AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 7, 2000
FILE NO. 333-36864
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3 TO
FORM SB-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
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LEAPFROG SMART PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 84-1076959
(STATE OR OTHER (PRIMARAY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION
LEAPFROG SMART PRODUCTS, INC.
1011 Maitland Center Commons
Maitland, FLORIDA 32751
(407) 838-0400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MARK T. THATCHER
17 WEST CHEYENNE MOUNTAIN BOULEVARD
COLORADO SPRINGS, CO 80906
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
WITH COPIES TO:
NADEAU & SIMMONS, P.C.
1250 TURKS HEAD BUILDING
PROVIDENCE, RI 02903
401-272-5800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after approval.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act"), check the following box. [X]
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement number for the same offering.
[X] ____________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] _________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ] _________________
<PAGE>
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
Disclosure alternative used (check one):
Alternative 1 ( ) Alternative 2(X)
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED PROPOSED
CLASS OF MAXIMUM MAXIMUM
SECURITIES TO AMOUNT TO OFFERING AGGREGATE AMOUNT OF
BE REGISTERED BE REGISTERED PRICE PER OFFERING PRICE REGIST. FEE
SHARE
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Common Stock, 3,305,923(1) $2.87 per $9,488,000(1) $
No par value
Underlying Common 128,000(2) $4.00 per $ 512,000(2) $
Stock, Par Value,
$4.00, to Series
A Convertible
Preferred Stock
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(1) This offering registers shares previously sold. The securities will be
sold at their market price on the Over-the-Counter Electronic Bulletin
Board when sold. Accordingly, the registration fee has been calculated in
accordance with Rule 457(c) of the Securities Act and based upon certain
shares of common stock. The average bid price as of May 11, 2000 was $2.87.
(2) This offering registers underlying common shares yet to be converted.
The securities may be re-sold at their market price on the Over-the-Counter
Electronic Bulletin Board when sold. Accordingly, the registration fee has
been calculated in accordance with Rule 457(c) of the Securities Act and
based upon certain shares of Series A Convertible Preferred Stock. The
offering price of the Leapfrog Series A Preferred Stock as of May 11, 2000
was $4.00.
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(THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK)
Neither the Securities and Exchange Commission nor any State securities
commission has approved or disapproved of these securities or passed upon
the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal offense.
Subject to Completion Dated September ___, 2000
LEAPFROG SMART PRODUCTS, INC.
3,433,923 SHARES
COMMON STOCK
This Prospectus relates to up to 3,433,923 shares of common stock, no par
value, of Leapfrog Smart Products, Inc., whose corporate address is 1011
Maitland Center Commons, Maitland, FL 32751. All of the shares of the
Company being offered under this document are to be sold for the accounts
of the selling shareholders, whose identities are set forth at page 16. The
Company will not receive any of the proceeds from the sale of the Shares by
the selling shareholders. The Company estimates that total expenses of the
offering will be approximately $___________.
The Company's Common Stock is quoted on the Over-the-Counter Electronic
Bulletin Board stock symbol "FROG". The Company is subject to the reporting
requirements of Section 13 and 15(d) of the Exchange Act and is presently
current in its filed reports with the Securities and Exchange Commission.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary..........................................................
Risk Factors.................................................................
Year 2000 Problems May Have an Adverse Effect
Competition
Potential Fluctuations in Quarterly Operating Results
Limited Operating History
Dependence on Third-Party Suppliers
Patents, Trademarks and Proprietary Information
Rapid Technological Changes
Expansion
Government Regulation
Dependence on Key Personnel
Control by Principal Shareholders, Officers and Directors
Issuance of Preferred Stock
Trading Market; Volatility of Stock Price
Possible Need for Additional Financing
Indemnification of Officers and Directors
Dependence Upon Outside Advisors
Rule 144 Sales
Use of Proceeds..............................................................
Dilution....................................................................
Dividend Policy.............................................................
Business....................................................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................
Management..................................................................
Certain Transactions........................................................
Principal Shareholders......................................................
Description of Capital Stock................................................
Plan of Distribution........................................................
Agreements..................................................................
Investor Relations Arrangements.............................................
Legal Matters................................................................
Experts.....................................................................
Additional Information......................................................
Financial Statements........................................................F-1
<PAGE>
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, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, hopes, intentions or strategies regarding the
future. All forward-looking statements included in this document are based
on information available to the Company on this date, 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 following:
-expectation that the Company can secure additional capital;
-continued expansion of the Company's operations through joint ventures and
acquisitions;
-success of existing and new marketing initiatives undertaken by the
Company; and
-success in controlling the cost of services provided and general
administrative expenses as a percentage of revenues.
The forward-looking statements included in this document 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;
-capital will be available to fund the Company's growth at a reasonable
cost;
-competitive conditions within the industry would not change materially or
adversely;
-demand for the Company's services would remain strong;
<PAGE>
-there would be no material adverse change in the Company's operations or
business; and
-changes in laws and regulations or court decisions will not adversely or
significantly alter the operations of the Company.
Assumptions relating to the above statements involve judgments with respect
to 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 in this document, 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.
<PAGE> 1
PART I
NARRATIVE INFORMATION REQUIRED IN PROSPECTUS
ITEM 1. INSIDE FRONT AND OUTSIDE BACK COVER PAGES OF PROSPECTUS
See front and back cover pages of this Prospectus.
ITEM 2. SIGNIFICANT PARTIES
(a) The Company's directors:
The directors and officers of the Company are as follows:
NAME TITLE AGE
Dale Grogan President & Director
Randolph Tucker CEO, Treasurer & Director
Jim Gornto Secretary
Jim Grebey Executive Vice President
& Director
Ron Breland Director
Bob Harnett Director
George MacKay Director
Randall Schrader Director
Bruce Starling Chairman & Director
Van Staton Director
George Stuart Director
<PAGE> 2
(b) The Company's officers: See response to Item 2(a) above.
The officers of the Company are as follows:
NAME TITLE ADDRESS
Bruce Starling Chairman 1011 Maitland Center Commons
Maitland, FL 32751
Randolph Tucker CEO & Treasurer 1011 Maitland Center Commons
Maitland, FL 32751
Dale Grogan President 1011 Maitland Center Commons
Maitland, FL 32751
Jim Grebey Vice President 1011 Maitland Center Commons
Maitland, FL 32751
Jim Gornto Secretary 1011 Maitland Center Commons
Maitland, FL 32751
(c) The Company's general partners: None.
(d) Record owners of 5 percent or more of any class of the Company's
common stock: See response to Item 2(e) below.
(e) Beneficial owners of 5 percent or more of any class of the
Company's common stock:
<PAGE> 3
COMMON STOCK
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NAME AND ADDRESS NUMBER OF PERCENT
OF BENEFICIAL OWNER SHARES OF CLASS OPTIONS(1)
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Ron Breland 0 0.00% 240,000
C/O Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
William Campion 325,681 5.73% 3,971
C/O Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Jim Grebey 5,000 0.09% 110,000
C/O Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Dale Grogan 309,500 5.44% 143,574
C/O Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Bruce Starling 139,858 2.46% 50,000
C/O Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Van Staton 304,858 5.36% 50,000
C/O Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
George Stuart 130,730 2.30% 52,307
C/O Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
George MacKay
C/O Leapfrog Smart Products, Inc. 285,500 5.02% 25,000
1011 Maitland Center Commons
Maitland, FL 32751
Robert Harnett 139,858 2.45% 25,000
C/O Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Randall Schrader 0 0.00% -
C/O Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Randolph Tucker 490,500 8.62% 170,052
C/O Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Jim Gornto 0 0.00% 25,000
C/O Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
<PAGE> 4
(f) Promoters of the Company: See response to Item 2(a) above.
(g) Affiliates of the Company: See Items 2(a), (b), (d) and (f) above.
(h) Counsel to the Company with respect to the proposed offering:
Nadeau & Simmons, P.C.
1250 Turks Head Building
Providence, RI 02903
(i) Each underwriter with respect to the proposed offering:
Not applicable.
(j) The underwriter's directors:
Not applicable.
(k) The underwriter's officers:
Not applicable.
(l) The underwriter's general partners:
Not applicable.
(m) Counsel to the underwriter:
Not applicable.
ITEM 3. RELATIONSHIP WITH ISSUER OF EXPERTS NAMED IN REGISTRATION
STATEMENT
No expert named in this prospectus was paid on a contingent basis or had a
material interest in the Company or any of its subsidiaries. Likewise, No
expert was connected with the Company or any of its subsidiaries as a
promoter, underwriter, voting trustee, director, officer or employee.
ITEM 4. LEGAL PROCEEDINGS
Leapfrog and its subsidiary, Leapfrog Global IC Products, Inc. ("LGIC")
were named in an action alleging that the companies failed to disclose
certain corporate records as required by Florida Law. Leapfrog's special
Florida litigation counsel has advised the company that the remedies asked
for in the complaint against Leapfrog are not available because Leapfrog is
a Colorado corporation. In any event, the plaintiff is seeking primarily
equitable relief, and not money damages, against both Leapfrog and LGIC. As
such, even if the suit was successful, it would not materially impact the
financial condition of either Leapfrog or LGIC.
