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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-20786
LEAPFROG SMART PRODUCTS, INC.
formerly Albara Corporation
(Name of small business issuer in its charter)
COLORADO 84-1076959
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1011 Maitland Center Commons, Maitland , Florida 32751
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number (407) 838-0400
Securities registered pursuant to Section 12(b) of the Securities Exchange Act:
NONE
Securities registered pursuant to section 12(g) of the Securities Exchange Act:
COMMON STOCK, NO PAR VALUE PER SHARE
------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy
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or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [ ]
State issuer's revenues for its most recent fiscal year: $ 121,533
The aggregate market value of the 5,185,179 shares of Common Stock held by
non-affiliates was ($1,296,294) as of March 31, 2000. For purposes of the
foregoing calculation only, each of the issuer's officers and directors is
deemed to be an affiliate. The market value of the shares was calculated based
on the book value of such shares on such date.
As of March 31, 2000, 5,996,495 shares of the issuer's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The following documents are incorporated by reference into this report:
1. Information required by Part III of this Form 10-KSB is incorporated by
reference by the Company from its Definitive Information Statement on
Schedule 14C filed with the Commission on January 18, 2000.
Transitional Small Business Disclosure Format: Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Leapfrog Smart Products, Inc.--Description of the Business
Founded in April of 1996, Leapfrog Smart Products, Inc. ("LEAPFROG" or the
"Company") is a Florida corporation dedicated to designing, developing,
licensing, and marketing Smart card applications and related database management
systems and services. The Smart card is a wallet-sized plastic card with an
embedded computer chip carrying a myriad of accessible data that is retrievable
on demand and capable of fully integrating a variety of everyday functions with
strict security features. Just like Microsoft writes software to operate PCs,
LEAPFROG writes software to make computers called "Smart cards" work.
LEAPFROG merged with Albara Corporation ("ALBARA") effective February 18, 2000
through a reverse acquisition whereby the existing shareholders of LEAPFROG
obtained control of ALBARA. The transaction was approved by the shareholders at
ALBARA's annual meeting held on January 28, 2000. ALBARA was development stage
company with no ongoing operations. It was traded under the stock symbol "ALBR"
which has now been changed to "FROG".
At ALBARA's Annual Shareholder meeting, the shareholders approved effecting a 1
for 7 reverse split of the Company's common stock, increasing the number of
authorized shares of common stock, no par value, to 30,000,000, increasing the
number of authorized shares of preferred stock, no par value, to 10,000,000,
changing the name of ALBARA to "Leapfrog Smart Products, Inc.", electing a new
Board of Directors, and modifying ALBARA's Incentive Stock Option Plan, all of
which were conditions to closing the acquisition of LEAPFROG.
LEAPFROG had 27 full-time and three part-time employees and a growing sales
representative network at December 31, 1999. The engineering department was
comprised of nine full-time employees and the three part-time employees. A total
of ten employees were associated with administrative roles. The sales and
marketing team was comprised of eight people, which is expected to increase when
the sales and marketing plan is implemented.
In 1997 and 1998, LEAPFROG invested in developing a technology that would serve
as a platform for developing commercially viable Smart card software products.
That technology is based on an architecture which is designed to allow any
combination of software modules to be activated via a patent pending
"Plug-and-Play" technology. Management believes, the technology allows a client
to choose any number of modules from the LEAPFROG "library" and have a
customized product. For LEAPFROG, this proprietary technology allows LEAPFROG to
re-use software modules numerous times without having to duplicate previous
development efforts. Management believes this technology is key to LEAPFROG's
potential future success and potential future profitability in the software
business.
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During 1999, a suite of proprietary software programs were under development for
commercialization. Six commercial products are nearing completion in
Commercial-Off-The-Shelf form and have been announced by LEAPFROG. They are:
SecurePak, Smart card Commander, MDCard, SmartPoints, SmartExpo, and
SmartResort.
LEAPFROG has two patents pending: ("Plug and Play Architecture", and "Biometric
Identity Verification Authentication" on a Smart card). Management believes
these patents, if eventually awarded, will help to create a barrier of entry
against potential competitors and will help create an intangible asset value for
the shareholders of the Company. Additionally, LEAPFROG appears to be the only
software engineering firm that is qualified as a "Development Partner" with two
Smart card manufacturers: Schlumberger and Giesecke & Devrient.
On December 21, 1998, LEAPFROG was awarded its Government Services
Administration ("GSA") master contract number, GS-35J-0161. This process took
almost one year to complete. LEAPFROG intends to pursue GSA contracts in 2000.
Management believes the United States federal government is presently the
largest potential domestic issuer of Smart cards for two reasons: (1) it has the
ability to mandate change, and (2) it has the financial resources to build and
upgrade infrastructure. The United States government has undertaken several
initiatives, in pilot form, to test the viability and use of Smart cards. As a
result, the GSA is expected to issue a Request For Proposal for employee cards
which will provide physical as well as logical access for 2,500,000 federal
employees. This contract could have a substantial value over a ten-year period
and is expected to be awarded to multiple vendors. LEAPFROG intends to actively
pursue this contract opportunity on some basis and is currently working to
establish an alliance with a major government contractor to supply Smart card
software integration services over the next ten years in connection with this
GSA contract.
Products
In 2000, if financial resources will allow, LEAPFROG intends to enter several
commercial markets with products focusing on market share and creating barriers
for the competition. For each of its targeted markets, LEAPFROG is in the
testing, pilot or final deployment stage. LEAPFROG is currently targeting the
following markets: Internet security, medical and patient data, authentication,
consumer and sports loyalty, conventions and expos, hospitality and college
campuses.
Having developed a proprietary underlying architectural technology, LEAPFROG is
now preparing software products for commercialization. LEAPFROG's software
development strategy is expressly based on creating Commercial-Off-The-Shelf
software. Management believes that software which can be packaged for mass
replication and distribution may provide LEAPFROG a competitive advantage in
that units can be shipped with minimal customization. This in turn could allow
LEAPFROG access to the consumer market. LEAPFROG hopes to be the first company
into the market with a "boxed" product and the ability to turn out multiple
exact copies.
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Management of LEAPFROG expects to be able to leverage its proprietary technology
to develop new products that can be marketed and sold as exact copies all over
the world in much the same way as word processing or spreadsheet programs are
marketed today. Additionally, Management of LEAPFROG believes that its
proprietary technology may allow its products to be designed to be easily
configurable providing each user their choice of preferences, needed
accessories, and report requirements.
LEAPFROG's Management believes that a number of markets can be penetrated with a
relatively small number of products. In developing a marketing strategy,
additional considerations such as life expectancy of a product, enhancement of
core services, and product replication become important. If financial resources
will allow, Management intends to make the following products commercially
available in 2000, although there can be no assurance that such resources will
be available:
SecurePak (Internet/Intranet Security). SecurePak is a tool designed for sending
information through Cyberspace. SecurePak is designed to combine DES,
triple-DES, and RSA encryption with physical security to protect data and
systems.
Smart card Commander (Application Development Tool). The Smart card Commander is
an application program development environment designed for use by persons
seeking to create Smart card applications that interface directly with in-house
proprietary software systems. Management intends to market the Smart card
Commander through LEAPFROG resellers.
MDCard (Health Care). MDCard, is designed to be a fully-integrated Smart card
program that authenticates patients and expedites check-in, while streamlining
insurance data gathering and claims submission. MDCard is designed to be a
comprehensive suite of medical software modules that create a digital
environment for data collection and management within the medical community.
This product is currently being beta tested by a hospital group in Florida that
intends to utilize a patient Smart card for a host of interactive functions.
SmartPoints (Loyalty for Sports, Chambers of Commerce, Banks). SmartPoints is
designed to be a loyalty program for closed user groups wishing to increase
member or fan loyalty such as a frequent flyer program or a cash-back program.
The user of this software, i.e., a sports team or Chamber of Commerce, issues
cards to their respective affinity group or member base and then those cards are
used to collect SmartPoints at various points-of-encounter. The SmartPoints can
then be redeemed for prizes providing a way to bring the fans back.
SmartExpo (Expo and Convention Registration). SmartExpo is an offshoot of the
SmartPoints loyalty software. It was designed as an expo registration and
tracking software module. SmartExpo software is designed to allow show sponsors
and exhibitors to gather data on each attendee through the use of a single card
for all expo purposes (registration, lead tracking, purchases, and continuing
education credit tracking).
SmartResort (Hospitality Member Registration/Tracking). SmartResort is designed
to verify membership, while providing guests with a secure way to enter and exit
a destination such as a
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membership resort, time share, or other self-contained vacation property.
Members enjoy the convenience of using that same card to check in and out
quickly, make reservations, shop, pay for entertainment, buy snacks and meals,
get discounts, rent skis, etc. SmartResort is designed for use by membership
properties to manage a large database of members with different levels of usage
rights, including reciprocity.
Sales and Marketing
In the technology industry, there are three distinct phases of a company's
development: Formulation, Product Development, and Sales. Management believes
that LEAPFROG has successfully negotiated the Formulation phase in 1997 and
1998. The Product Development phase has been a primary focus in 1999. Although
the Sales phase has begun in late 1999, major efforts in this phase will not
begin until 2000 after additional capital becomes available to fund sales and
marketing efforts.
