PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD LOOKING STATEMENTS
MARKET RISKS AND OTHER BUSINESS FACTORS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Sections 77z 2 and 78u 5 (Supp. 1996), Congress
encouraged public companies to make "forward looking statements" by
creating a safe harbor to protect companies from securities law liability in
connection with forward looking statements. Leapfrog Smart Products, Inc.
("the "Company") intends to qualify both its written and oral forward
looking statements for protection under the Reform Act and any other
similar safe harbor provisions.
"Forward looking statements" are defined by the Reform Act. Generally,
forward looking statements include expressed expectations of future events
and the assumptions on which the expressed expectations are based. All
forward looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could
cause actual events or results to differ materially from those projected.
Due to those uncertainties and risks, the investment community is urged not to
place undue reliance on written or oral forward looking statements of the
Company. The Company undertakes no obligation to update or revise this Safe
Harbor Compliance Statement for Forward Looking Statements (the "Safe Harbor
Statement") to reflect future developments. In addition, the Company
undertakes no obligation to update or revise forward looking statements to
reflect changed assumptions, the occurrence of unanticipated events or
changes to future operating results over time.
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The Company provides the following risk factor disclosure in connection
with its continuing effort to qualify its written and oral forward looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to
management that could cause actual results to differ materially from those in
forward looking statements include the following:
A HIGHLY COMPETITIVE MARKET MAY NEGATIVELY IMPACT THE COMPANY'S BUSINESS,
PROSPECTS, FINANCIAL CONDITION AND RESULTS OF THE COMPANY
At this time, the Company is in a highly competitive market with brand name
operators. The Company must rely solely on the effective and efficient
promotion, operational support and sales of its services for its success. The
Company is engaged in a business with a high public profile and is directly
competitive with manufacturers and distributors of Smart Card Systems. There
can be no assurance that these threats of competition will not negatively
impact the operations and results of the Company.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S BUSINESS, PROSPECTS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's business and prospects must be considered along with the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development. The risks the Company faces include, but are not
limited to, an evolving and unpredictable business and industry, management of
growth, the Company's ability to anticipate and adapt to a developing market
and unforeseen changes and developments in the Company's strategic partners'
activities and direction. To address these risks, the Company must, among
other things, implement and successfully execute its business strategy,
continue to develop and upgrade its technology, provide superior client
service, respond to competitive developments and attract, retain and motivate
qualified personnel and meet the expectations of its strategic partners.
There can be no assurance that the Company will be successful in addressing
such risks, and the failure to do so could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
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THE COMPANY'S LIMITED OPERATING HISTORY MAY NEGATIVELY EFFECT ITS ABILITY TO
ACCURATELY PREDICT REVENUES AND FORECASTS
The Company has a limited operating history. In addition, the Company competes
in emerging markets. As such, the Company may not be able to accurately
predict its revenues. The Company expects to experience significant
fluctuations in its future quarterly operating results due to a variety of
factors, many of which are outside the Company's control. Factors that may
adversely affect the Company's quarterly operating results include:
(a) the Company's ability to retain and attract clients;
(b) the level of competition in the Smart Card industry;
(c) the Company's ability to upgrade and develop its systems and
infrastructure and attract new personnel in a timely and effective
manner;
(d) the amount and timing of operating costs and capital expenditures
relating to expansion of the Company's business, operations and
infrastructure;
(e) governmental regulation; and
(f) general economic conditions and economic conditions specific to the
Smart Card industry.
(g) ability to raise additional capital
THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL SECURE, OR BE ABLE TO PROTECT
ANY PATENTS, TRADEMARKS OR INTELLECTUAL PROPERTY
The Company has applied for United States patents related to its business. The
Company also has applied for trademark protection in the United States for the
name LEAPFROG SMART PRODUCTS, INC. There can be no assurance that existing or
future patents or trademarks, if any, will adequately protect the Company.
Also, there can be no assurances that any patent or trademark applications
will result in issued patents or trademarks. In addition, there can be no
assurances that the Company's patents or trademarks will be upheld, if
challenged. The Company also faces the risk that competitors will develop
similar or superior methods or products outside the protection of any patent
issued to the Company. Although the Company believes that its potential patent
and trademarks, as well as the Company's products, do not and will not
infringe patents or trademarks or violate the proprietary rights of others, it
is possible that the Company's existing patent or trademark rights may not be
valid or that infringement of existing or future patents, trademarks or
proprietary rights may occur. Failure to do any of the foregoing could have a
material adverse effect upon the Company.