<PAGE> 5
ITEM 5. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
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. Thomas Leger & Company, P.A. 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, Leapfrog dismissed Thomas Leger & Company and
retained Moore Stephens & Lovelace, P.A. The following information is set
forth pursuant to Reg. Sec. 229.304 of Regulation S-K of the Securities Act
of 1933:
(a) Thomas Leger and Company's report on the balance sheet of
Albara Corporation, the predecessor corporation to the Company, 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;
(b) the board of directors recommended and approved the decision to
change accountants;
(c) From the date Albara commenced operations until their
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.
(d) The Company has requested Thomas Leger & 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, Leapfrog hired Moore Stephens Lovelace, P.A.
Certified Public Accountants, whose address is 1201 South Orlando Avenue,
Suite 400 Winter Park, FL 32789-7192 as the principal accountant to audit
the Company's financial statements.
ITEM 6. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
The Company's Articles of Incorporation provide that a director of the
Company shall not be personally liable to the Company or any of its
shareholders for monetary damages for breach of fiduciary duty as a
director, except liability for the following:
(a)any breach of the director's duty of loyalty to the Company or its
shareholders;
(b)acts or omissions not in good faith or which involve gross
negligence intentional misconduct or a knowing violation of law;
(c)any unlawful distribution as set forth in the General Corporation
Law of the State of Colorado; or
(d)any transaction from which the director derived an improper personal
benefit.
<PAGE> 6
These provisions may have the effect in certain circumstances of reducing
the likelihood of derivative litigation against directors. While these
provisions may eliminate the right to recover monetary damages from
directors in various circumstances, rights to seek injunctive or other
non-monetary relief are not eliminated.
The Company's By-laws provide for indemnification of the Company's
directors to the fullest extent permitted by law. The Company's Bylaws also
permit the Company, through action of the Board of Directors, to indemnify
the Company's officers or employees to the fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
the 1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the 1933 Act and will be governed by the final adjudication of such issue.
<PAGE> 7
PROSPECTUS SUMMARY
THE COMPANY
This Summary of Business describes the overall operational plan for the
Company with respect to its development and operation of power plant
systems.
Company Description
Leapfrog was founded in April of 1996 as a Florida corporation. The Company
is dedicated to designing, developing, licensing, and marketing Smart
cards, software applications and related database management systems and
services. The Smart card is a wallet-sized plastic card with a computer
chip inside. The computer chip can carry a wide variety of information and
make it easily accessible, while keeping the information secure. Just like
Microsoft writes software to operate PCs, Leapfrog writes software to make
computers called "Smart cards" work.
Leapfrog currently has 32 full-time employees, and a growing sales force.
The engineering department has fourteen employees, while ten employees are
associated with administrative roles. The sales and marketing team is made
up of eight people. The Company expects to increase its sales and marketing
team once the Company's sales and marketing plan is implemented.
In 1997 and 1998, Leapfrog began developing a technology that would serve
as the foundation for commercially viable Smart card software products.
That technology is designed to work with patent pending "Plug-and-Play"
technology. Management believes the technology allows a client to choose
any number of software options from Leapfrog's "library" of software
products and have a customized product. For Leapfrog, this proprietary
technology allows Leapfrog to re-use software modules over and over again
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.
In 1999, Leapfrog began developing a number of proprietary software
programs for commercialization. Six commercial products, in
Commercial-Off-The-Shelf form, are nearly complete. These six commercial
products, called SecurePak, Smart card Commander, MDCard, SmartPoints,
SmartExpo, and SmartResort, have been announced by Leapfrog.
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
limit 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.
<PAGE> 8
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 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. The contract to
provide the United States Government's Smart cards could have a substantial
value over a ten-year period.
Management expects this contract to be awarded to multiple vendors.
Leapfrog intends to actively pursue this contract opportunity and will
likely enter into an alliance with a major government contractor to supply
Smart card software integration services in connection with this GSA
contract.
Leapfrog's corporate headquarters are located at 1011 Maitland Center
Commons, Maitland FL 32751. The Company's transfer agent is American
Securities Transfer, Inc., 1825 Lawrence Street, Ste 444 Denver, CO 80020
(303) 298-5370.
THE OFFERING
The offering to which this Prospectus relates consists of 3,433,923 shares
of common stock.
<PAGE> 9
RISK FACTORS
A HIGHLY COMPETITIVE MARKET MAY NEGATIVELY IMPACT THE COMPANY'S BUSINESS,
PROSPECTS, FINANCIAL CONDITION AND RESULTS OF THE COMPANY
At this time, the Company is in a highly competitive market with brand name
operators. The Company must rely solely on the effective and efficient
promotion, operational support and sales of its services for its success.
The company is engaged in a business with a high public profile and is
directly competitive with manufacturers and distributors of Smart Card
Systems. There can be no assurance that these threats of competition will
not negatively impact the operations and results of the Company.
<PAGE> 10
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S BUSINESS, PROSPECTS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's business and prospects must be considered along with the
risks, expenses and difficulties frequently encountered by companies in
their early stages of development. The risks the Company faces include, but
are not limited to, an evolving and unpredictable business and industry,
management of growth, the Company's ability to anticipate and adapt to a
developing market and unforeseen changes and developments in the Company's
strategic partners' activities and direction. To address these risks, the
Company must, among other things, implement and successfully execute its
business strategy, continue to develop and upgrade its technology, provide
superior client service, respond to competitive developments and attract,
retain and motivate qualified personnel and meet the expectations of its
strategic partners. There can be no assurance that the Company will be
successful in addressing such risks, and the failure to do so could have a
material adverse effect on the Company's business, prospects, financial
condition and results of operations.
THE COMPANY'S LIMITED OPERATING HISTORY MAY NEGATIVELY EFFECT ITS
ABILITY TO ACCURATELY PREDICT REVENUES AND FORECASTS
The Company has a limited operating history. In addition, the Company
competes in emerging markets. As such, the Company may not be able to
accurately predict its revenues. The Company expects to experience
significant fluctuations in its future quarterly operating results due to a
variety of factors, many of which are outside the Company's control.
Factors that may adversely affect the Company's quarterly operating results
include:
(a) the Company's ability to retain and attract clients;
(b) the level of competition in the Smart Card industry;
(c) the Company's ability to upgrade and develop its systems and
infrastructure and attract new personnel in a timely and effective
manner;
(d) the amount and timing of operating costs and capital expenditures
relating to expansion of the Company's business, operations and
infrastructure;
(e) governmental regulation; and
(f) general economic conditions and economic conditions specific to the
Smart Card industry.
THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL SECURE, OR BE ABLE
TO PROTECT ANY PATENTS, TRADEMARKS OR INTELLECTUAL PROPERTY
The Company may apply for United States patents related to its business.
The Company also has applied for trademark protection in the United States
for the name LEAPFROG SMART PRODUCTS, INC. There can be no assurance that
existing or future patents or trademarks, if any, will adequately protect
the Company. Also, there can be no assurances that any patent or trademark
applications will result in issued patents or trademarks. In addition,
there can be no assurances that the Company's patents or trademarks will be
upheld, if challenged. The Company also faces the risk that competitors
will develop similar or superior methods or products outside the protection
of any patent issued to the Company. Although the Company believes that its
potential patent and trademarks, as well as the Company's products, do not
and will not infringe patents or trademarks or violate the proprietary
rights of others, it is possible that the Company's existing patent or
trademark rights may not be valid or that infringement of existing or
future patents, trademarks or proprietary rights may occur. Failure to do
any of the foregoing could have a material adverse effect upon the Company.
In addition, there can be no assurance that the Company will have the
financial or other resources necessary to enforce or defend a patent or
trademark infringement or proprietary rights violation action which may be
brought against it. Moreover, if the Company's products infringe patents,
trademarks or proprietary rights of others, the Company could, under
certain circumstances, become liable for damages, which also could have a
material adverse effect on the Company.
<PAGE> 11
POTENTIALLY RAPID OPERATIONAL EXPANSION MAY NOT BE EFFECTIVELY
MANAGED OR MAINTAINED BY THE COMPANY
The Company's proposed expansion will also require the company to enhance
its operational and financial systems. Expansion will also require
additional management, operational and financial resources. If the Company
cannot make the necessary changes to its systems and resources, it is
possible that the Company's results of operations and financial condition
could be materially adversely affected. There can be no assurance that the
Company will be able to manage its expanding operations effectively or that
it will be able to maintain or accelerate its growth. In addition, there
can be no assurance of the viability of the Company's products in new
geographic regions or particular local markets.
GOVERNMENT REGULATION MAY IMPEDE THE PROGRESS OF THE COMPANY
In running its business, the Company must comply with state laws and a wide
range of other state and local rules and regulations. It is essential and
costly to make sure the Company complies with federal, state and local
regulations. The failure to comply could have a material adverse effect on
the Company. If the Company were to violate any of the federal and/or state
laws and regulations governing its business in a particular state, the
Company and its affiliates could be forced to make rescission offers, pay
monetary damages and/or penalties, face imprisonment and/or face injunctive
proceedings.