Management believes that the winner of the marketing game will generally be the
company that hits critical mass first, by utilizing the most efficient paths to
customers. For smaller companies, strategic marketing alliances maximize reach
while reducing potential competition. LEAPFROG intends to market its products
three ways: (i) partnership distribution and licensing; (ii) closed user-group
decision makers; and (iii) indirect distribution.
Creating strong strategic partnerships is initially of paramount importance for
a smaller company. Management does not believe that LEAPFROG has the marketing
resources and capabilities of major companies in other software market segments.
Instead, LEAPFROG intends to focus on establishing important relationships and
alliances with other companies that can license LEAPFROG's software and
distribute it through their existing channels, although there can be no
assurance that such relationships and alliances can be established. LEAPFROG
intends to target alliances which may include Fortune 500 companies such as
Sprint, Motorola, Lockheed Martin, EDS, GTE, AAA and others. If successful,
LEAPFROG can expect to garner license fees on a wholesale basis from each
alliance.
Secondly, LEAPFROG plans to employ a "leadership relationship" marketing
strategy to offer its software to closed user groups. Because emerging
technology demands a certain visionary mentality to embrace it, marketing
requires one-to-one selling with decision-makers. In this regard, Management
intends to utilize sales tactics that are based on portraying a lead position,
utilizing personal contacts at the highest level in each target user group.
Lastly, LEAPFROG plans to offer certain products through indirect distribution
channels. These channel distributors will be located on a regional basis and
will be chosen based on overall commitment to LEAPFROG. For example, a company
may have the exclusive rights to market specific LEAPFROG software products in a
particular geographic region, but would be a non-exclusive reseller in other
areas. Further, a distributor's discount level may be determined by the number
of units purchased or the level of value-added services provided.
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Competition
The entire Smart card industry is fragmented into several strata. Management
believes that LEAPFROG's direct competitors are companies that create software
applications. They are: 3GI, National CacheCard, Precis, Cybermark, and RealMed.
All of these companies are small privately held companies.
There are a host of other players in the industry with whom Management believes
LEAPFROG does not compete. Within the Smart card industry, the sub-markets
include: (1) card manufacturers (Schlumberger, Gemplus, Giesecke & Devrient) and
hardware manufacturers (Verifone, DANYL, Intellect) who are suppliers to
LEAPFROG; (2) integrators (IBM, Honeywell/Bull) who generally do not develop or
own any software that is proprietary in nature or are marketers of limited
applications only, which do not currently encroach on LEAPFROG markets, but are
potential customers; (3) American Express, Visa, Master Card and banks who aid
in developing market awareness and are potential LEAPFROG customers; and (4)
system platform providers (Microsoft, Visa, Mondex, Proton) who write languages
for applications but do not market Smart card products to end users. Management
does not believe that LEAPFROG directly competes with these players, but rather
purchases from or sells to them.
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
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The statements contained in this report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), including statements
regarding the Company's expectations, hopes, intentions or strategies regarding
the future. All forward-looking statements included herein are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements. It is important to
note that the Company's actual results could differ materially from those in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are the risk factors which may be listed from time
to time in the Company's reports on Form 10-QSB, 10-KSB and registration
statements filed under the Securities Act.
Forward-looking statements encompass the (i) expectation that the Company can
secure additional capital, (ii) continued expansion of the Company's operations
through joint ventures and acquisitions, (iii) success of existing and new
marketing initiatives undertaken by the Company, and (iv) success in controlling
the cost of services provided and general administrative expenses as a
percentage of revenues.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements were based on assumptions that the Company would continue to expand,
that capital will be available to fund the Company's growth at a reasonable
cost, that competitive conditions within the industry would not change
materially or adversely, that demand for the Company's services would remain
strong, that there
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would be no material adverse change in the Company's operations or business, and
that changes in laws and regulations or court decisions will not adversely or
significantly alter the operations of the Company. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive, regulatory and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, there
can be no assurance that the forward-looking information will prove to be
accurate.
In light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases its headquarters facility in Maitland, Florida,
which is owned by Geneva College. The space for the headquarters facility is
leased to the Company. The following tabulates certain information with respect
to the lease currently executed between the Company and Geneva College. The
lease has annual increases of $.50 per square foot per year.
Current
Square Monthly
Location Footage Rental Expiration
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Executive Offices 14,500 $17,944 November, 2004
1011 Maitland Center Commons
Maitland, Florida 32751
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings to which the Company (or any of its directors and
officers in their capacities as such) is party or to which property of the
Company is subject is pending and no such material proceeding is known by
management of the Company to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter of
fiscal year 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
During the 1998 and 1999 fiscal years, the Company's Common Stock traded on the
over-the-counter market and was quoted in the National Quotation Bureau, Inc.'s
"Pink Sheets" and the National Asociation of Securities Dealers, Inc.'s "OTC
Bulletin Board". The range of high and low bid quotations for the Common Stock
for the two most recently completed fiscal years is provided below. The volume
of trading in the Company's Common Stock has been limited and the bid prices as
reported may not be indicative of the value of the Common Stock or of the
existence of an active trading market. These over-the-counter market quotations
reflect inter-dealer prices without retail markup, markdown or commissions and
may not necessarily represent actual transactions.
1998 Fiscal Year High Bid Low Bid
First Quarter $ 0.01 $ 0.01
Second Quarter $ 0.01 $ 0.01
Third Quarter $ 0.01 $ 0.01
Fourth Quarter $ 0.05 $ 0.04
1999 Fiscal Year High Bid Low Bid
First Quarter $ 0.09 $ 0.04
Second Quarter $ 0.09 $ 0.01
Third Quarter $ 0.43 $ 0.01
Fourth Quarter $ 0.50 $ 0.34
On March 31, 2000, the reported bid for the Company's Common Stock was $5.875.
The number of record holders of the Company's Common Stock on March 31, 2000,
was 5,996,495.
The Company has never paid dividends with respect to the Common Stock and
currently does not have any plans to pay cash dividends in the future. There are
no contractual restrictions on the Company's present or future ability to pay
dividends. Future dividend policy is subject to the discretion of the Board of
Directors and is dependent upon a number of factors, including future earnings,
capital requirements and the financial condition of the Company. The payment of
future dividends will also be restricted to the extent of $20,000 in liquidation
preference inuring to the benefit of the holders of the Company's Series F
Preferred Stock. The Colorado Corporation Code provides that a corporation may
not pay dividends if the payment would reduce the remaining net assets of the
corporation below the corporation's stated capital plus amounts constituting a
liquidation preference to other security holders.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OR
PLAN OF OPERATION
The following discussion should be read in conjunction with the Financial
Statements and notes thereto.
PLAN OF OPERATION
LEAPFROG did not have any external sources of working capital during 1999 and
1998 except for the sale of stock to individuals and the issuance of short-term
notes payable while it was a private company. On February 18, 2000, LEAPFROG
merged with Albara Corporation through a reverse acquisition in which Albara
acquired LEAPFROG and the existing shareholders of LEAPFROG obtained control of
Albara. Even with the completion of this business combination transaction, there
can be no assurance that the combined companies will have sufficient funds to
undertake any significant development, marketing and manufacturing activities.
Accordingly, the combined companies are being required to seek additional debt
or equity financing or funding from third parties, in exchange for which the
combined companies might be required to issue a substantial equity position.
From the period January 1, 2000 through April 3, 2000, additional debt of
$550,000 was issued to third parties and 212,000 shares of restricted common
stock were issued for $842,000 and 125,000 shares of convertible preferred stock
were issued for $500,000.
There is no assurance that the combined companies will be able to obtain
additional financing on terms acceptable to the Company. If Management is
successful in obtaining additional funding, these funds will be used primarily
to provide working capital needed for repayment of outstanding notes payable,
software development, sales and marketing expense, to finance research,
development and advancement of intellectual property concerns and for general
administration.
Management has committed to a $225,000 investment into its China subsidiary for
funding a joint venture to produce and market biometric readers internationally.
A description of the LEAPFROG business is provided in ITEM 1.
RESULTS OF OPERATIONS
Revenues and Gross Profits:
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LEAPFROG is a development stage company with virtually no revenues. Revenues for
the year ended December 31, 1999 increased $35,000, from $86,000 to $121,000, a
41 % increase compared to the year ended December 31, 1998. Revenues were
associated with the sale of predominantly hardware related items such as Smart
card readers/writers utilized in pilot evaluation programs, software testing
programs and specialized software solutions by potential future users of
LEAPFROG's software products. Gross profit margin for the year ended
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December 31, 1999 increased to 64% from 24% in the same period in 1998. During
part of 1999 and all of 1998, LEAPFROG initiated pilot programs by providing
software and hardware at cost or near cost. During 1999, LEAPFROG also focused
on selling some packaged products for a small but positive gross margin to
ensure that handling costs were covered. Gross margins are not expected to
continue in the 64% range in future years. In 1999, this margin is due to small
projects with inconsequential added costs to the Company that will not be the
primary source of revenue in the future.
Total Operating Expenses:
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Total operating expenses for the year ended December 31, 1999 increased $1.2
million from $1.5 million to $2.7 million, an 82% increase compared to the same
period in 1998. This increase is net of $76,000 in software development
expenditures that have been capitalized during the year ended December 31, 1999.
