LeapFrog 2002 Annual Report Download - page 95

LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except share, per share and percent data)
16. Warrants
On July 21, 1998, the Board of Directors approved a dividend to be declared and paid to its then current
stockholders of Class B common stock. The dividend was in the form of five-year warrants, terminating on July
20, 2003, to purchase an aggregate of 10,000,000 shares of Class B common stock of the Company for $5.00 per
share. One warrant was issued to Knowledge Kids, L.L.C. for the purchase of 8,200,000 shares of Class B
common stock. Another warrant was issued to FrogPond, LLC for the purchase of 1,800,000 shares of Class B
common stock. At the time of the dividend, Knowledge Kids owned approximately 79% of the equity interests
and approximately 82% of the voting power of the Company, and FrogPond owned approximately 17% of the
equity interest and approximately 18% of the voting power of the Company. Knowledge Kids is an indirect,
wholly owned subsidiary of Knowledge Universe. FrogPond owns the shares that were issued as consideration
for the assets of LeapFrog RBT, LLC at the time that the Company acquired the assets of LeapFrog RBT in
September 1997.
On November 8, 2002, Knowledge Kids, L.L.C. exercised such warrant through the surrender of 1,483,358
shares of previously-owned Class B common stock, the aggregate value of which was the total $41,000 exercise
price in accordance with the terms of the warrant. As a result, Knowledge Kids acquired 6,716,642 additional
shares of the Company’s Class B common stock on a net basis.
Also on November 8, 2002, FrogPond, LLC exercised such warrant by canceling a portion of the warrant
equal in value to the total $9,000 exercise price in accordance with the terms of the warrant. As a result,
FrogPond received 1,474,384 shares of Class B common stock on a net basis.
In March 2002, in connection with recruiting services rendered, the Company issued a warrant to purchase
20,000 shares of Class A common stock at an exercise price of $10.00 per share. The Company accounted for the
fair value of the warrants of approximately $142 as an increase to additional paid in capital with a corresponding
reduction of accrued expenses. The fair value of the warrant, which was expensed in 2001, was estimated using
the Black-Scholes valuation model.
On July 29, 2002 such warrant was exercised through a cashless exercise, in accordance with the terms of
the warrant, and 6,789 shares of Class A common stock was issued.
17. Notes Receivable From Stockholders
During 2000, the Board of Directors approved four loans to certain executives to enable early exercise of
their stock options in exchange for full recourse promissory notes (borrower is directly personally liable for all
amounts owed). The 1,302,359 shares of Class A common stock purchased and pledged under the full recourse
notes vest to the executives over various periods of up to four years. All shares were vested at both December 31,
2002 and 2001.
The notes accrue interest at 6.62%. Both principal and accrued interest are due in full on the earlier of (1)
December 31, 2006 and (2) ten days following the later of an initial public offering (July 25, 2002) or the
expiration of the applicable lock-up period (January 30, 2003). The notes had an outstanding balance of $2,624
and $3,087 at December 31, 2002 and 2001, respectively, and are recorded as a reduction of stockholders’ equity
in the balance sheet. In connection with these full recourse notes, the Company also loaned these individuals
funds for the payment of taxes under the same terms described above. The Company was owed $565 and $664
under these loans for taxes at December 31, 2002 and 2001. See Note 24 (Subsequent Events).
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