LeapFrog 2008 Annual Report Download - page 29

Notably, our U.S. distribution centers, including our distribution center in Fontana, California, and our
corporate headquarters are located in California near major earthquake faults that have experienced earthquakes
in the past. In addition to the factors noted above, our existing earthquake insurance relating to our distribution
center may be insufficient and does not cover any of our other operations.
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, 2008, Lawrence J. Ellison and entities controlled by him beneficially owned
approximately 16.2 million shares of our Class B common stock, which represents approximately 52.4% 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.
Mr. Ellison could have interests that diverge from those of our other stockholders. This control by
Mr. Ellison could depress the market price of our Class A common stock; deter, delay or prevent a change in
control of LeapFrog; or affect other significant corporate transactions that otherwise might be viewed as
beneficial for other stockholders.
Our stock price has declined rapidly in recent months and could decline further, resulting in losses for our
investors and harming the employee-retention and recruiting value of our equity compensation.
Our stock price has been extremely volatile since the markets began suffering rapid declines in stock prices,
particularly since the third quarter of 2008. Our closing stock price declined to $2.01 as of the market close on
January 30, 2009 from $10.56 on September 30, 2008. All the factors discussed in this section could affect our
stock price. The timing of announcements in the public markets regarding new products, product enhancements
or product recalls by us or our competitors, or any other material announcements could affect our stock price.
Speculation in the media and analyst communities, changes in recommendations or earnings estimates by
financial analysts, changes in investors’ or analysts’ valuation measures for our stock and market trends unrelated
to our stock can cause the price of our stock to change. A significant drop in the price of our stock could also
expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert
management’s attention and resources, adversely affecting our business.
Our future success depends partly on the continued contribution of our key executives and technical, sales,
marketing, manufacturing and administrative personnel. Part of our compensation package includes stock and/or
stock options. To the extent our stock performs poorly, it may adversely affect our ability to retain or attract key
employees, potentially resulting in lost institutional knowledge and key talent. Nearly all of our outstanding stock
options have exercise prices that significantly exceed current prices. Changes in compensation packages or costs
could impact our profitability and/or our ability to attract and retain sufficient qualified personnel.
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