THE COMPANY'S DEPENDENCE ON KEY PERSONNEL COULD NEGATIVELY
IMPACT THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's future success depends in large on part of the continued
service of its key marketing and management personnel. The Company must
also be able to continue to attract an retain qualified employees. The
competition for such personnel is intense, and the loss of key employees
could have a material effect on the Company's financial condition and
results of operations.
THE CONTROL OF THE COMPANY BY PRINCIPAL SHAREHOLDERS, OFFICERS AND
DIRECTORS COULD IMPEDE ITS SHAREHOLDERS FROM HAVING ANY ABILITY
TO DIRECT AFFAIRS AND BUSINESS
The Company's principal shareholders, officers and directors will
beneficially own approximately 2,131,485 (35.55%) of the Company's common
stock. As a result, the principal shareholders, officers and directors may
have the ability to control the Company and direct its affairs and
business. Such concentration of ownership could delay, defer or prevent a
change in control of the Company.
<PAGE> 12
ISSUANCE OF PREFERRED STOCK MAY ADVERSELY AFFECT HOLDERS OF
COMMON STOCK OR DELAY OR PREVENT CORPORATE TAKE-OVER
The Company's Articles of Incorporation provide that the Company may, from
time to time, issue preferred stock in one or more series. The Articles of
Incorporation authorize the Board of Directors of the Company to determine
the rights, preferences, privileges and restrictions granted to and imposed
upon any wholly unissued series of preferred stock and the designation of
any such shares, without any vote or action by the Company's shareholders.
The Board of Directors may authorize and issue Preferred stock with voting
power or other rights that could adversely affect the voting power or other
rights of the holders of Common Stock. In addition, the issuance of
preferred stock could delay, defer or prevent a change in control of the
Company, because the terms of preferred stock that might be issued could
potentially prohibit the Company's consummation of any merger,
reorganization, sale of substantially all of its assets, liquidation or
other extraordinary corporate transaction without the approval of the
holders of the outstanding shares of the preferred stock.
THE COMPANY'S STOCK PRICE WILL BE POTENTIALLY VOLATILE
There has been little public market for the Company's common stock. There
can be no assurance that an active trading market will develop or be
sustained. At a future date, provided a public market for the stock does
develop, the market price of the shares of Common Stock is likely to be
highly volatile and may be significantly affected by factors such as
fluctuations in the Company's operating results, announcements of
technological innovations or new products and/or services by the Company or
its competitors, governmental regulatory action, developments with respect
to patents or proprietary rights and general market conditions. In
addition, the stock market has, from time to time, experienced significant
price and volume fluctuations that are unrelated to the operating
performance of particular companies.
THE POSSIBLE NEED FOR ADDITIONAL FINANCING MAY IMPEDE THE COMPANY'S
ABILITY TO MANAGE OPERATIONS AT AN OPTIMAL LEVEL
The ultimate success of the Company may depend upon its ability to raise
additional capital. The Company has not investigated the availability,
source, or terms that might govern the acquisition of additional capital.
The Company will not investigate these issues until it determines a need
for additional financing. If additional capital is needed, there is no
assurance that funds will be available from any source. Also, if additional
capital is available, there can be no assurance that additional capital can
be obtained on terms acceptable to the Company. If additional is not
available, the Company's operations will be limited to those that can be
financed with its modest capital.
<PAGE> 13
THE COMPANY'S INDEMNIFICATION OF OFFICERS AND DIRECTORS MAY RESULT
IN SUBSTANTIAL EXPENDITURES
The Company's Articles of Incorporation provide for the indemnification of
its directors, officers, employees, and agents, under certain
circumstances, against attorney's fees and other expenses incurred by them
in any litigation to which they become a party arising from their
association with or activities on behalf of the Company. The Company will
also bear the expenses of such litigation for any of its directors,
officers, employees, or agents, upon such person's promise to repay the
Company therefor if it is ultimately determined that any such person shall
not have been entitled to indemnification. This indemnification policy
could result in substantial expenditures by the Company which it will be
unable to recoup.
THE COMPANY'S DEPENDENCE UPON OUTSIDE ADVISORS MAY LIMIT THE
ABILITY TO GROW OPERATIONS AT AN OPTIMAL RATE
To supplement the business experience of its officers and directors, the
Company may be required to employ consultants or advisors. It is
anticipated that such persons may be engaged on an "as needed" basis
without a continuing fiduciary or other obligation to the Company. There
can be no assurances that the Company will locate adequate outside
advisors, or that they will be available at affordable rates. Provided such
persons are not located, the Company's operations may be negatively
impacted.
RULE 144 SALES MAY HAVE A DEPRESSIVE IMPACT ON THE COMPANY'S STOCK
Certain of the outstanding shares of Common Stock held by present
stockholders are "restricted securities" within the meaning of Rule 144
under the Securities Act of 1933, as amended.
As restricted shares, these shares may be resold only pursuant to an
effective registration statement or under the requirements of Rule 144 or
other applicable exemptions from registration under the Act and as required
under applicable state securities laws. Rule 144 provides in essence that a
person who has held restricted securities for a prescribed period may,
under certain conditions, sell every three months, in brokerage
transactions, a number of shares that does not exceed the greater of 1.0%
of a company's outstanding common stock or the average weekly trading
volume during the four calendar weeks prior to the sale. As a result of
revisions to Rule 144 which became effective on or about April 29, 1997,
there will be no limit on the amount of restricted securities that may be
sold by a nonaffiliate after the restricted securities have been held by
the owner for a period of two years. A sale under Rule 144 or under any
other exemption from the Act, if available, or pursuant to subsequent
registrations of shares of Common Stock of present stockholders, may have a
depressive effect upon the price of the Common Stock in any market that may
develop.
<PAGE> 14
REQUIRED REGULATORY DISCLOSURE RELATING TO LOW-PRICED STOCKS MAY
NEGATIVELY IMPACT LIQUIDITY IN THE COMPANY'S STOCK
As long as the trading price of the Common Stock is less than US$5.00 per
share, trading in the Common Stock in the US secondary market is subject to
certain rules promulgated under the Securities Exchange Act of 1934, which
rules require additional disclosure by broker-dealers in connection with
any trades involving a stock defined as a "penny stock" (generally, any
non-NASDAQ equity security that has a market price of less than US$5.00 per
share, subject to certain exceptions). Such rules require the delivery,
prior to any penny stock transaction, of a disclosure schedule explaining
the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks
to persons other than established customers and accredited investors. For
these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale.
The additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in the Common Stock,
which could severely limit the market liquidity of the Common Stock and the
ability of stockholders to sell the Common Stock in the US secondary
market.
USE OF PROCEEDS
The Company will not realize any of the proceeds of this Offering.
<PAGE> 15
CAPITALIZATION
The following is the capitalization of the Company as of May 10, 2000.
AMOUNT TO BE
AMOUNT AMOUNT OUTSTAND. UPON
TITLE OF CLASS AUTHORIZ. OUTSTAND. ISSUANCE OF ALL SHARES
--------------------------------------------------------------------------------
Common Stock
No par value 30,000,000 8,906,120 8,906,120
Preferred Stock 10,000,000
Series A
Convertible 125,000 1,459,625
Series F
Convertible 195 195
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 Association 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
2000 Fiscal Year High Bid Low Bid
First Quarter $ 9.00 $ 5.88
On March 31, 2000, the reported bid for the Company's Common Stock was
$5.875.
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.
<PAGE> 16
DILUTION
The Company's shareholders will not realize any dilution from this
Offering.
SELLING SHAREHOLDERS
This offering registers shares previously sold. The securities will be sold
at their market price on the Over-the-Counter Electronic Bulletin Board
when sold. Accordingly, the registration fee has been calculated in
accordance with Rule 457(c) of the Securities Act and based upon certain
shares of common stock. The average of the bid and asked price as of May
11, 2000 was $2.87.
This offering registers underlying common shares yet to be converted. The
securities may be re-sold at their market price on the Over-the-Counter
Electronic Bulletin Board when sold. Accordingly, the registration fee has
been calculated in accordance with Rule 457(c) of the Securities Act and
based upon certain shares of Series A Convertible Preferred Stock. The
price of the Leapfrog Series A Preferred Stock as of May 11, 2000 was
$4.00.
THE OFFERING
An aggregate of up to 3,433,923 Shares of the Company's Common Stock, no
par value, may be offered by the Selling Shareholders who had previously
been issued "restricted" shares by the Company and who will be entitled to
sell up to 3,433,923 Shares of the Company's Common Stock offered herein by
this Prospectus.
The following table sets forth certain information with respect to the
Selling Shareholders, persons or entities for whom the Company is
registering for resale to the public, either the Shares of the Company's
Common Stock which such persons or entities own.
The following table reflects certain person's or entities' ownership as of
May 11, 2000.
AMOUNT AND
NATURE OF
BENEFICIAL MAX.