This increase is primarily associated with expense incurred in preparing a
marketing plan, hiring senior marketing and sales personnel to prepare for an
intended roll-out of software products in 2000 and the initial costs of
developing sales, advertising and marketing materials, as well as product
packaging. Significant expenses have been incurred in identifying potential
contract opportunities and recruiting distributors and value added resellers who
may participate in the intended product rollout in 2000.
Personnel and related expenses increased $265,000 or 28% to $1.2 million for the
year ended December 31, 1999 compared to the $952,000 for the same period in
1998. This increase was primarily due to the hiring of senior marketing and
sales personnel to prepare for an intended rollout of software products in 2000.
Consulting fees increased by $372,000 from the $21,000 incurred for the year end
December 31, 1998 to $392,000 for the year ended December 31, 1999. The expenses
in 1999 related primarily to fees paid to individuals and companies that
assisted the Company in identifying potential contract opportunities and
recruiting distributors and value added resellers who may participate in the
intended product rollout in 2000.
General and administrative expenses increased to $1.1 million for the year ended
December 31, 1999 from $491,000 for the same period in 1998. This $589,000 or
120% increase was due largely to increase legal costs related to the impending
merger as well as financial advisory services during 1999. General and
administrative expenses also increase in several areas with the hiring of new
personnel requiring more space and general overhead as well as the travel and
other related costs for developing sales, advertising and marketing materials
and in identifying potential contract opportunities and recruiting distributors
and value added resellers who may participate in the intended product rollout in
2000.
Depreciation and amortization expenses increased $10,000 or 22% to $55,000 for
the year ended December 31, 1999 compared to $45,000 for the same period in
1998. The increase was due to the purchase of additional assets as well as the
amortization of capitalized software costs and the addition attributable to
costs of assets acquired in excess of fair market value.
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Other income and expense:
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Interest expense for the year ended December 31, 1999 increased $397,000 from
$36,000 to $433,000 when compared to the same period in 1998. In March through
July 1999, LEAPFROG completed a short-term debt offering to a select group of
accredited investors providing net proceeds of $1,402,000. As additional
consideration, LEAPFROG provided these note holders 386,128 shares of common
stock. For accounting purposes, these shares of common stock were valued at
$290,000 and that value was included as additional interest consideration and
expense associated with the issuance of notes payable. Substantially all of the
remaining interest expense in 1999 is directly associated with these outstanding
notes payable and the $350,000 in bank notes. Almost all of the interest expense
in 1998 is related to the bank notes and $200,000 in convertible common stock
debentures.
Net loss:
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The net loss for the year ended December 31, 1999 increased $1.6 million from
$1.5 million to $3.1 million, a 104% increase compared to the year ended
December 31, 1998. This increase is net of $76,000 in software development
expenditures that were capitalized during the year ended 1999. This increase in
the net loss is primarily associated with expenses incurred in preparing a
marketing plan, hiring senior marketing and sales personnel to prepare for an
intended roll-out of software products in 2000 and the initial costs of
developing sales, advertising and marketing materials, as well as product
packaging. Significant expenses have been incurred in identifying potential
contract opportunities and recruiting distributors and value added resellers who
may participate in the intended product rollout in 2000. Net loss per share of
common stock increased from $.49 per share in 1998 to $.72 in 1999. This
increase is primarily due to the increase in losses realized offset by an
increase in the weighted average number of common shares outstanding from
3,125,793 for the year ended December 31, 1998 to 4,280,158 for the year ended
December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities increased $1.1 million from $1.2 million
for the year ended December 31, 1998 to $2.4 million for the year ended December
31, 1999. Net cash provided by financing activities increased $1.2 million from
$1.4 million for the year ended December 31, 1998 to $2.6 million for the year
ended December 31, 1999. Financing activities during 1999 included the issuance
of common stock providing $1.2 million in the aggregate and the issuance of
notes payable which provided a net of $1.4 million offset by an $18,000
repayment of existing notes payable. Financing activities during 1998 included
the issuance of common stock providing $965,000 in the aggregate and the
issuance of notes payable that provided a net of $361,000 after repayment of
principal in the amount of $153,000.
Like many early stage technology companies, the majority of LEAPFROG's assets
are intangible assets such as copyrights, trademarks, and research and
development costs which by their very nature are not reflected in the Company's
balance sheet as assets.
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Net cash used by financing activities increased $119,000 from $118,000 for the
year ended December 31, 1998 to $237,000 for the year ended December 31, 1999.
The increase was primarily due to the increase in acquisitions of property and
equipment, as well as to the capitalization of software costs in 1999.
Management expects this trend to continue as LEAPFROG's operations grow.
In the past, LEAPFROG's Management has been successful in attracting accredited
investors who have purchased newly issued common stock. However, there can be no
assurance that the Company will be able to obtain additional equity financing on
similar terms in the future.Over the past two years all of LEAPFROG's debt
financing has been short-term notes payable. These notes can only be repaid if
the company successfully raises additional equity or debt financing. In addition
to the cash requirement associated with repaying these notes, LEAPFROG will not
be able to mount an effective national marketing campaign for its products
without an additional infusion of capital. The Company does not have any
commitments to provide additional capital funding. Accordingly, there can be no
assurance that any additional funds will be available to the Company to allow it
to repay its outstanding debt and to cover the expenses associated with
executing its sales and marketing plan.
From the period January 1, 2000 through April 3, 2000, additional debt of
$550,000 was issued to third parties and 212,000 shares of restricted common
stock were issued for $842,000 and 125,000 shares of convertible preferred stock
were issued for $500,000.
Y2K COMPLIANCE
LEAPFROG concluded its efforts concerning its exposure relative to year 2000
issues for both information and non-information technology systems. Management
actively monitors the status of the readiness program of the Company. LEAPFROG`s
out of pocket cost associated with becoming Year 2000 compliant were not
significant. These cost were expensed as incurred, and the Company does not
anticipate any additional material expenditure as a result of Year 2000 issues.
Based on operations since January 1, 2000, including the leap year date of
February 29, 2000, the Company has not experienced any significant disruption or
change, and does not expect any significant impact to its ongoing business as a
result of the Year 2000 issue. Additionally, the Company is not aware of any
significant Year 2000 issues or problems that have arisen for its significant
customers, vendors or service providers. As there can be no assurance that the
Company's efforts to achieve Year 2000 readiness have been completely successful
or that customers, vendors and service providers will not experience Year 2000
related failures in the future, the Company will continue to monitor its
exposure to Year 2000 issues and will leave its contingency plans in place in
the event that any significant Year 2000 related issues arise.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect
Management's current views with respect to future events and financial
performance. Those statements include statements
<PAGE>
regarding the intent, belief or current expectations of LEAPFROG and members of
its management team as well as the assumptions on which such statements are
based. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risk and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. Readers are urged to carefully
review and consider the various disclosures made by the Company in this report
and in the Company's other reports filed with the Securities and Exchange
Commission. Important factors currently known to Management could cause actual
results to differ materially from those in forward-looking statements. The
Company undertakes no obligation to update or revise forward-looking statements
to reflect changed assumptions, the occurrence of unanticipated events or
changes in the future operating results over time. The Company believes that its
assumptions are based upon reasonable data derived from and known about its
business and operations and the business and operations of LEAPFROG. No
assurances are made that actual results of operations or the results of the
Company's future activities will not differ materially from its assumptions.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are included beginning at page F-1. See page F-2 for
the Table of Contents to the Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
As previously reported on a Current Report on Form 8-K dated March 17, 2000,
LEAPFROG dismissed Thomas Leger & Company, P.A., whose address is 1235 Loop
West, Suite 907, Houston, Texas, and which was previously engaged as the
principal accountant to audit the registrant's financial statements, on March 2,
2000, by unanimous consent of the board of directors of the Company, in favor of
retaining the present independent accounting firm. The following information is
set forth pursuant to Reg. Sec. 229.304 of Regulation S-K of the Securities Act
of 1933 (the "Act"):
(i) Thomas Leger and Company's report on the balance sheet of Albara
Corporation (now known as LEAPFROG) for only the year ended December 31, 1998
contained no adverse opinion or a disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope, or accounting principles;
(ii) The decision to change accountants was recommended and approved by
the board of directors of the Company;
(iii) From the date the Company commenced operations (January 13, 1998)
through any subsequent interim period preceding the dismissal, there have been
no disagreements with the former accountant on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope of
procedure.
<PAGE>
(iv) The Company has requested Thomas Leger and Company, P.A., to
furnish it a letter addressed to the Commission stating whether it agrees with
the above statements. A copy of that letter was filed as Exhibit 16.1 to the
Company's Form 8-K, dated March 17, 2000.
On February 25, 2000, Moore Stephens Lovelace, P.A. Certified Public
Accountants, whose address is 1201 South Orlando Avenue, Suite 400 Winter Park,
FL 32789-7192 was engaged as the principal accountant to audit the Company's
financial statements.