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In addition, there can be no assurance that the Company will have the
financial or other resources necessary to enforce or defend a patent or
trademark infringement or proprietary rights violation action that may be
brought against it. Moreover, if the Company's products infringe patents,
trademarks or proprietary rights of others, the Company could, under certain
circumstances, become liable for damages, which also could have a material
adverse effect on the Company.
POTENTIALLY RAPID OPERATIONAL EXPANSION MAY NOT BE EFFECTIVELY
MANAGED OR MAINTAINED BY THE COMPANY
The Company's proposed expansion will also require the company to enhance its
operational and financial systems. Expansion will also require additional
management, operational and financial resources. If the Company cannot make
the necessary changes to its systems and resources, it is possible that the
Company's results of operations and financial condition could be materially
adversely affected. There can be no assurance that the Company will be able to
manage its expanding operations effectively or that it will be able to
maintain or accelerate its growth. In addition, there can be no assurance of
the viability of the Company's products in new geographic regions or
particular local markets.
GOVERNMENT REGULATION MAY IMPEDE THE PROGRESS OF THE COMPANY
In running its business, the Company must comply with state laws and a wide
range of other state and local rules and regulations. It is essential and
costly to make sure the Company complies with federal, state and local
regulations. The failure to comply could have a material adverse effect on the
Company. If the Company were to violate any of the federal and/or state laws
and regulations governing its business in a particular state, the Company and
its affiliates could be forced to make rescission offers, pay monetary damages
and/or penalties, face imprisonment and/or face injunctive proceedings.
THE COMPANY'S DEPENDENCE ON KEY PERSONNEL COULD NEGATIVELY
IMPACT THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's future success depends in large part on the continued service of
its key marketing and management personnel. The Company must also be able to
continue to attract and retain qualified employees. The competition for such
personnel is intense, and the loss of key employees could have a material
effect on the Company's financial condition and results of operations.
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THE CONTROL OF THE COMPANY BY PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS
COULD IMPEDE ITS SHAREHOLDERS FROM HAVING ANY ABILITY TO DIRECT AFFAIRS AND
BUSINESS
The Company's principal shareholders, officers and directors beneficially own
approximately 1,431,571 (17.78%) shares of the Company's Common Stock. As a
result, the principal shareholders, officers and directors may have the
ability to control the Company and direct its affairs and business. Such
concentration of ownership could delay, defer or prevent a change in control
of the Company.
ISSUANCE OF PREFERRED STOCK MAY ADVERSELY AFFECT HOLDERS OF
COMMON STOCK OR DELAY OR PREVENT CORPORATE TAKE-OVER
The Company's Articles of Incorporation provide that the Company may, from
time to time, issue preferred stock in one or more series. The Articles of
Incorporation authorize the Board of Directors of the Company to determine the
rights, preferences, privileges and restrictions granted to and imposed upon
any wholly unissued series of preferred stock and the designation of any such
shares, without any vote or action by the Company's shareholders. The Board
of Directors may authorize and issue Preferred stock with voting power or
other rights that could adversely affect the voting power or other rights of
the holders of Common Stock. In addition, the issuance of preferred stock
could delay, defer or prevent a change in control of the Company, because the
terms of preferred stock that might be issued could potentially prohibit the
Company's consummation of any merger, reorganization, sale of substantially
all of its assets, liquidation or other extraordinary corporate transaction
without the approval of the holders of the outstanding shares of the preferred
stock.
THE COMPANY'S STOCK PRICE WILL BE POTENTIALLY VOLATILE
There has been little public market for the Company's common stock. There can
be no assurance that an active trading market will develop or be sustained.
At a future date, provided a public market for the stock does develop, the
market price of the shares of Common Stock is likely to be highly volatile and
may be significantly affected by factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new products
and/or services by the Company or its competitors, governmental regulatory
action, developments with respect to patents or proprietary rights and general
market conditions. In addition, the stock market has, from time to time,
experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies.
THE POSSIBLE NEED FOR ADDITIONAL FINANCING MAY IMPEDE THE COMPANY'S ABILITY TO
MANAGE OPERATIONS AT AN OPTIMAL LEVEL
The ultimate success of the Company may depend upon its ability to raise
additional capital. The Company has not investigated the availability, source,
or terms that might govern the acquisition of additional capital. The Company
will not investigate these issues until it determines a need for additional
financing. If additional capital is needed, there is no assurance that funds
will be available from any source. Also, if additional capital is available,
there can be no assurance that additional capital can be obtained on terms
acceptable to the Company. If additional capital is not available, the
Company's operations will be limited to those that can be financed with its
modest capital.