NAME OF OWNER. OF PERCENT NO.TO
HOLDERS SHARES OF CLASS BE SOLD
------------------------------------------------------------------------------
Hin H. Khoo
Equator Star Holdings LTd
5 Shenton Way
UIC Building, Ste. 32-07
Singapore 068808
VIVEKANANTHAN s/o M.V. NATHAN
42 Jalan Bangsar Utama
Bangsar 59000
Kuala Lumpur
Malaysia
NATIONS CORP LIMITED
50 Playfair Road
#06-03 Noel Building
Singapore 367995
Anthony J. Skelchy
6 Jalan 5/41
Petaling Jaya 46000
Malaysia
Vicki Skelchy
6 Jalan 5/41
Petaling Jaya 46000
Malaysia
<PAGE> 17
DIVIDEND POLICY
The Company expects to retain its earnings to finance further growth and,
when appropriate, retire existing debt. As a result, the Directors of the
Company expect that, for the foreseeable future, the Company will not
declare or pay any dividends on any of its shares.
BUSINESS
GENERAL
Leapfrog Smart Products, Inc.--Description of the Business
Leapfrog Smart Products was founded on April 11, 1996 as a Florida
corporation. The Company is dedicated to designing, developing, licensing,
and marketing Smart card software applications and related database
management systems and services. The Smart card is a wallet-sized plastic
card with a computer chip in it. The computer chip is capable of carrying a
variety of data that is retrievable on demand while maintaining security.
Just like Microsoft writes software to operate PCs, LEAPFROG writes
software to make computers called "Smart cards" work.
LEAPFROG merged with its predecessor corporation, Albara Corporation,
effective February 18, 2000 through a reverse acquisition. As a result of
the merger, 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 and no significant assets or liabilities. It was
traded under the stock symbol "ALBR" which has now been changed to "FROG".
At ALBARA's Annual Shareholder meeting, the shareholders approved 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
force at December 31, 1999. The engineering department had 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
consisted of of eight people, which is expected to increase when the
Company implements a sales and marketing plan.
In 1997 and 1998, LEAPFROG began developing a technology that would serve
as the foundation for developing commercially viable Smart card software
products. That technology is designed to work with patent pending
"Plug-and-Play" technology. Management believes, the technology allows a
client to choose any number of software options from the LEAPFROG's
"library" of software products 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.
<PAGE> 18
During 1999, Leapfrog began developing a suite of proprietary software
programs for commercialization. Six commercial products, in
Commercial-Off-The-Shelf form, are almost complete 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 and
limit 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 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 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
limiting potential 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 technology, LEAPFROG is now
preparing software products for commercialization. LEAPFROG's software
development strategy is based on creating Commercial-Off-The-Shelf
software. Management believes that software which can be packaged for mass
distribution. Management believes that this 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.
<PAGE> 19
Management of LEAPFROG expects to be able to use its proprietary technology
to develop new products that can be marketed and sold as exact copies all
over the world similar to the way 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
customized to provide each user their choice of preferences, needed
accessories, and report requirements.
LEAPFROG's Management believes that the Company can access previously
untapped markets with a relatively small number of products. Product
replication is an important part in developing a marketing strategy,
Similarly, additional considerations, such as life expectancy of a product,
enhancement of product replication also become important. If financial
resources will allow, Management intends to make the following products
commercially available in 2000. There can be no assurance that such
resources will be available:
SecurePak. SecurePak is a tool designed for sending information through the
internet. SecurePak is designed to combine various encryption systems,
namely DES, triple-DES, and RSA encryption, with physical security to
protect data and systems.
Smart card Commander. The Smart card Commander is an application program
development tool designed assist in creating Smart card applications that
interface directly with Leapfrog's own proprietary software systems.
Management intends to market the Smart card Commander through LEAPFROG
resellers.
MDCard. 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 medical software package. The software creates a digital
environment for data collection and management within the medical
community. This product is currently being tested by a hospital group in
Florida that intends to utilize a patient Smart card for a host of
interactive functions.
SmartPoints. SmartPoints is designed to be a loyalty program for closed
user groups wishing to increase member or fan loyalty. The user of this
software, i.e., a sports team or Chamber of Commerce, issues cards to their
respective 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. 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. For example:
-registration;
-lead tracking;
-purchases; and
-continuing education credit tracking.
SmartResort. SmartResort is designed to verify membership, while providing
guests with a secure way to enter and exit a destination such as a
<PAGE> 20
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. In 1999, the Company has been focused on Product
Development. 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 utilizes 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:
(a) partnership distribution and licensing; (b) closed user-group decision
makers; and (c) indirect distribution.
Initially, it is extremely important for a smaller company to create strong
strategic partnerships. 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. Marketing emerging
technology requires one-on-one selling with decision-makers. In this
regard, Management intends to utilize sales tactics that are based on
portraying Leapfrog in 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.
<PAGE> 21
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
<PAGE> 22
RESULTS OF OPERATIONS
Revenues and Gross Profits:
---------------------------
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 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:
-------------------------
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.
<PAGE> 23
Other income and expense:
-------------------------
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:
---------
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.
<PAGE> 24
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> 25
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.
MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
Management
The directors and officers of Leapfrog Smart Products, Inc. are as follows:
Name Age Position
Bruce Starling Chairman
Randolph Tucker CEO, Director and Treasurer
Dale Grogan President and Director
Jim Grebey Executive Vice President and Director
Jim Gornto Secretary
Ronald Breland Director
Robert Harnett Director
George MacKay Director
Randall Schrader Director
Van Staton Director
<PAGE> 26
Biographical Information:
BRUCE STARLING Director.
Mr. Starling attended the University of Florida where he earned a Bachelor
of Science in Business Administration (1963), Master of Business
Administration (1965) and Juris Doctor (1967).
After graduating the University of Florida School of Law, Mr. Starling
entered the military serving in the Judge Advocate General's office in
Vietnam (1968-1972). He practiced law in the Miami and Orlando offices of
Helliwell, Melrose and DeWolf (1972-1977) and was General Counsel to
Governor Reubin Askew (Tallahassee, Florida 1977 to 1979).
From 1979 through 1981, he was the Executive Assistant to the U.S.
Trade Representative in 1979 and subsequently became a partner in the
Orlando based law firm of DeWolf, Ward and Morris (1981-1986).
Mr. Starling became Senior Vice President of Harcourt Brace Jovanovich,
Inc. (1986-1990), was Of Counsel to Akerman, Senterfitt and Edison
(1990-1992), Assistant Executive Director of the Greater Orlando Aviation
Authority (1992-1993) and later VP of governmental relations for the Walt
Disney Corporation (1993-1994). Mr. Starling with his brother Alan, now
owns the Starling Auto Group based in Kissimmee, Florida.
Mr. Starling presently sits on the Advisory Board of Colonial Bank; the
Florida Prepaid College Board, where he was appointed by the Governor of
Florida; the Florida Tax Watch Board, the Florida District Export Council
Board, the Florida/Korea Economic Cooperation Committee and the Florida
Chamber of Commerce Board.
VAN STATON, Director
Mr. Staton received an Honorary Associate Degree from Central Florida
Community College, Ocala, Florida and is a member of the Executive
Committee and Board of Directors of the Company.
Mr. Staton was manager of the Ocala, Florida Belk Lindsey store for 36
years before his retirement in 1984. He is a former member of the Board of
Trustees for the Central Florida Community Collage and past Chairman of the
School Board for Marion County, Florida. He is actively involved in the
recruiting and regional training as an area coordinator for Excel
Telecommunications, a public company.
<PAGE> 27
RANDOLPH TUCKER, CEO/Director
Mr. Tucker has practiced business law for more than 25 years and has
consummated numerous transactions in all phases of business. His experience
includes business formation and administration, banking, bankruptcy,
mergers and acquisitions. He is recognized as one of the outstanding
specialists within the membership law discipline. He has represented over
50 corporations in various aspects of leisure law over the past twelve
years. His business experience includes the chartering of banks, television
stations, underwritings, and various corporate counsel responsibilities.
As Chairman of Leapfrog Smart Products, he has been instrumental in
creating the infrastructure and corporate environment. Mr. Tucker has been
able to assemble the brightest minds in a new industry and establish a
cohesive creative workplace. Mr. Tucker provided strategic guidance,
business development, and expansion analysis.
DALE GROGAN, President/Director
Mr. Grogan's professional experience includes over a decade in finance and
investment banking. He has managed two investment banking firms
specializing in business start-ups, with particular emphasis in the
membership industry. Related business experience for Mr. Grogan includes
the formation and initial administration of a national non-profit trade
association within the leisure and travel industry, board membership for an
interactive travel information supplier, and advisor to several
telecommunications marketing companies within the pre-paid phone card
industry.
Mr. Grogan provides corporate and industry vision. His duties include
product and market development, recruiting, management and strategy
formulation and implementation. Mr. Grogan is a recognized author and guest
speaker in the Smart card industry and serves on various industry
technology committees. He is a co-founded and President of Leapfrog Smart
Products.
RONALD BRELAND, Director
Mr. Breland is the current President of Selbre Associates, Inc. He brings
28 years of experience in contract negotiations and management for both
commercial and governmental markets. Mr. Breland has supervised and
personally negotiated more than 1,000 Schedule Contracts and has
successfully conducted compliance audits for several Fortune 1,000
companies. Mr. Breland was a Charter Member of the Industry Advisory
Council of the Federation of Government Information Processing Councils, a
member of the American Management Association and a former member of the
Baltimore-Washington Minority Economic Development Council. Mr. Breland
holds a B.S. in Engineering from the University of Maryland.