PART III
Information required by Items 9, 10 and 11 of Part III of this form 10-KSB is
incorporated herein by reference from the Company's (as successor to Albara
Corporation) Definitive Information Statement on Schedule 14C filed with the
Commission on January 18, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the transactions described below, the Company did not secure
an independent determination of the fairness and reasonableness of such
transactions and arrangements with affiliates of the Company. However, in each
instance described below, the directors reviewed and unanimously approved the
fairness and reasonableness of the terms of the transactions. The Company
believes that the transactions described below were fair and reasonable to the
Company on the basis that such transactions were on terms at least as favorable
as could have been obtained from unaffiliated third parties. The transactions
between officers and directors of the Company, on the one hand, and the Company,
on the other, have inherent conflicts of interest.
The Company is a party to a Representation Agreement with Selbre Associates, a
Maryland corporation ("Selbre"), dated April 29, 1999. Ron Breland, a director
of the Company, is the owner of over 95% of the outstanding equity of Selbre.
Pursuant to that agreement, the Company pays Selbre a consultation fee of $4,000
per month during the two-year term of the agreement, in exchange for which
Selbre assists the Company in marketing the Company's products to the Federal
government. In addition to the consultation fee, Selbre is eligible to receive
stock options to purchase up to 500,000 shares of the Company's Common Stock in
the event that certain revenue targets are met by the Company. The agreement is
filed herewith as Exhibit 10.7.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following documents are filed herewith or have been included as exhibits to
previous filings with the Commission and are incorporated herein by this
reference:
<PAGE>
Exhibit No. Exhibit
----------- -------
### 2.1 Agreement and Plan of Merger
## 3(a) Articles of Incorporation
## 3(b) Bylaws
# 4(a) Agreements Defining Certain Rights of Shareholders
# 4(b) Specimen Stock Certificate
# 10(a) Pre-incorporation Consultation and Subscription
Agreement
## 10.1 Consultation Services Agreement
## 10.2 Legal Services Engagement Agreement
### 10.3 Bleed-Out Agreement
### 10.4 Consulting Agreement
### 10.5 Warrant Agreement
### 10.6 Registration Rights Agreement
x 10.7 Representation Agreement
x 11 Statement re Computation of Earnings per Share
(included in financial statements filed herewith)
#### 16 Letter on Change in Certifying Accountant
# 21 Subsidiaries of the Registrant
x 27 Financial Data Schedule
# 99.1 Safe Harbor Compliance Statement
- ----------------------------
x filed herewith
# previously filed with the Company's Definitive Information Statement on
Schedule 14C on January 18, 2000.
<PAGE>
## previously filed with the Company's Registration Statement on Form S-8
on February 29, 2000
### previously filed with the Company's Form 8-K dated March 8, 2000
#### previously filed with the Company's Form 8-K dated March 17, 2000
(b) REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the last quarter of
the 1999 fiscal year:
Current Report on Form 8-K dated March 8, 2000, reporting a change in
control of the registrant, pursuant to a merger transaction, in Item 1, and
other information regarding the merger transaction in Item 5. Financial
statements were filed in Item 7.
Current Report on Form 8-K dated March 17, 2000, reporting a change in
the registrant's certifying account in Item 4. No financial statements were
filed.
<PAGE>
LEAPFROG SMART PRODUCTS, INC.
AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
and For The Period April 11, 1996
(Date of Inception) Through December 31, 1999
F-1
<PAGE>
C O N T E N T S
--------
Page
Number
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Moore Stephens Lovelace, P.A. F-3
Meeks, Dorman & Company, P.A. F-5
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet F-6
Consolidated Statements of Operations F-7
Consolidated Statements of Changes in Stockholders' Equity (Deficit) F-8
Consolidated Statements of Cash Flows F-10
Notes to Consolidated Financial Statements F-11
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Leapfrog Smart Products, Inc. and Subsidiaries
(A Development Stage Company)
Maitland, Florida
We have audited the accompanying consolidated balance sheet of Leapfrog Smart
Products, Inc. and Subsidiaries (a development stage company) as of December 31,
1999, and the related consolidated statements of operations, changes in
stockholders' equity (deficit), and cash flows for the year then ended and for
the period April 11, 1996 (date of inception) through December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the financial statements of Leapfrog Smart Products,
Inc. and Subsidiaries for the years ended December 31, 1997 and December 31,
1998, which reflect a deficit accumulated during development stage of $2,413,005
and which is included in the financial statements presented for the period April
11, 1996 (date of inception) through December 31, 1999. Those statements were
audited by other auditors, whose report has been furnished to us, and our
opinion insofar as it relates to the amounts included in the cumulative period
since April 11, 1996 (date of inception) through December 31, 1998, is based
solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Leapfrog Smart Products, Inc. and
Subsidiaries as of December 31, 1999, and the results of its operations and its
cash flows for the year then ended and for the period April 11, 1996 (date of
inception) through December 31, 1999 in conformity with generally accepted
accounting principles.
F-3
<PAGE>
Board of Directors
Leapfrog Smart Products, Inc. and Subsidiaries
(A Development Stage Company)
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company is currently in
its development stage and, as discussed in Note 1 to the financial statements,
since its inception, the Company has incurred an accumulated deficit of
approximately $5,500,000 and as of December 31, 1999, it has a working capital
deficit of approximately $1,900,000. Additionally, the Company incurred a net
loss of approximately $3,100,000 and had negative cash flows from operations of
approximately $2,400,000 in 1999. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1 to the financial
statements. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
/s/ Moore Stephens Lovelace, P.A.
- ---------------------------------
Moore Stephens Lovelace, P.A.
Certified Public Accountants
Orlando, Florida
March 31, 2000
F-4
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Leapfrog Smart Products, Inc. and Subsidiary
Orlando, Florida
We have audited the accompanying consolidated balance sheets of Leapfrog Smart
Products, Inc. (a corporation in the development stage) and Subsidiary as of
December 31, 1998 and 1997 and the related consolidated statements of
operations, changes in stockholders' deficit and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Leapfrog Smart Products, Inc. (a corporation in the development stage) and
Subsidiary as of December 31, 1998 and 1997, and the consolidated results of
their operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company has experienced significant operating losses,
an accumulated deficit and negative working capital at December 31, 1998 and
1997. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Meeks, Dorman & Company, P.A.
- --------------------------------
Meeks, Dorman & Company, P.A.
Longwood, Florida
September 13, 1999, (Except for Note 12,
which is as of November 17, 1999)
F-5
<PAGE>
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
CURRENT ASSETS
Cash $ 18,529
Accounts receivable 6,554
Inventory 52,639
Prepaid expenses 219,740
Notes receivable - related party 26,600
Other receivables 9,226
------------
TOTAL CURRENT ASSETS 333,288
PROPERTY AND EQUIPMENT, net 267,073
OTHER ASSETS
Related-party advances 43,116
Notes receivable - related party 5,000
Deposits 8,600
Capitalized software costs, net of accumulated
Amortization of $7,600 68,400
Costs in excess of fair market value of assets acquired,
Net of accumulated amortization of $2,500 27,500
------------
$ 752,977
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable $ 1,859,049
Notes payable - related party 75,258
Accounts payable 223,474
Accrued expenses 99,816
------------
TOTAL CURRENT LIABILITIES 2,257,597
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (deficit)
Common stock - $0.01 par value per share;
6,000,000 shares authorized; 5,189,769 shares
issued and outstanding 51,897
Additional paid-in capital 3,954,128
Deficit accumulated during development stage (5,510,645)
------------
(1,504,620)
------------
$ 752,977
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
From
April 11,
1996
Year Ended Year Ended (Inception)
December 31, December 31, Through
1999 1998 December 31,
1999
-------------- ------------- -------------
<S> <C> <C> <C>
REVENUES $ 121,533 $ 86,360 $ 880,790
COST OF SALES 44,199 65,906 590,429
-------------- ------------- -------------
GROSS PROFIT 77,334 20,454 290,361
OPERATING EXPENSES
Personnel and related expenses 1,216,809 952,176 2,556,749
Consulting fees 392,308 20,577 454,465
General and administrative 1,080,133 491,077 2,188,852
Depreciation and amortization 55,478 45,354 131,199
-------------- ------------- -------------
TOTAL OPERATING EXPENSES 2,744,728 1,509,184 5,331,265
other income (expense)
Other income, net 3,095 7,293 21,922
Interest expense (433,341) (36,312) (491,663)
-------------- ------------- -------------
(430,246) (29,019) (469,741)
-------------- ------------- -------------
NET LOSS $ (3,097,640) $ (1,517,749) $ (5,510,645)
============== ============= =============
basic and diluted net LOSS PER
common SHARE $ (0.72) $ (0.49)
============== =============
WEIGHTED AVERAGE number of common
shares outstanding 4,280,158 3,125,793
============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated Total
$.01 Par Value Additional During Stockholders'
------------------------- Paid-In Development Equity
Shares Amount Capital Stage (Deficit)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
COMMON STOCK ISSUED TO
FOUNDING STOCKHOLDERS ON
APRIL 11, 1996 1,414,000 $ 14,140 $ 153,960 $ - $ 168,100
NET LOSS - - - (245,429) (245,429)
----------- ----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 1996 1,414,000 14,140 153,960 (245,429) (77,329)
ISSUANCE OF COMMON STOCK 1,070,846 10,708 418,792 - 429,500
NET LOSS - - - (649,827) (649,827)
----------- ----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 1997 2,484,846 24,848 572,752 (895,256) (297,656)
ISSUANCE OF COMMON STOCK 1,066,373 10,664 954,147 - 964,811
ISSUANCE OF COMMON STOCK FOR
CONVERSION OF NOTES PAYABLE 216,000 2,160 213,840 - 216,000
NET LOSS - - - (1,517,749) (1,517,749)
----------- ----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 1998 3,767,219 37,672 1,740,739 (2,413,005) (634,594)
ISSUANCE OF COMMON STOCK FOR
CASH 474,879 4,749 1,136,755 - 1,141,504