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THE COMPANY'S INDEMNIFICATION OF OFFICERS AND DIRECTORS MAY RESULT IN
SUBSTANTIAL EXPENDITURES
The Company's Articles of Incorporation provide for the indemnification of its
directors, officers, employees, and agents, under certain circumstances,
against attorney's fees and other expenses incurred by them in any litigation
to which they become a party arising from their association with or activities
on behalf of the Company. The Company will also bear the expenses of such
litigation for any of its directors, officers, employees, or agents, upon such
person's promise to repay the Company if it is ultimately determined that any
such person shall not have been entitled to indemnification. This
indemnification policy could result in substantial expenditures by the Company
that it will be unable to recoup.
THE COMPANY'S DEPENDENCE UPON OUTSIDE ADVISORS MAY LIMIT THE
ABILITY TO GROW OPERATIONS AT AN OPTIMAL RATE
To supplement the business experience of its officers and directors, the
Company may be required to employ consultants or advisors. It is anticipated
that such persons may be engaged on an "as needed" basis without a continuing
fiduciary or other obligation to the Company. There can be no assurances that
the Company will locate adequate outside advisors, or that they will be
available at affordable rates. Provided such persons are not located, the
Company's operations may be negatively impacted.
RULE 144 SALES MAY HAVE A DEPRESSIVE IMPACT ON THE COMPANY'S STOCK
Certain of the outstanding shares of Common Stock held by present stockholders
are "restricted securities" within the meaning of Rule 144 under the
Securities Act of 1933, as amended.
As restricted shares, these shares may be resold only pursuant to an effective
registration statement or under the requirements of Rule 144 or other
applicable exemptions from registration under the Act and as required under
applicable state securities laws. Rule 144 provides in essence that a person
who has held restricted securities for a prescribed period may, under certain
conditions, sell every three months, in brokerage transactions, a number of
shares that does not exceed the greater of 1.0% of a company's outstanding
common stock or the average weekly trading volume during the four calendar
weeks prior to the sale. As a result of revisions to Rule 144 that became
effective on or about April 29, 1997, there will be no limit on the amount of
restricted securities that may be sold by a non-affiliate after the restricted
securities have been held by the owner for a period of two years. A sale
under Rule 144 or under any other exemption from the Act, if available, or
pursuant to subsequent registrations of shares of Common Stock of present
stockholders, may have a depressive effect upon the price of the Common Stock
in any market that may develop.
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REQUIRED REGULATORY DISCLOSURE RELATING TO LOW-PRICED STOCKS MAY NEGATIVELY
IMPACT LIQUIDITY IN THE COMPANY'S STOCK
As long as the trading price of the Common Stock is less than US$5.00 per
share, trading in the Common Stock in the US secondary market is subject to
certain rules promulgated under the Securities Exchange Act of 1934, which
rules require additional disclosure by broker-dealers in connection with any
trades involving a stock defined as a "penny stock" (generally, any non-NASDAQ
equity security that has a market price of less than US$5.00 per share,
subject to certain exceptions). Such rules require the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith, and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transactions prior to sale.
The additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in the Common Stock,
which could severely limit the market liquidity of the Common Stock and the
ability of stockholders to sell the Common Stock in the US secondary market.
CURRENT PROSPECTUS AND STATE BLUE SKY REQUIREMENTS MAY IMPEDE THE COMPANY'S
ABILITY TO OFFER ITS COMMON STOCK IN CERTAIN JURISDICTIONS
The Company will be able to issue shares of its common stock only if there is
then a current prospectus relating to such common stock and only if such
common stock is qualified for sale or exempt from qualification under
applicable state securities laws of the jurisdictions in which the various
holders of the common stock reside. The Company has undertaken and intends to
file and keep current a prospectus that will permit the purchase and sale of
the common stock, but there can be no assurance that the Company will be able
to do so. Although the Company intends to seek to qualify for sale the shares
of Common Stock in those states in which the securities are to be offered, no
assurance can be given that such qualification will occur. The common stock
may be deprived of any value and the market for such shares may be limited if
a current prospectus covering the common stock is not kept effective or if
such common stock is not qualified or exempt from qualification in the
jurisdictions in which the holders then reside.
