Kids Media Group, Inc., an
affiliate of Krest LLC, for $2.0 million. Krest LLC indirectly owned 80.1% of Knowledge Kids Media
Group. Knowledge Kids Media Group owned substantially all of the voting power of Knowledge Kids
Network, Inc. Sarina D. Simon, a member of our board of directors until June 2004, was Chief Executive
Officer of Knowledge Kids Media Group and Knowledge Kids Network from January 1999 to June 2004.
In 1999 and 2000, we wrote off our entire investment in Knowledge Kids Media Group. Knowledge Kids
Media Group was dissolved in August 2004.
• In June 2004, we entered into an asset purchase agreement with and purchased certain assets from
Knowledge Kids Network, an affiliate of Krest LLC, and its wholly-owned subsidiary Kids and Family
Edge LLC for a total purchase price of $300,000. We purchased the assets in order to obtain the contents
of a children’s website developed by Knowledge Kids Network and to benefit from a contract giving us
online advertising impressions.
• In July 2002, we entered into a tax sharing agreement with Krest LLC (the successor in interest to
Knowledge Universe, Inc.), with respect to certain state tax matters. In accordance with the agreement, we
were required to pay Knowledge Universe, Inc. amounts equal to what our liability would have been as a
stand-alone taxpayer in 2002 and prior years. In the course of preparing the state income tax returns for
2003, it was determined that we were no longer a part of a unitary group with Knowledge Universe, Inc.
for the entire year of 2003. The liabilities computed under the tax sharing agreement were $0 in 2004 and
2003, and $2.7 million in 2002. We are currently in a dispute with Krest LLC relating to the settlement of
certain amounts under the tax sharing agreement. We are claiming a refund of $635,000 in overpaid state
taxes from Krest LLC while Krest LLC is claiming approximately $1.2 million for payment of tax
attributes that were allocated to us under state tax law.
• Affinity Squared, Inc., an affiliate of Krest LLC, provided health and welfare plan administration services
to us in 2004. In 2004, we paid $65,000 for the services provided to us by Affinity Squared, Inc.
The law firm of Maron & Sandler served as our primary outside general counsel from August 1997 through
July 2002 and as the transfer agent for our Class B common stock. As of December 2004, they no longer provided
legal services to us and are no longer the transfer agent for our Class B common stock. Stanley E. Maron, a member
of our board of directors, is a partner of Maron & Sandler. In 2004, we paid Maron & Sandler $9,000 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 Krest LLC. These non-
voting units amount to a less than 1% economic interest in Krest LLC.
We believe that our board of directors will take such action as is necessary to comply with applicable corporate
law in connection with any transactions with affiliates, including in appropriate cases obtaining approval by our
independent directors.
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