<PAGE> 28
JAMES GREBEY, EVP Director
Mr. Grebey received an AAS degree in Electronics from SUNY (1970), BT
Degrees in computer Systems and Technical Management from NYIT (1977), and
has completed course work towards his MBA from SUNY.
Mr. Grebey comes to Leapfrog from Hughes Training in Orlando, where he
developed and oversaw a 100-man engineering team responsible for multiple
projects in the millions of dollars (1994-1998). His management background
includes financial planning and execution at the programs department
division and operational level plus cost account management and strategic
planning. Mr. Grebey has led the development on over 3000,000 lines of ADA,
C. and FORTRAN code. As an engineer and technical manager. Mr. Grebey has
been highly involved with solving software and system production problems.
His engineering experiences, include hardware, software and system design,
domain engineering, system architecture, requirement analysis design,
coding and hardware fabrication and testing of complex virtual and
constructive simulation systems. Mr. Grebey is responsible for the daily
activities of the Engineering Department of Leapfrog.
GEORGE STUART, JR. Director
Mr. Stuart served as Secretary of Florida's Department of Business and
Professional Regulation (BPR) from 1991 to 1995. The Department licensed
and regulated eight major industries and fifty-five professions and
occupations including the pari-mutual, hotel and restaurant industries.
Senator Stuart served as a Florida State Senator from 1978 through 1990.
His legislative service included sponsoring landmark legislation in health
care, growth management and education. Senator Stuart chaired the
committees on Education, Natural Resources and Economic and Consumer
Affairs and chaired the Joint Committee on Information Technology
Resources. He sponsored major innovations in international business
development and in the management and acquisition of technology. He
co-chaired the Council of State Government's Task Force on Health Care
Reform.
Mr. Stuart earned an MBA from Harvard University's Graduate School of
Business. He is a graduate of the University of Florida.
JIM GORNTO, CFO and Secretary
Mr. Gornto, who serves as the Company's CFO, earned a Bachelor's of
Business Administration from Georgia State University in 1969, where he
also earned an M.B.A. in 1972. He has over 30 years experience in the
banking industry, beginning in 1969 with First National Bank in Griffin,
Georgia. Mr. Gornto began as a cashier at First National Bank and, before
his departure in 1973, was elected Vice President and Executive Vice
President. He subsequently served as President and Chief Executive Officer
of the Bank of Fort Valley in Fort Valley, Georgia, First American Bank,
Monroe, Georgia, Florida National Bank, Gainesville, Florida, Barnett Bank
of Pinellas County, Clearwater, Florida, South Trust Bank, Ocala, Florida,
Bank U.S., Ocala, Florida and First Federal Savings Bank of New Smyrna.
During his years in executive offices, Mr. Gornto has participated in a
number of mergers and acquisitions between financial institutions with tens
of millions of dollars in assets. At Riverside National Bank, Mr. Gornto
earned his Series 7 and 63 licenses. He also served as an Investment
Representative at Edward Jones Investments, Port Orange, Florida. Mr.
Gornto is a certified public accountant. He served in Vietnam in the United
States Army-Airborne Division of Special Forces.
Management has advised that they may acquire additional shares of the
Company's Common Stock from time to time in the open market at prices
prevailing at the time of such purchases.
The Company's key personnel bring a broad range of private and public
management, corporate finance and technical skills to the Company.
<PAGE> 29
BOARD OF DIRECTORS
Colorado provides that a corporation's board of directors may be divided
into various classes with staggered terms of office. The Company's
directors are elected for a term of three years and until their successors
are elected and qualified.
NUMBER OF DIRECTORS
The Company's board of directors currently consists of five directors. The
number of directors on the Company's board may only be changed by a vote of
a majority of the directors, subject to the rights of the holders of any
outstanding series of the Company's preferred stock to elect additional
directors. There is currently two million three hundred seventeen thousand
eight hundred thirty-nine (2,317,839) shares of Series A Convertible
Preferred Stock of the Company outstanding.
REMOVAL OF DIRECTORS
The Company's directors, or the entire board, may be removed for cause by
the affirmative vote of the holders of at least 50% of the outstanding
shares of capital stock of the Company entitled to vote in the election of
directors, voting as a single class and subject to the rights of the
holders of any outstanding series of the Company's preferred stock.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Any newly created directorships in either of our boards of directors,
resulting from any increase in the number of authorized directors or any
vacancies, may be filled by a majority of the remaining members of such
board of directors, even though less than a quorum, or in the case of the
Company, by a sole remaining director, subject to the rights of holders of
any outstanding series of preferred stock.
Newly created directorships or decreases in directorships in either of our
boards of directors are to be apportioned among the classes of directors so
as to make all classes as nearly equal in number as practicable, provided
that no decreases in the number of directors in either of our boards of
directors may shorten the term of any director then in office.
To the extent reasonably possible, any newly created directorship will be
added to the class of directors whose term of office is to expire at the
latest date following the creation of that directorship, unless otherwise
provided for by resolution of the majority of the directors then in office.
Any newly eliminated directorship will be subtracted from the class whose
office is to expire at the earliest date following the elimination of the
directorship, unless otherwise provided for by resolution of the majority
of the directors then in office.
<PAGE> 30
ABILITY TO CALL SPECIAL MEETINGS
Special meetings of the Company's stockholders may be called by the
Company's board of directors, by affirmative vote of a majority of the
total number of authorized directors at that time, regardless of any
vacancies, or by the chief executive officer.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND
PROPOSALS
The Company's bylaws allow stockholders to nominate candidates for election
to the board of directors at any annual or any special stockholder meeting
at which the board of directors has determined that directors will be
elected. In addition, the bylaws allow stockholders to propose business to
be brought before any annual stockholder meeting. However, nominations and
proposals may only be made by a stockholder who has given timely written
notice to the Secretary of the Company before the annual or special
stockholder meeting.
Under the Company's bylaws, to be timely, notice of stockholder nominations
or proposals to be made at an annual stockholder meeting must be received
by the Secretary of the Company no less than 60 days nor more than 90 days
before the first anniversary of the preceding year's annual stockholder
meeting. If the date of the annual meeting is more than 30 days before or
more than 60 days after the anniversary of the preceding year's annual
stockholder meeting, notice will also be timely if delivered within 10 days
of the date on which public announcement of the meeting was first made by
the Company.
In addition, if the number of directors to be elected is increased and no
public announcement is made by the Company naming all of the nominees or
specifying the size of the increased board of directors at least 70 days
before the first anniversary of the preceding year's annual meeting, or, if
the date of the annual meeting is more than 30 days before or 60 days after
the anniversary of the preceding year's annual meeting, at least 70 days
before the annual meeting, a stockholder's notice will be considered
timely, with respect to the nominees for any new positions created by the
increase, if it is delivered to the Secretary of the Company within 10 days
of the date on which public announcement of the meeting was first made by
the Company.
Under the Company's bylaws, to be timely, notice of a stockholder
nomination to be made at a special stockholder meeting must be received no
less than 60 days nor more than 90 days before a special meeting at which
directors are to be elected or within 10 days of the date on which public
announcement of the special meeting was first made by the Company.
<PAGE> 31
A stockholder's notice to the Company must set forth all of the following:
- all information required to be disclosed in solicitations of proxies
for election of directors, or information otherwise required by
applicable law, relating to any person that the stockholder proposes
to nominate for election or reelection as a director, including that
person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected
- a brief description of the business the stockholder proposes to bring
before the meeting, the reasons for conducting that business at that
meeting and any material interest of the stockholder in the business
proposed
- the stockholder's name and address as they appear on the Company's
books and the class and number of shares which are beneficially owned
by the stockholder
The chairman of the Company's stockholder meeting will have the power to
determine whether the nomination or proposal was made by the stockholder in
accordance with the advance notice procedures set forth in the Company's
bylaws. If the chairman determines that the nomination or proposal is not
in compliance with the Company's advance notice procedures, the chairman
may declare that the defective proposal or nomination will be disregarded.
DIRECTOR COMPENSATION
The directors of the Company, who are all executive officers of the Company
as well, are not compensated for serving as directors of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation provide that a director of the
Company shall not be personally liable to the Company or any of its
shareholders for monetary damages for breach of fiduciary duty as a
director, except for liability for:
(a)any breach of the director's duty of loyalty to the Company or its
shareholders;
(b)acts or omissions not in good faith or which involve gross negligence,
intentional misconduct or a knowing violation of law;
(c)for any unlawful distribution as set forth in the Colorado Model
Business Corporation Act of Colorado (the "CMBCA") or (iv) for any
transaction from which the director derived an improper personal
benefit.
These provisions may have the effect in certain circumstances of reducing
the likelihood of derivative litigation against directors. While these
provisions may eliminate the right to recover monetary damages from
directors in various circumstances, rights to seek injunctive or other
non-monetary relief is not eliminated.
<PAGE> 32
EXECUTIVE COMPENSATION
The following executive compensation was paid for the fiscal years ended
December 31, 1999, to the Company's Directors, Officers or Affiliates or
other persons who were executive officers of the Company as at December 31,
1999.
