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No. of Recommendations: 4
I have seen the TV commercials showing the cool products that LeapFrog makes and sells. Also I see that they are growing fast and making good profits. Now that the shares have dropped from the high point, I started thinking this might be a good investment...

Then I got the Investor's packet and started reading up on who actually owns and controls LF... (see page 43 and 54 of the 2002 Annual Report, but I will summarize some points below):

Knowledge Universe owns LeapFrog. And who owns Knowledge Universe?

"Knowledge Universe, L.L.C., which is jointly controlled by Lawrence J. Ellison, Michael R. Milken and Lowell J. Milken, controls all stockholder voting power as well as 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."

What this means is that buying stock in leapfrog is not the same as buying stock in 99% of the other public companies... In LF the public shareholders are given 1/10 the voting power that the insiders enjoy...

As of November 4th, 2003 there were 29,919,720 Class A shares and 28,882,817 Class B shares outstanding. Class B shares can be converted into Class A shares at any time. There were also options to purchase a total of 6.7 million Class A shares at November 4th, 2003. When LeapFrog went public in July 2002, 17.4 million Class A shares were reserved for issuance under their "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." (that is a lot of dilution)

As of December 31st, 2002, there were options to purchase 10.2 million shares of Class A stock at an average price of $8.06, of which 5.2 million of them were "exercisable" at an average price of $5.17. Since there were 6.7 million outstanding at 11/04/03, I guess 3.5 million options have been exercised so far this year, most likely at a price around $5 per share. This means insiders maybe cashing in shares for nice profits...

The option grant for 2002 was 4 million shares at an average price of $10.41. If 3 or 4 million shares are given each year as options, this will add up to a good amount of dilution... I still like the idea of LeapFrog as an investment, but I feel that there should be some discussion of these facts on this board. After I found out that Mr. Ellison and the Milken brothers controlled the company I realized that it may not be as good as it first appeared to me...

This is my first post on the board and I have no equity interest in LF at this time... But I am interested in any comments or questions you might have...

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