ISSUANCE OF COMMON STOCK ON
EXERCISE OF OPTIONS 64,075 641 15,378 - 16,019
ISSUANCE OF COMMON STOCK FOR
SERVICES 424,135 4,241 695,754 - 699,995
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated Total
$.01 Par Value Additional During Stockholders'
------------------------- Paid-In Development Equity
Shares Amount Capital Stage (Deficit)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK FOR
PAYMENT OF DEBT 33,333 $ 333 $ 49,667 $ - $ 50,000
ISSUANCE OF COMMON STOCK FOR
ACQUISITION OF MINORITY
INTEREST POSITION IN 40,000 400 29,600 - 30,000
SUBSIDIARY
ISSUANCE OF COMMON STOCK
RELATED TO DEBT FINANCING 386,128 3,861 286,235 - 290,096
NET LOSS FOR THE YEAR ENDED
DECEMBER 31, 1999 - - - (3,097,640) (3,097,640)
----------- ----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 1999 5,189,769 $ 51,897 $ 3,954,128 $(5,510,645) $ (1,504,620)
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE>
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
From
April 11,
1996
(Inception)
Year Ended Year Ended Through
December 31, December 31, December 31,
1999 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,097,640) $ (1,517,749) $ (5,510,645)
Adjustments to reconcile net loss to net cash
Used in operating activities
Depreciation 52,978 45,354 125,688
Depreciation and amortization charged to 26,338 - 26,338
cost of sales
Amortization 2,500 - 2,500
Loss on disposal of assets, net 6,877 3,250 10,127
Loss on write-off of related party note 17,870 - 17,870
receivable
Common stock issued for services and 990,091 16,000 1,007,594
interest
Cash provided by (used in) change in:
Accounts receivable (3,554) (3,000) (6,554)
Related party advances (39,394) - (43,116)
Other receivables (9,226) - (9,226)
Inventory (21,139) (31,500) (52,639)
Prepaid expenses and other assets (222,130) (2,450) (228,340)
Accounts payable (124,199) 281,503 241,141
Accrued expenses 63,630 18,961 99,816
Deferred income (11,500) (21,289) -
Minority interest 11,018 (2,046) -
------------ ------------ -------------
NET CASH USED IN OPERATING ACTIVITIES (2,357,480) (1,212,966) (4,319,446)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment (143,878) (85,626) (430,099)
Net increase in notes receivable - related (17,400) (32,070) (49,470)
party
Capitalization of software costs (76,000) - (76,000)
Proceeds from sale of vehicles - - 8,473
------------ ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (237,278) (117,696) (547,096)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 1,402,326 513,540 2,415,866
Payments on notes payable (18,434) (152,650) (324,484)
Proceeds from exercise of common stock options 16,019 367,390 448,620
Proceeds from sale of common stock 1,141,504 597,421 2,269,811
Proceeds from related-party borrowings 37,300 34,258 82,658
Repayments of related-party borrowings (6,300) (1,100) (7,400)
------------ ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,572,415 1,358,859 4,885,071
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH (22,343) 28,197 18,529
CASH AT BEGINNING OF PERIOD 40,872 12,675 -
------------ ------------- -------------
CASH AT END OF PERIOD $ 18,529 $ 40,872 $ 18,529
============ ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE>
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Leapfrog Smart Products, Inc. and Subsidiaries operations include the design,
development, and licensing of Smart card applications and related database
management systems and services. The Smart card is a wallet-sized plastic card
with an embedded computer chip carrying accessible data that is retrievable on
demand and is capable of integrating various functions with security features.
Leapfrog Smart Products, Inc. (Leapfrog) was incorporated under the laws of the
State of Florida in 1996 originally under the name Telephones! Telephones!, Inc.
Leapfrog owns 100% of the outstanding common stock of Leapfrog Global IC
Products, Inc. and approximately 96% of the outstanding common stock of Conduit
Healthcare Solutions, Inc. (Conduit). Conduit was originally incorporated in
1997 under the name Leapfrog Healthcare Products, Inc.
The consolidated financial statements include the accounts of Leapfrog Smart
Products, Inc., Conduit Healthcare Solutions, Inc., and Leapfrog Global IC
Products, Inc. (collectively, the Company). All significant intercompany
transactions and balances have been eliminated in the consolidated financial
statements.
Development Stage Company
Since its inception, the Company's planned principal operations have not yet
begun to produce significant revenue; accordingly, the Company is considered to
be a development stage enterprise.
Accounts Receivable
The Company provides its services and extends credit to its customers under
normal trade credit terms.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out method. Inventory is generally comprised of software
purchased for resale, Smart cards and accessories, and packaging material.
Prepaid Expenses
Prepaid expenses consists of the following at December 31, 1999:
Prepaid legal fees $ 186,750
Prepaid license fees 25,760
Other 7,230
-----------
$ 219,740
===========
F-11
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Prepaid Expenses (Continued)
The prepaid legal fees were paid for through the issuance of 150,000 shares of
the Company's common stock. The shares were valued at per share prices
approximating recent private placement transactions.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from three to seven years.
Software Development Costs
Costs incurred internally in creating a computer software product are charged to
research and development expense when incurred until technological feasibility
has been established for the product. Research and development expense for the
years ended December 31, 1999 and 1998 and for the period from the Company's
inception through December 31, 1999 were $293,643, $287,840 and $650,098,
respectively. Technological feasibility is established upon completion of a
detail program design or, in its absence, completion of a working model.
Thereafter, all software production costs are capitalized and subsequently
reported at the lower of unamortized cost or net realizable value. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by management with
respect to certain external factors, such as anticipated future revenue,
estimated economic life, and changes in software and hardware technologies.
Capitalization of software development costs cease when the product is available
for general release to customers. Costs of maintenance and customer support are
charged to expense when related revenue is recognized or when those costs are
incurred, whichever occurs first. Capitalized costs are amortized based on
current and future revenue for each product with an annual minimum equal to the
straight-line amortization over the remaining estimated economic life of the
product. Amortization expense related to capitalized software costs for the year
ended December 31, 1999, was $7,600.
Excess of Costs Over Fair Value of Net Assets Acquired
Excess of costs over fair value of net assets acquired is amortized using the
straight-line method over five years.
Unearned Revenue
Payments received from customers which relate to future periods are deferred and
are recognized in the periods in which they are earned.
Revenue
The Company recognizes revenue on the sales of its products when shipped.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse (see Note 7).
F-12
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Net Loss Per Share of Common Stock
The basic and diluted net loss per common share in the accompanying consolidated
statements of operations are based upon the net loss divided by the weighted
average number of shares outstanding during the periods presented. Diluted net
loss per common share is the same as basic net loss per common share since the
inclusion of all potentially dilutive common shares that would be issuable upon
the exercise of outstanding stock options and the convertible promissory note
would be anti-dilutive.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and receivables. The Company
maintains its cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts and believes that it is not exposed to any significant credit risk on
cash. The Company believes that the concentration of credit risk related to its
receivables is limited due to the number of parties the balances are due from.
Fair Value of Financial Instruments
At December 31, 1999, the fair values of cash, receivables, accounts payable and
notes payable approximated their carrying values because of their short-term
nature.
Continued Operations
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements during the year ended December 31, 1999 and 1998, the
Company incurred losses of approximately $3,100,000 and $1,518,000,
respectively, and had a deficiency in working capital of approximately
$1,900,000 at December 31, 1999. These factors, among others, may indicate the
Company will be unable to continue as a going concern for a reasonable period of
time. The accompanying consolidated financial statements do not include any
adjustments relating to the outcome of this uncertainty.
Liquidity and Plan of Operations
At December 31, 1999, the Company had cash of approximately $19,000 and a
deficiency in working capital of $1,900,000.
The Company has a limited operating history and its prospects are subject to the
risks, expenses and uncertainties frequently encountered by companies in new and
rapidly evolving markets such as Smart
F-13
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Liquidity and Plan of Operations (Continued)
card products and services. These risks include the failure to develop and
extend the Company's products and services, the rejection of such services by
Smart card customers, vendors and/or advertisers, the inability of the Company
to maintain and increase its customer base, as well as other risks and
uncertainties. In the event that the Company does not successfully implement its
business plan, certain assets may not be recoverable.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis. The
Company's primary source of liquidity has been through the private placement of
equity and debt securities. The Company is presently exploring possibilities
with respect to raising working capital through additional equity and/or debt
financings in the near future. However, there can be no assurance that the
Company will be successful in achieving profitable operations or acquiring
additional capital or that such capital, if available, will be on terms and
conditions favorable to the Company. Based upon its current business plan, the
Company believes that it will generate sufficient cash flow through operations
and external sources of capital to continue to meet its obligations in a timely
manner. If anticipated financing transactions and operating results are not
achieved, management has the intent and believes that it has the ability to
delay or reduce expenditures so as not to require additional financial
resources, if such resources were not available on terms acceptable to the
Company.
