LeapFrog 2006 Annual Report Download - page 29

“Item 9A. Controls and Procedures” in this report on our assessment of our internal control over financial
reporting. We received an unqualified opinion from our external auditors on our financial statements for the
years ended December 31, 2006 and 2005. Areas of our internal control over financial reporting may require
improvement from time to time. If management is unable to assert that our internal control over financial
reporting is effective at any time in the future, or if our external auditors are unable to express an opinion that our
internal control over financial reporting is effective, investors may lose confidence in our reported financial
information, which could result in the decrease of the market price of our Class A common stock.
One stockholder controls a majority of our voting power as well as the composition of our board of
directors.
Holders of our Class A common stock will not be able to affect the outcome of any stockholder vote. Our
Class A common stock entitles its holders to one vote per share, and our Class B common stock entitles its
holders to ten votes per share on all matters submitted to a vote of our stockholders. As of December 31, 2006,
Lawrence J. Ellison and entities controlled by him beneficially owned approximately 16.7 million shares of our
Class B common stock, which represents approximately 53% of the combined voting power of our Class A
common stock and Class B common stock. As a result, Mr. Ellison controls all stockholder voting power,
including with respect to:
• the composition of our board of directors and, through it, any determination with respect to our business
direction and policies, including the appointment and removal of officers;
• any determinations with respect to mergers, other business combinations, or changes in control;
• our acquisition or disposition of assets;
• our financing activities; and
• payment of dividends on our capital stock, subject to the limitations imposed by our credit facility.
This control by Mr. Ellison could depress the market price of our Class A common stock or delay or prevent
a change in control of LeapFrog.
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
B common stock.
Provisions in our charter documents, Delaware law and our credit facility agreement 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 affect 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
22