SUMMARY COMPENSATION TABLE FOR LEAPFROG
Long Term Compensation
____________________________________________________________________________
Annual Compensat. Awards Payouts
____________________________________________________________________________
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Rest. All
Name and Annual Stock LTIP Other
Principal Calend. Comp. Award(s)Opt. P/outs Comp.
Position Year Salary Bonus($) ($) ($) SARs(#) ($) ($)
_____________________________________________________________________________
Director
Grebey, 1999 116,625
Jim (annualized)
1998 115,000
Director
Grogan, 1999 87,500
Dale (annualized)
1998 75,000
1997 64,583
Director
Tucker, 1999 98,750
Randolph (annualized)
1998 85,000
1997 80,833
____________________________
Director Compensation
The Company does not reimburse directors for expenses incurred, if any, in
attending meetings of the Board of Directors. The Company does not pay
director fees to directors for their service on the Board.
Compensation of Directors
The directors of the Company are currently compensated for serving as a
director on the basis of options.
Directors' and Officers' Insurance
The Company intends to purchase liability insurance for the directors and
officers of the Company. No part of this premium will be paid by the
directors or officers of the Company.
<PAGE> 33
STOCK OPTION PLAN
The Company maintains a stock option plan designed to provide incentives to
directors, executive officers and employees of the Company or its
subsidiaries and companies wholly owned by these individuals in order to
permit those persons to participate in the growth and success of the
Company.
Under the terms of the Company's stock option plan, the Company is
authorized to set aside as options a maximum of 10% of the Company's Common
Shares outstanding from time to time, for the benefit of directors,
officers and full time employees of the Company or its subsidiaries and
companies wholly owned by these individuals. The Stock Option Plan does not
permit any one individual to hold as options more than 5% of the Common
Shares outstanding from time to time.
Any options so granted will be exercisable at the exercise price and for
such period of time as may be determined by the board of directors of the
Company and approved pursuant to the requirements of the applicable stock
exchange, or if the Company's securities are not listed on a stock
exchange, then in accordance with the conditions established by the board
of directors of the Company.
Any stock options will be non-transferable and terminate on the earlier of
the expiry date or the 90th day following the day on which the director,
officer or employee, as the case may be, ceases to be either a director,
officer or employee of the Company or any of its subsidiaries.
INDEBTEDNESS OF DIRECTORS AND SENIOR OFFICERS AND PROMOTERS
No director, senior officer, promoter or other member of management or
their respective associates or affiliates have been indebted to the Company
at any time during the period ended December 31, 1999 or since that date.
CERTAIN 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, 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.
<PAGE> 34
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of the ownership of
Leapfrog Smart Products, Inc. outstanding common stock on February 23, 2000
by:
-each director and executive officer of the Company
-all directors and executive officers of the Company as a group, and
-each shareholder who was known by the Company to be the beneficial owner
of more than five percent (5%) of the outstanding shares of Leapfrog Smart
Products, Inc.:
NAME NUMBER OF SHARES OWNED PERCENTAGE OF
OWNERSHIP
Ron Breland 0 0.00%
William Campion 325,681 5.73%
Jim Grebey 5,000 0.09%
Dale Grogan 309,500 5.44%
Bruce Starling 139,858 2.46%
Van Staton 304,858 5.36%
George Stuart 130,730 2.30%
Jim Gornto 0 0.00%
Randolph Tucker 490,500 8.62%
All Executive Officers and 1,706,126 30.00%
Directors as a Group
Management has advised that they may acquire additional shares of the
Company's Common Stock from time to time in the open market at prices
prevailing at the time of such purchases.
<PAGE> 35
DESCRIPTION OF CAPITAL STOCK
As of the date hereof, the authorized share capital of the Company consists
of:
(a)30,000,000 common shares of which:
-7,546,495 common shares are issued and outstanding; and
(b)10,000,000 preferred shares of which:
-125,000 Series A Convertible Preferred Shares are issued and
outstanding; -195 Series F Shares are issued and outstanding.
The following is a summary of the principal attributes of the share capital
of the Company.
COMMON SHARES
The rights, privileges, restrictions and conditions attached to the common
shares are as follows:
Voting
Holders of common shares shall be entitled to receive notice of and to
attend and vote at all meetings of shareholders of the Company, except
meetings of holders of another class of shares. Each common share shall
entitle the holder thereof to one vote.
Dividends
Subject to the preferences accorded to holders of Series A Shares and any
other shares of the Company ranking senior to the common shares from time
to time with respect to the payment of dividends, holders of common shares
shall be entitled to receive, if, as and when declared by the Board of
Directors, such dividends as may be declared thereon by the Board of
Directors from time to time.
Liquidation, Dissolution or Winding-Up
In the event of the voluntary or involuntary liquidation, dissolution or
winding-up of the Company, or any other distribution of its assets among
its shareholders for the purpose of winding-up its affairs, holders of
common shares shall be entitled, subject to the preferences accorded to
holders of the Series A Shares and any other shares of the Company ranking
senior to the Common Shares from time to time with respect to payment on a
distribution, to share equally, share for share, in the remaining property
of the Company.
<PAGE> 36
PREFERRED SHARES
The Company's articles of incorporation provides that the board of
directors is authorized to provide for the issuance of shares of
un-designated preferred stock in one or more series, and to fix the
designations, powers, preferences and rights of the shares of each series
and any qualifications, limitations or restrictions thereof.
The number of authorized shares of the Company un-designated preferred
stock may be increased by the affirmative vote of the holders of a majority
of the Company's common stock, without a vote of the holders of preferred
stock, unless their vote is required pursuant to the terms of any preferred
stock then outstanding. The number of authorized shares of un-designated
preferred stock of the Company may be reduced or eliminated by the
affirmative vote of the holders of 80% of the outstanding capital stock of
the Company entitled to vote in the election of directors, voting together
as a single class.
Attributes
Subject to the filing of Articles of Amendment in accordance with the Act,
the Board of Directors may from time to time fix, before issuance, the
designation, rights, privileges, restrictions and conditions attached to
each series of Preferred Shares including, without limiting the generality
of the foregoing, the amount, if any, specified as being payable
preferentially to such series on a distribution; the extent, if any, of
further participation on a Distribution; voting rights, if any; and
dividend rights (including whether such dividends be preferential,
cumulative or non-cumulative), if any.
Liquidation
In the event of a distribution, holders of each series of preferred shares
shall be entitled, in priority to holders of common shares and any other
shares of the Company ranking junior to the Preferred Shares from time to
time with respect to payment on a Distribution, to be paid rateably with
holders of each other series of preferred shares the amount, if any,
specified as being payable preferentially to the holders of such series on
a distribution.
Dividends
The holders of each series of preferred shares shall be entitled, in
priority to holders of common shares and any other shares of the Company
ranking junior to the Preferred Shares from time to time with respect to
the payment of dividends, to be paid rateably with holders of each other
series of preferred dhares, the amount of accumulated dividends, if any,
specified as being payable preferentially to the holder of such series.
<PAGE> 37
The Company has never paid any dividends on its common shares. The Company
intends to retain its earnings to finance the growth and development of its
business and does not expect to pay dividends in the near future. The Board
of Directors of the Company will review this policy from time to time
having regard to the Company's financing requirements, its financial
condition and other factors considered relevant.
RESTRICTIONS ON TRANSFER
Affiliates of the Company under the Securities Act of 1933, as amended, are
persons who generally include individuals or entities that control, are
controlled by, or are under common control with the Company and may include
certain officers and directors of the Company as well as principal
stockholders of the Company. Persons who are affiliates of the Company will
be permitted to sell their shares of the Company only pursuant to an
effective registration statement under the Securities Act or an exemption
from the registration requirements of the Securities Act, such exemptions
afforded by Section 4(1) or 4(2) of the Securities Act or Rule 144.
CERTAIN PROTECTIVE PROVISIONS
General
The Articles and Bylaws of the Company and the CMBCA contain certain
provisions designed to enhance the ability of the Board of Directors to
deal with attempts to acquire control of the Company. These provisions may
be deemed to have an anti-takeover effect and may discourage takeover
attempts which have not been approved by the Board of Directors, including
potential takeovers which certain shareholders may deem to be in their best
interest, and may adversely effect the price that a potential purchaser
would be willing to pay for the Company's stock. These provisions also
could discourage or make more difficult a merger, tender offer or proxy
contest, even though such transaction may be favorable to the interests of
shareholders, and could potentially adversely effect the price of the
Common Stock.
The following briefly summarizes protective provisions contained in the
Articles, the Bylaws and the CMBCA. This summary is necessarily general and
is not intended to be a complete description of all the features and
consequences of these provisions, and is qualified in its entirety by
reference to the Articles, the Bylaws and the provisions of the CMBCA.
The Company has one class of common stock issued and outstanding. Holders
of the Company's common stock are each entitled to one vote for each share
held.
<PAGE> 38
AMENDMENT OF ARTICLES OF INCORPORATION
Under Colorado law, articles of incorporation of a Colorado corporation may
be amended by approval of the board of directors of the corporation and the
affirmative vote of the holders of a majority of the outstanding shares
entitled to vote for the amendment, unless a higher vote is required by the
corporation's articles of incorporation.