Reclassifications
Certain amounts in the December 31, 1998 financial statements have been
reclassified to conform with the December 31, 1999 presentation.
NOTE 2 - NOTES RECEIVABLE - RELATED PARTY
Notes receivable - related party consists of the following at December 31, 1999:
Unsecured 6% promissory notes from employee/stockholder, all
principal and interest due at maturity, maturing December 2000. $ 11,000
Unsecured 6% promissory note receivable from officer, all
principal and interest due at maturity, maturing December 2000. 1,500
Unsecured 6% promissory notes receivable from officer, all
principal and interest due at maturity, maturing December 2000. 2,500
Unsecured 6% promissory note receivable from employee/stockholder,
monthly interest payments of $50 beginning in March 2000, with all
remaining principal and interest due December 2000. 8,200
Unsecured 6% promissory note receivable from employee/stockholder,
monthly principal and interest payments of $400 beginning in
February 2000, with all remaining principal and interest due
March 2001. 5,000
Unsecured 6% promissory note receivable, principal and interest
due October 2000. 3,400
----------
31,600
Less current portion (26,600)
----------
Total notes receivable - related party $ 5,000
==========
F-14
<PAGE>
NOTE 3 - ADVANCES RECEIVABLE - RELATED PARTY
During 1998, the Company advanced an officer of the Company approximately
$4,000. This balance remains unpaid at December 31, 1999.
In 1999, the Company advanced a related entity approximately $40,000. This
balance remains unpaid at December 31, 1999.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net at December 31, 1999, consists of the following:
Computer equipment $196,187
Software 60,350
Furniture and equipment 147,617
-----------
404,154
Less accumulated depreciation (137,081)
-----------
Property and equipment, net $267,073
===========
NOTE 5 - NOTES PAYABLE
During 1999, the Company issued notes payable to third parties in the aggregate
amount of $1,152,326, bearing interest at 12%. The notes had terms of four to
five months and matured in 1999. The maturity dates of approximately $997,000 of
the notes were subsequently extended to January 31, 2000, upon which time they
were in default. The entire aggregate amount of these notes was outstanding at
December 31, 1999.
Notes payable at December 31, 1999, consists of the following:
Unsecured debentures, interest at 12% payable quarterly,
maturing in 1999, approximately $997,000, extended to
January 31, 2000. $1,152,326
Unsecured notes payable, interest at 12% per annum, principal
and interest due in January 2000. 250,000
Note payable to financial institution, interest due in monthly
installments at prime plus 1%, guaranteed by certain stockholders
and officers, collateralized by all assets of the 150,000
Company, matured in October 1999.
Unsecured notes payable, matured in September and October 1999,
default interest at 10.75% per annum. 100,000
Note payable to financial institution, interest due in monthly
installments at prime plus 1%, guaranteed by certain stockholders
and officers, collateralized by all assets of the 100,000
Company, matured in August 1999.
Note payable to financial institution, interest due in monthly
installments at prime plus 1%, guaranteed by certain stockholders
and officers, collateralized by all assets of the 50,000
Company, matured in February 1999.
Note payable to financial institution, interest due in monthly
installments at prime plus 1%, guaranteed by certain stockholders
and officers, collateralized by all assets of the Company,
matured in September 1999. 50,000
F-15
<PAGE>
NOTE 5 - NOTES PAYABLE (Continued)
Unsecured notes payable, interest at 10% payable monthly,
matured in September 1999. $ 6,723
------------
1,859,049
Less current portion (1,859,049)
------------
Total notes payable - long term $ -
============
Notes payable - related party at December 31, 1999, consists of the following:
Unsecured notes payable to former board member and stockholder,
interest at 8% per annum, principal and interest due in
December 2000. $ 37,300
Unsecured note payable to officer, interest at 10% per annum,
principal and interest due in December 2000. 12,958
Unsecured, noninterest-bearing promissory note payable to
former board member, no specified maturity date. 10,000
Unsecured notes payable, interest at 6% per annum, principal
and interest matured in November 1998. 10,000
Unsecured note payable, interest at 6% per annum, principal and
interest matured in January 1999. 5,000
------------
Total notes payable - related party 75,258
Less current portion (75,258)
------------
Total notes payable - related party - long term $ -
============
Cash paid for interest during 1999 and 1998 was approximately $46,000 and
$21,000, respectively.
NOTE 6 - STOCKHOLDERS' EQUITY
Private Placements
During the year ended December 31, 1999, the Company issued 474,879 shares of
its common stock in private placements at per share prices ranging from $0.88 to
$3.50. The Company received $1,141,504 in net proceeds from these private
placements.
Other Issuances of Common Stock
During the year ended December 31, 1999, the Company issued 424,135 shares of
its common stock as payment for various consulting services related to legal,
finance and merger related services. The shares issued were valued at per share
prices approximating recent private placement transactions.
During the year ended December 31, 1999, the Company issued 419,461 shares of
its common stock in satisfaction of certain notes payable and related interest
charges.
Purchase of Minority Interest
During the year ended December 31, 1999, the Company acquired an additional 16%
ownership interest in Conduit Healthcare Solutions, Inc. by issuing 40,000
shares of the Company's common stock to the former minority interest. The shares
issued were valued at per share prices approximating recent private placement
transactions.
F-16
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
Authorized Shares
In August 1999, the stockholders of the Company approved the increase in the
number of authorized shares of stock from 5,000,000 to 6,000,000.
Stock Options
Activity related to the Company's stock options during the years ended December
31, 1999, was as follows:
Outstanding Options
-----------------------------
Weighted
Number of Average
Shares Exercise
Price
-------------- --------------
December 31, 1997 622,472 $ .87
Grants 172,000 $ 1.21
Exercises (367,390) $(1.00)
Cancellations - $ -
--------------
December 31, 1998 427,082 $ 1.08
Grants 1,098,546 $ 1.42
Exercises (64,075) $ 0.26
Cancellations (26,603) $ 1.15
--------------
December 31, 1999 1,434,950 $ 1.33
==============
Options Exercisable at
December 31 1999 1,154,950 $ 1.41
==============
The range of exercise prices for options outstanding at December 31, 1999 was
$0.25 to $1.75. The following table summarizes information about options
outstanding at December 31, 1999:
Outstanding Options
-------------------------------------------
Weighted
Average
Contractual Weighted
Range of Exercise Number of Life (in Average
Prices Shares years) Exercise Price
---------------------- --------------------------- ---------------
$0.25 86,174 1.5 $0.25
$1.00 631,230 3.0 $1.00
$1.75 717,546 3.1 $1.75
-------------
1,434,950 3.0 $1.33
=============
Exercisable Options
-------------------------------------------
Weighted
Range of Exercise Number of Average
Prices Shares Exercise Price
---------------------- -------------- ---------------
$0.25 86,174 $0.25
$1.00 351,230 $1.00
$1.75 717,546 $1.75
--------------
1,154,950 $1.41
==============
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) establishes
financial accounting and reporting standards for stock-based employee
compensation plans. It encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments to employees based on new fair value accounting rules. Companies
that choose
F-17
<PAGE>
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
Stock Options (Continued)
not to adopt the new fair value accounting rules are required to disclose net
income and earnings per share under the new method on a pro forma basis. The
Company accounts for its options and warrants according to APB No. 25 and
follows the disclosure provisions of SFAS 123. Accordingly, if options or
warrants are granted to employees or others for services and other consideration
with an exercise price below the fair market value on the date of the grant, the
difference between the exercise price and the fair market value is charged to
operations. The fair value of the options granted during the fiscal year ended
December 31, 1999, reported below, has been estimated at the dates of grant
using the Black-Scholes option-pricing model with the following assumptions:
Expected life (in years) 3.7
Risk-free interest rate 8.0%
Volatility 340%
Dividend yield 0.0%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
Pro forma net loss $ (4,983,000)
Pro forma loss per share $(1.16)
The effects on pro forma disclosures of applying SFAS 123 are not necessarily
indicative of the effects on pro forma disclosures of future years.
NOTE 7 - INCOME TAXES
The difference between the Company's effective income tax rate and the federal
statutory rate at December 31, 1999 and 1998, is reconciled below:
December 31,
---------------------
1999 1998
--------- ---------
Federal (benefit) expected (34.0)% (34.0)%
State taxes (net of Federal (3.6) (5.0)
Benefit)
Increase in valuation 37.6 39.0
allowance
--------- ---------
0.0% 0.0%
========= =========
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1999, are approximately as follows:
Deferred tax assets $ 102,000
Net operating losses 1,849,000
------------
Gross deferred tax assets 1,951,000
Less valuation allowance (1,951,000)
------------
Deferred tax assets $ -
============
F-18
<PAGE>
NOTE 7 - INCOME TAXES (Continued)
There were no deferred tax liabilities as of December 31, 1999.
As of December 31, 1999, the Company had a net operating loss carryforward of
approximately $4.9 million available to offset future taxable income. The net
operating loss carryforward expires through the year 2019. Under U.S. federal
tax laws, certain changes in ownership of a company may cause a limitation on
future utilization of these loss carryforwards.