The Company's articles of incorporation provides that the affirmative vote
of the holders of at least 50% of the outstanding shares of capital stock
of the Company entitled to vote in the election of directors, voting
together as a single class, will be required to reduce or eliminate the
number of authorized shares of the Company's common stock or preferred
stock, or to amend, repeal or adopt any provision inconsistent with the
provisions of the Company's articles of incorporation which deal with the
following:
-undesignated preferred stock
-matters relating to the board of directors, including the number of
members, board classification, vacancies and removal
-the powers and authority expressly conferred upon the board of
directors
-the manner in which stockholder action may be effected
-amendments to bylaws
-business combinations with interested stockholders of the Company
-indemnification of officers and directors of the Company
-the personal liability of directors to the Company or its stockholders
for breaches of fiduciary duty
-the amendment of the Company's articles of incorporation
AMENDMENT OF BYLAWS
Under Colorado law, stockholders entitled to vote have the power to adopt,
amend or repeal bylaws. In addition, a corporation may, in its articles of
incorporation, confer such power upon the board of directors. The
stockholders always have the power to adopt, amend or repeal bylaws, even
though the board may also be delegated such power.
The Company's board of directors is expressly authorized to adopt, amend
and repeal the Company's bylaws by an affirmative vote of a majority of the
total number of authorized directors at that time, regardless of any
vacancies.
The Company's bylaws may also be adopted, amended and repealed by the
affirmative vote of the holders of at least 50% of the outstanding shares
of capital stock of the Company entitled to vote in the election of
directors, voting together as a single class.
<PAGE> 39
LIMITATION OF LIABILITY OF DIRECTORS
The CMBCA permits a corporation to include a provision in its articles of
incorporation eliminating or limiting the personal liability of a director
or officer to the corporation or its stockholders for damages for a breach
of the director's fiduciary duty, subject to certain limitations. Our
respective articles of incorporation include such a provision to the
maximum extent permitted by law.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate
that duty. Accordingly, these provisions will have no effect on the
availability of equitable remedies such as an injunction or rescission
based on a director's breach of his duty of care.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The CMBCA permits a corporation to indemnify officers and directors for
actions taken in good faith and in a manner they reasonably believed to be
in, or not opposed to, the best interests of the corporation, and with
respect to any criminal action, which they had no reasonable cause to
believe was unlawful.
Our articles of incorporation and bylaws provide that any person who was or
is a party or is threatened to be a party to or is involved in any action,
suit, or proceeding, whether civil, criminal, administrative or
investigative, because that person is or was a director or officer, or is
or was serving at the request of either of us as a director, officer,
employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, will be indemnified against expenses,
including attorney's fees, and held harmless by each of us to the fullest
extent permitted by the CMBCA. The indemnification rights conferred by each
of us are not exclusive of any other right to which persons seeking
indemnification may be entitled under any statute, our articles of
incorporation or bylaws, any agreement, vote of stockholders or
disinterested directors or otherwise. In addition, each of us is authorized
to purchase and maintain insurance on behalf of its directors and officers.
Additionally, each of us may pay expenses incurred by our directors or
officers in defending a civil or criminal action, suit or proceeding
because that person is a director or officer, in advance of the final
disposition of that action, suit or proceeding. However, such payment will
be made only if we receive an undertaking by or on behalf of that director
or officer to repay all amounts advanced if it is ultimately determined
that he or she is not entitled to be indemnified by us, as authorized by
our articles of incorporation and bylaws.
<PAGE> 40
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent of the Company is American Securities
Transfer, Inc, at its principal office in Lakewood, Colorado.
PLAN OF DISTRIBUTION
The shares of common stock registered hereunder could be sold, if desired,
by the Selling shareholder on the Over-the-Counter Bulletin Board.
The selling shareholders' shares, are being offered hereby:
-through dealers or in ordinary brokers' transactions, in the
over-the-counter market or otherwise;
-at the market or through market makers or into an existing market for the
commons stock;
-in other ways not involving market makers or established trading markets,
including direct sales to purchasers or effective through agents; or
-in combinations of any of such methods of sale.
The common stock will be sold at market prices prevailing at the time of
sale or at negotiated prices.
If a dealer is utilized in the sale of the common stock in respect of which
the Prospectus is delivered, the selling shareholders will sell such common
shares to the dealer, as principal. The dealer may then resell such common
shares to the public at varying prices to be determined by such dealer at
the time of resale.
Sales of securities "at the market" and not at a final price, which are
made into an existing market for the securities, will be made by the
selling shareholders to or through a market maker, acting as principal or
as agent. Other sales may be made, directly or through an agent, to
purchasers outside existing trading markets. A selling broker may act as
agent or may acquire the common stock or interests therein as principal or
pledgee and may, from time to time, effect distributions of such common
stock and interests.
The common stock offered hereby are eligible for sale only in certain
states, and, in some of those states, may be offered or sold only to
"institutional investors", as defined under applicable state securities
law. No sales or distributions, other than as described herein, may be
effected after this Prospectus shall have been appropriately amended or
supplemented.
INVESTOR RELATIONS ARRANGEMENTS
On ________________, the Company entered into an Investor Relations
Agreement with Continental Capital, Inc. ("CCI"). Under the agreement, CCI
is to provide investor relations, corporate communications and related
support services to the Company, specifically including, among other
duties, the development of a comprehensive plan for the dissemination of
Company information to shareholders as well as brokers, analysts and
potential investors; advising the Company regarding trends and changes in
the Over-the-Counter Bulletin Board brokerage and investment community, as
well as changes in share ownership of the Company's securities, all in the
context of providing appropriate investor relations communications;
coordinating investor and shareholder contacts with Company counsel to
ensure compliance with applicable securities laws and exchange listing
requirements; and assisting the Company with on-site investor relations
meetings and with the design, preparation and dissemination of investor
relations materials. The initial term of the agreement expires
_________________ but will renew automatically for successive one-month
terms thereafter unless either party provides the other with 30 days'
advance written notice of termination. In exchange for their services, CCI
is entitled to receive a fee of US $___________, plus reimbursement of all
reasonable out-of-pocket expenses and any reasonable third-party
professional advisory fees.
<PAGE> 41
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
--------- ------- ------ ----------
Executive Offices 14,500 $17,944 November, 2004
1011 Maitland Center Commons
Maitland, Florida 32751
LEGAL MATTERS
The validity of the common stock offered hereby has been passed upon for
the Company by Nadeau & Simmons, P.C., 1250 Turks Head Building,
Providence, Rhode Island.
EXPERTS
The consolidated financial statements of Leapfrog Smart Products, Inc. and
subsidiaries as of, and for the year ended December 31, 1999 appearing in
this prospectus and registration statement for the year ended December 31,
1999, have been audited by Moore Stephens Lovelace, P.A., independent
auditors, as set forth in their report appearing in this document. Such
consolidated financial statements are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of the Company and subsidiaries as
of, and for the year ended December 31, 1998 appearing in this prospectus
and registration statement for the year ended December 31, 1998, have been
audited by Meeks, Dorman & Company, P.A., independent auditors as set forth
in their report appearing in this document. Such consolidated financial
statements are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-1 under the Securities Act of 1933, with respect to the shares of common
stock offered hereby. This prospectus constitutes a part of the
registration statement and does not contain all of the information set
forth in the registration statement, certain parts of which are omitted
from this prospectus as permitted by the rules and regulations of the
commission.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to herein are not necessarily complete
and, where such agreement or other document is an exhibit to the
registration statement, each such statement is qualified in all respects by
the provisions of such exhibit, to which reference is hereby made for a
full statement of the provisions thereof. For further information with
respect to the Company and the common stock, reference is hereby made to
the Registration Statement and to the exhibits thereto.
<PAGE> 42
The registration statement and the exhibits may be inspected, without
charge, and copies may be obtained, at prescribed rates, at the public
reference facilities of the Securities and Exchange Commission maintained
at Judiciary Plaza, 450 Fifth Street, N.W., room 1024, Washington, DC
20549, or on the Internet at http://www.sec.gov.
Copies of the registration statement and the exhibits may also be
inspected, without charge, at the Commission's regional offices at 7 World
Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. In addition, copies of the
Registration Statement and the exhibits may be obtained by mail, at
prescribed rates, from the Public Reference Branch of the Commission at 450
Fifth Street, N.W., Washington, DC 20549.
In connection with this offering, the Company continues to be subject to
the information and periodic reporting requirements of the Securities
Exchange Act of 1934, and, in accordance therewith, will file periodic
reports, proxy statements and other information with the Commission. Such
periodic reports, proxy statements and other information will be available
for inspection and copying at the public reference facilities and regional
offices referred to above. The Company intends to furnish its shareholders
with annual reports containing audited financial statements certified by
independent public accountants and with quarterly reports containing
unaudited financial statements for the first three quarters of each fiscal
year.