The Company has established a valuation allowance to fully offset all deferred
tax assets and carryforwards, as their future realization is uncertain.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space under noncancelable operating lease agreements,
which expire through April 2005.
Future minimum rental payments required under these leases are approximately as
follows:
Year Ending
December 31, Amount
-------------- ------------
2000 $ 188,000
2001 247,000
2002 232,000
2003 235,000
2004 242,000
Thereafter 61,000
------------
Total future minimum rental
payments $ 1,205,000
============
Total rent expense incurred under these leases approximated $73,000 and $50,000
for the years ended December 31, 1999 and 1998, respectively.
Employment Agreements
The Company has entered into employment agreements with three officers, which
provide for future annual base salaries aggregating approximately $396,000 and
$444,000 for the years ended December 31, 2000 and 2001, respectively. The
agreements also provide for the issuance of an aggregate of 280,000 $1.00
options upon the execution of the agreements and for the potential issuance of
up to 1,800,000 additional $1.00 options, if certain market capitalization and
revenue targets are met. In addition, the officers are each entitled to receive
a quarterly cash bonus equal to 2% of the Company's gross margin, which is
defined as gross revenues less cost of goods sold, including third party costs.
F-19
<PAGE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
Chinese Joint Venture
In November 1999, the Company entered into a joint venture agreement with Top
Group, (TOP) a Chinese corporation registered in Chengdu, P.R. China. The
Company's interest in the joint venture will be held by a wholly owned
subsidiary to be named Leapfrog China, Inc. In accordance with the "Law of the
People's Republic of China Joint Venture Using Chinese and Foreign Investment"
and other relevant laws and regulations, both parties of the joint venture have
agreed to set up a separate company called Leap-TOP Limited Liability Company
(Joint Venture Company). Per the agreement, TOP will contribute $100,000 to
Joint Venture Company for a 20% interest therein and Leapfrog China, Inc. will
contribute $400,000 to Joint Venture Company for an 80% interest therein.
Leapfrog China, Inc.'s contribution will be in the form of $225,000 in cash and
$175,000 in the form of intangible assets, including exclusive and non-exclusive
license rights to use, produce, adapt, market, sell and distribute the Company's
products, technology, know-how and processes. The purpose of Joint Venture
Company is to adapt the Company's products for application to suitable
governmental and private sector markets in Mainland People's Republic of China,
Hong Kong, Macau, Taiwan, Singapore and elsewhere in the Chinese-speaking
portions of the Asia-Pacific Region. Leapfrog China, Inc. will be responsible
for all approved costs associated with the registration and protection of the
intellectual property and related technology rights, as well as certain other
costs.
TOP will be paid 20% - 50% of gross margins (as defined) from Joint Venture
Company sales and will be reimbursed for specified costs. Leapfrog China, Inc.
will be paid the balance of available revenues. The term of the joint venture is
for a period of ten years, commencing on the date Joint Venture Company receives
its business license.
As of December 31, 1999, the joint venture operations had not yet commenced.
Guaranty
In July 1999, the Company guaranteed up to a $150,000 of a $200,000 promissory
note of three of its officers and/or stockholders (the Group). The balance due
on this note as of December 31, 1999 is $150,000 and is due September 2000. The
Group has pledged 200,000 shares of Company's common stock owned by the Group as
collateral for the promissory note. Due to the absence of any market for this
guaranty and the related-party nature, management believes that the fair value
of this guaranty would not be material and the estimation thereof would not be
practicable.
Consulting Agreement with Related Party
In April 1999, the Company entered into a two year marketing consulting
agreement with a member of the Company's board of directors. The agreement
provides for the Company to compensate the consultant as follows: $4,000 per
month, 240,000 stock options upon ratification of the agreement by the board of
directors and up to 260,000 additional stock options if certain revenue targets
are achieved by the Company. The exercise price for all options shall be at a
per share price of $3.50. The term of the options shall be ten years from the
grant date. Past due consulting fees may be converted into the Company's common
stock at the conversion rate of $2.50 per share. No options have been issued
under this agreement. Expenses incurred under this agreement during the year
ended December 31, 1999 approximated $43,000, of which approximately $11,500 was
paid to the consultant and an additional $22,000 was paid through the issuance
of 8,800 shares of the Company's common stock. As of December 31, 1999,
approximately $13,000 is due to the related party.
F-20
<PAGE>
NOTE 9 - SUBSEQUENT EVENTS
Merger
Effective February 18, 2000, Albara Corporation (Albara) acquired, through its
wholly owned subsidiary Leapfrog Merger, Inc., 100% of the outstanding common
stock of the Company in exchange for 5,350,049 shares of Albara common stock.
Additionally, the outstanding stock options of the Company were converted, on a
pro rata basis, into 2,434,950 Albara stock options. Prior to the merger, Albara
was considered to be a publicly held shell company with no revenues and
insignificant expenses, assets and liabilities. Upon completion of the merger,
the original shareholders of Albara held 610,946 shares of its common stock. As
a result of the exchange, the former stockholders of the Company gained control
of Albara. For accounting purposes, the acquisition has been accounted for as a
recapitalization of the Company with the Company being treated as the acquiring
entity (reverse acquisition) with no goodwill recorded. In connection with the
merger, Albara changed its name to Leapfrog Smart Products, Inc. In January 2000
Albara increased its authorized shares of no par value common stock to
30,000,000 and increased its authorized shares of no par value preferred stock
to 10,000,000.
Convertible Preferred Stock
Subsequent to the merger, the Company issued 125,000 shares of Series A
Convertible Preferred Stock and received proceeds of $500,000. The holders of
the Series A Preferred Shares are entitled to cumulative dividends at the rate
of 6% per annum. Each share of Series A Convertible Preferred Stock is
convertible into one share of common stock at the election of the holder
thereof. The Company may require mandatory conversion of all, but not less than
all, of the Series A Preferred Shares on or after the first anniversary of the
initial sale if certain stock trading prices are attained or if there is a
reorganization of the Company involving an exchange of its common stock for
shares of a United States domiciled corporation the shares of which are traded
on a national exchange or on the NASDAQ National Market System. Additional
issuances of the preferred stock, under substantially identical terms and
conditions of the aforementioned shares, may be sold until Series A Convertible
Preferred Stock having an aggregate purchase price of $6,000,000 have been sold,
provided that all such sales are held prior to May 2, 2000. For as long as at
least 50% of the Series A Convertible Preferred Shares are outstanding, the
holders thereof may elect one board member to the Company's board of directors.
Sale of Common Stock
In January, February and March 2000, the Company issued an aggregate of 212,000
shares of its common stock and received proceeds of $842,000.
Issuance of Debentures
In January 2000, the Company issued an aggregate of $550,000 of 8% - 12%
debenture notes. The Company also issued an aggregate of 75,000 shares of its
common stock to the debenture holders as incentive to enter into the agreements.
F-21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LEAPFROG SMART PRODUCTS, INC.
By: /s/ Randolph Tucker
------------------------------
Randolph Tucker, CEO
Date: April 14, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Randolph Tucker Chief Executive Officer April 14, 2000
- ------------------------ & Director
Randolph Tucker
/s/ James Gornto Chief Financial Officer April 14, 2000
- ------------------------ & Secretary
James Gornto
/s/ James Grebey Chief Technical Officer April 14, 2000
- ------------------------ & Director
James Grebey
/s/ Dale Grogan President April 14, 2000
- ------------------------ & Director
Dale Grogan
/s/ Bruce Starling Chairman April 14, 2000
- ------------------------ & Director
Bruce Starling
EXHIBIT 10.7
REPRESENTATION AGREEMENT
------------------------
LSP Smart Products - Selbre Associates
---------------------------------------
This Agreement is between LSP Smart Products, Inc. ("LSP"), a Florida
corporation, located at 545 Delaney Avenue, Building Two, Orlando, Florida
32801, [(407) 872-1161]; and, Selbre Associates ("Selbre"), a Maryland
corporation, located at 7315 Wisconsin Avenue, 10th Floor, East Building,
Bethesda, Maryland 20814, [(301) 656-1090].
WHEREAS, LSP desires to achieve a cumulative revenue target of at least
$13,000,000 over the next twenty-four (24) months (starting with the date this
REPRESENTATION AGREEMENT is effective) in order to adequately prepare the
company for an Initial Public offering ("IPO") of securities, or alternatively,
a secondary offering;
WHEREAS, LSP and Selbre believe that the Federal Government market
offers significant opportunities for achieving said revenue target;
WHEREAS, LSP wishes engage the assistance of Selbre in achieving this
revenue target and Selbre wishes to provide advice, counseling and support in
this regard;
NOW, THEREFORE, in order to establish the parameters of a working
relationship, and in consideration of the foregoing as well as the mutual
covenants contained herein, the parties hereby agree as follows:
1. Term.
-----
The term of this Agreement shall be for two years, beginning with the
date that this Agreement is ratified by LSP's Board of Directors.
Thereafter, this agreement may be extended or renewed for a fixed term,
by mutual agreement of the parties.
Alternatively, this agreement will continue in force for 30 day
increments, unless terminated by mutual agreement, or until terminated
by either party in accordance with Paragraph 7, "Termination", below.
<PAGE>
2. Confidentiality.
----------------
The parties acknowledge that from time to time each may have access to
certain confidential information, proprietary information and/or trade
secrets of the other. Accordingly, each party agrees to hold such
information in confidence and shall be bound by the terms of the
Confidentiality/Non-Disclosure Agreement attached as Exhibit "A".
3. Scope of Authority.
-------------------
Selbre shall not enter into contracts or commitments in the name of, or
on behalf of, LSP. LSP will not exercise control over the amount of
time the Selbre devotes in the performance of this Agreement. Moreover,
during the course of this Agreement, Selbre shall be free to engage in
other activities and representation and to market for other individuals
or companies, provided that such activities/representation does not
result in a conflict of interest with the services provided LSP.
Further, such activities/representation may not violate the terms of
Confidentiality/Non-Disclosure Agreement described in Section 2, above.
4. Responsibilities of Selbre.
---------------------------
Selbre will use its extensive in-house capabilities (in addition to the
subcontracted services of selected experts) to provide Marketing and
Sales support on a "best efforts" basis, to accomplish the following:
v Establish initial contacts and arrange for introduction of potential
teaming partners;
v Register potential teaming partners in writing with LSP (see Exhibit
"B" for sample registration form);
v Explore potential Government business opportunities with respect to
management's goals and objectives; Develop a general understanding of
LSP's capabilities and product line;
v Determine estimated market potential; Research and analyze
competitors; Recommend corporate investment required to meet goals;
v Provide assistance in developing a marketing methodology to designed
to achieve revenue targets;
v Provide assistance in developing a strategy to successfully integrate
Government business with LSP's existing commercial sales and
marketing organization;
v Develop Federal agency relationships and establish appropriate levels
of contact with key procurement officials; Identify sales
opportunities; Identify unique circumstances that would establish a
competitive edge for LSP;
v On an "as-needed" basis, provide a "base of operations" for LSP's
visits to the Washington DC area;
v Conduct an on-going information gathering and analysis; Identify new
programs, changes in relevant Government rules and regulations;
<PAGE>
v Provide contract administration and 72A reporting services, if and
when specifically requested by LSP, at a 50% discount from Selbre's
standard commercial hourly rates.
v Furnish LSP with copies of written communications between Selbre and
clients under contract to LSP.
v On a regular basis, advise LSP of Selbre's activities. E-mail will be
used as much as possible, as well as other streamlined methods of
communication(s).
5. Responsibilities of LSP.
------------------------
LSP will:
v Maintain an active and adequate sales force capable of pursuing and
closing opportunities identified by Selbre.
v Provide all available marketing tools such as brochures and
presentation materials for Selbre's use;
v Follow-up on a timely basis with potential clients and/or teaming
partners;
v Advise Selbre regularly of the status of any pending contracts in the
Federal marketplace;
v Cooperate fully with Selbre's efforts to assist LSP in reaching its
revenue targets, and in general, conduct activities in such a way
that does not frustrate the purpose(s) of this Agreement;
v Advise Selbre of achievement of revenue targets on a monthly basis;
v Remit to Selbre any compensation as specifically set forth in
"Compensation Schedule", attached as Exhibit "C".
6. Registration of Clients and/or Teaming Partners.
------------------------------------------------
For information purposes, Selbre shall register potential clients
and/or potential teaming partners with LSP. Such registration may be
done by E-mail (see Exhibit "B" for sample registration form);
7. Termination.
------------
After the initial twenty-four (24) month terms, either party may
terminate this Agreement by giving thirty (30) days' written notice to
the other party. Any fees due to Selbre, as well as the Confidentiality
provisions referenced in Section 2, above, shall survive this
termination.
8. Amendments.
-----------
This agreement may be amended with the written consent of both parties
with notices given to the address(es) referenced above.
<PAGE>
9. Governing Law.
--------------
This Agreement shall be governed by the laws of the State of Florida.
Should it be necessary to enforce the terms of this Agreement by
litigation, the prevailing party shall be entitled to reasonable
attorney fees and court costs.
10. Ratification by LSP's Board of Directors.
-----------------------------------------
This Agreement shall be effective upon ratification by LSP's Board of
Directors. LSP shall give Selbre prompt written notice of such
ratification. Right to stock options, to be granted in accordance with
the terms and conditions contained herein, shall vest upon the date
this REPRESENTATION AGREEMENT is ratified by LSP's Board of Directors.
11. Entire Agreement.
-----------------
This Agreement contains the entire understanding between the parties
hereto relating to the subject matter hereof and as of its effective
date shall supersede and cancel all previous negotiations, agreements,
commitments, and writings in respect thereto. This Agreement may not be
modified in any manner except by an instrument in writing signed by a
duly authorized officer or representative of each of the parties
hereto.
On this 29th day of April 1999, this Agreement is entered into and
agreed to by:
FOR: LSP Smart Products, Inc. FOR: Selbre Associates, Inc.
/s/ Randolph Tucker /s/ Ronald L. Breland 4/28/99
- ---------------------------------- -------------------------------
(Date) Ronald L. Breland, President (Date)
<PAGE>
COMPENSATION SCHEDULE
---------------------
1. Consultation Fee.
-----------------
In consideration of the actions to be taken by Selbre, as outlined in Section 4
of the REPRESENTATION AGREEMENT, LSP shall pay to Selbre a Consultation Fee of
Four Thousand ($4,000.00) dollars per month, in advance, due and payable on the
first day of every month. [The initial payment shall be due immediately upon the
effective date of the REPRESENTATION AGREEMENT, and shall be prorated through
the last day of the month the REPRESENTATION AGREEMENT becomes effective.] In
general, this Consultation Fee shall be used as a "pass through" payment to
acquire the subcontracted services of selected experts on LSP's behalf.
2. Stock Options.
--------------
In addition, LSP shall grant and deliver stock options to individual third-party
beneficiaries Ronald L. Breland and Leonard A. Maisel ("Grantees"), as outlined
below.
(A) The parties acknowledge that it is an underlying assumption of this Section
2 of the Compensation Schedule that LSP intends to effect a reverse merger with
a fully-reporting corporate shell, and list the shares of the newly merged
company on the NASDAQ Electronic Bulletin Board shortly after the effective date
of the REPRESENTATION AGREEMENT.
(C) Stock options will be issued for the purchase of LSP common stock and will
be immediately exercisable on the grant date. Such options will not be subject
to taxation until exercised.
(D) The exercise price for all options shall be the price at which the initial
bid for LSP stock is posted, once trading in LSP stock commences.
(E) Options will expire ten (10) years from the grant date.
(F) In the event of a merger, consolidation, reorganization, recapitalization,
stock dividend, stock split, or other changes in corporate structure or
capitalization affecting the Common Stock, the parties shall agree on an
appropriate adjustment to be made in the number, kind, option price, etc., of
shares subject to Options granted.
<PAGE>
(G) Options may not be transferred except by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order, and during the
Grantee's lifetime, may be exercised only by said Grantee or by said Grantee's
legal representative.
<TABLE>
<CAPTION>
Number of Stock Options Grant Date
- ----------------------- ----------
<S> <C>
(EACH to Ronald L. Breland(1)
and Leonard A. Maisel)
240,000 shares Upon the execution of this Agreement.
60,000 shares Date that LSP achieves a cumulative revenue target of
$3,000,000.
60,000 shares Date that LSP achieves a cumulative revenue target of
$6,000,000.
60,000 shares Date that LSP achieves a cumulative revenue target of
$9,000,000.
80,000 shares Date that LSP achieves a cumulative revenue target of
$13,000,000.
</TABLE>
3. Travel Expenses.
----------------
[Any] travel expenses will be exclusive of the above and MUST be pre-approved by
LSP. Travel expenses (to include meals, ground transportation, accommodations,
and minor incidental expenses) will be reimbursed by LSP at cost, provided such
costs are not excessive (i.e., costs are reasonable and customary for ordinary
business class travel.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
LSP Smart Products, Inc. Selbre Associates
By: /s/ Randolph Tucker By: /s/ Ronald L. Breland
-------------------------------- -----------------------
Title: CEO Title: President
------------------------------ ---------------------
Date: 4-29-99 Date: 4/28/99
------------------------------- ---------------------
- --------
1 On a discretionary basis Ronald L. Breland reserves the right to have his
options issued to Selbre Associates, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,529
<SECURITIES> 0
<RECEIVABLES> 6,554
<ALLOWANCES> 0
<INVENTORY> 52,639
<CURRENT-ASSETS> 333,288
<PP&E> 404,154
<DEPRECIATION> (137,081)
<TOTAL-ASSETS> 752,977
<CURRENT-LIABILITIES> 2,257,597
<BONDS> 0
<COMMON> 51,897
0
0
<OTHER-SE> (1,556,517)
<TOTAL-LIABILITY-AND-EQUITY> 752,977
<SALES> 121,533
<TOTAL-REVENUES> 121,533
<CGS> 44,199
<TOTAL-COSTS> 44,199
<OTHER-EXPENSES> 2,741,633
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 433,341
<INCOME-PRETAX> (3,097,640)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,097,640)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,097,640)
<EPS-BASIC> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