<PAGE> F-1
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> F-2
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> F-2
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> F-4
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> F-6
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, 1999
-----------------
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
============
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> F-7
LEAPFROGSMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
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> F-8
LEAPFROGSMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
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> F-9
LEAPFROGSMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
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> F-10
LEAPFROGSMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
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> F-11
LEAPFROGSMART 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> F-12
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> F-13
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> F-14
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> F-15
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> F-16
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> F-17
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> F-18
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> F-19
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> F-20
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> F-21
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>
TABLE OF CONTENTS
Prospectus Summary
.........................................................................
Risk Factors.............................................................
Year 2000 Problems May Have an Adverse Effect Competition
Potential Fluctuations in Quarterly Operating Results
Limited Operating History
Dependence on Third-Party Suppliers
Patents, Trademarks and Proprietary Information
Rapid Technological Changes
Expansion
Government Regulation
Dependence on Key Personnel
Control by Principal Shareholders, Officers and Directors
Issuance of Preferred Stock
Trading Market; Volatility of Stock Price
Possible Need for Additional Financing
Indemnification of Officers and Directors
Dependence Upon Outside Advisors
Rule 144 Sales
Use of Proceeds..........................................................
Dilution ................................................................
Dividend Policy ,........................................................
Business ................................................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................
Management ..............................................................
Certain Transactions ....................................................
Principal Shareholders ..................................................
Description of Capital Stock ............................................
Plan of Distribution ....................................................
Agreements ..............................................................
Investor Relations Arrangements..........................................
Legal Matters ...........................................................
Experts .................................................................
Additional Information ..................................................
Financial Statements.....................................................F-1
thru
F-21
<PAGE>
-------------------------------
UNTIL ____________________, 2000 (45 DAYS AFTER THE DATE OF THIS
PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON
STOCK OFFERED HEREUNDER MAY BE REQUIRED TO DELIVER A PROSPECTUS.
=====================================================================
=====================================================================
LEAPFROG SMART PRODUCTS, INC.
---------------------------------
3,433,923 SHARES
---------------------------------
COMMON STOCK
--------------------------------
PROSPECTUS
--------------------------------
September ___, 2000
<PAGE> 43
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Model Business Corporation Act of the State of Colorado ("CMBCA")
provides, in general, that a corporation shall have the power to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in
the right of the corporation), because the person is or was a director or
officer of the corporation. Such indemnity may be against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection
with such action, suit or proceeding, if the person acted in good faith and
in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation and if, with respect to any criminal
action or proceeding, the person did not have reasonable cause to believe
the person's conduct was unlawful.
The CMBCA provides, in general, that a corporation shall have the power to
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor because the
person is or was a director or officer of the corporation, against any
expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or
suit if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation.
The CMBCA provides, in general, that a corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director or officer of the corporation against any liability asserted
against the person in any such capacity, or arising out of the person's
status as such, whether or not the corporation would have the power to
indemnify the person against such liability under the provisions of the
law.
The Company's Articles of Incorporation (incorporated by reference herein)
provides for indemnification of directors, officers and other persons as
follows:
To the fullest extent permitted by the CMBCA as the same now exists or may
hereafter be amended, the Corporation shall indemnify, and advance expenses
to, its directors and officers and any person who is or was serving at the
request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
The Corporation, by action of its board of directors, may provide
indemnification or advance expenses to employees and agents of the
Corporation or other persons only on such terms and conditions and to the
extent determined by the board of directors in its sole and absolute
discretion.
<PAGE> 44
The indemnification and advancement of expenses shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any By-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office.
The Corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would
have the power to indemnify him against such liability.
The indemnification and advancement of expenses, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs, executors
and administrators of such officer or director. The indemnification and
advancement of expenses that may have been provided to an employee or agent
of the Corporation by action of the board of directors, shall, unless
otherwise provided when authorized or ratified, continue as to a person who
has ceased to be an employee or agent of the Corporation and shall inure to
the benefit of the heirs, executors and administrators of such a person,
after the time such person has ceased to be an employee or agent of the
Corporation, only on such terms and conditions and to the extent determined
by the board of directors in its sole discretion.
<PAGE> 45
The Company's By-Laws (incorporated by reference herein) provides that:
Right to Indemnification. Each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or
investigative, because he is or was a director or an officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (hereinafter an "Indemnitee"),
whether the basis of such proceeding is alleged action in an official
capacity as a director, officer, employee or agent or in any other capacity
while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the CMBCA, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights
than such law permitted the Corporation to provide before such amendment),
against all expense, liability and loss (including attorney's fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably incurred or suffered by such Indemnitee in
connection therewith; provided, however, that, except as provided in the
section "Right of Indemnitees to Bring Suit" with respect to proceedings to
enforce rights to indemnification, the Corporation shall indemnify any such
Indemnitee in connection with a proceeding (or part thereof) initiated by
such Indemnitee only if such proceeding (or part thereof) was authorized by
the board of directors of the Corporation.
Right to Advancement of Expenses. The right to indemnification conferred in
the section "Right to Indemnification" of this Article shall include the
right to be paid by the Corporation the expenses (including attorney's
fees) incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the CMBCA requires, an advancement
of expenses incurred by an Indemnitee in his capacity as a director or
officer (and not in any other capacity in which service was or is rendered
by such Indemnitee, including, without limitation, service to an employee
benefit plan) shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such Indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision
from which there is no further right to appeal that such Indemnitee is not
entitled to be indemnified for such expenses under this section or
otherwise. The rights to indemnification and to the advancement of expenses
conferred in this section and the section "Right to Indemnification" of
this Article shall be contract rights and such rights shall continue as to
an Indemnitee who has ceased to be a director, officer, employee or agent
and shall inure to the benefit of the Indemnitee's heirs, executors and
administrators. Any repeal or modification of any of the provisions of this
Article shall not adversely affect any right or protection of an Indemnitee
existing at the time of such repeal or modification.
<PAGE> 46
Right of Indemnitees to Bring Suit. If a claim under the section "Right to
Indemnification" or "Right to Advancement of Expenses" of this Article is
not paid in full by the Corporation within sixty (60) days after a written
claim has been received by the Corporation, except in the case of a claim
for an advancement of expenses, in which case the applicable period shall
be twenty (20) days, the Indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by
the Corporation to recover an advancement of expenses pursuant to the terms
of an undertaking, the Indemnitee shall also be entitled to be paid the
expenses of prosecuting or defending such suit. In (1) any suit brought by
the Indemnitee to enforce a right to indemnification hereunder (but not in
a suit brought by the Indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (2) in any suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking, the Corporation shall be entitled to recover such expenses
upon a final adjudication that, the Indemnitee has not met any applicable
standard for indemnification set forth in the CMBCA. Neither the failure of
the Corporation (including its board of directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the Indemnitee is proper
in the circumstances because the Indemnitee has met the applicable standard
of conduct set forth in the CMBCA, nor an actual determination by the
Corporation (including its board of directors, independent legal counsel,
or its stockholders) that the Indemnitee has not met such applicable
standard of conduct, shall create a presumption that the Indemnitee has not
met the applicable standard of conduct or, in the case of such a suit
brought by the Indemnitee, be a defense to such suit. In any suit brought
by the Indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or brought by the Corporation to recover
an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the Indemnitee is not entitled to be indemnified, or
to such advancement of expenses, under this Article or otherwise shall be
on the Corporation.
Non-Exclusivity of Rights. The rights to indemnification and to the
advancement of expenses conferred in this Article shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, the Corporation's Articles of Incorporation as amended from time
to time, these By-Laws, any agreement, any vote of stockholders or
disinterested directors or otherwise.
Insurance. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the CMBCA.
<PAGE> 47
Indemnification of Employees and Agents of the Corporation. The Corporation
may, to the extent authorized from time to time by the board of directors,
grant rights to indemnification and to the advancement of expenses to any
employee or agent of the Corporation to the fullest extent of the
provisions of this Article with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation.
The directors and officers of the Company are covered by a policy of
liability insurance.
ITEM 2. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the sale of the Shares are estimated as
follows:
Securities and Exchange Commission registration fee...............$
Legal fees and expenses...........................................
Accounting fees and expenses......................................
Miscellaneous.....................................................
TOTAL.............................................................$
ITEM 3. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) that, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(2) that before any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
<PAGE> 48
(3) that every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(4) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
Form SB-1 under the Securities Act of 1933, within one business day of
receipt of any such request, and to send the incorporated documents by
first class mail or other equally prompt means, including information
contained in documents filed after the effective date of the registration
statement through the date of responding to such request; and
(5) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
If a claim of indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in a successful defense of
any action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
<PAGE> 49
ITEM 4. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN ONE YEAR.
A Plan and Agreement of Merger (the "Agreement") was executed on October
25, 1999, by and among ALBARA, LEAPFROG Merger, Inc., LEAPFROG and Real
Provencher, who joined in the execution of the Agreement for the purpose of
making certain covenants regarding the transaction contemplated therein.
ALBARA is a corporation duly organized and validly existing under the laws
of the state of Colorado, with its registered office at 1560 Broadway,
Denver, Colorado 80202, its principal executive office at 610 South
Frazier, Conroe, Texas 77301, and its phone number is (409) 441-2650;
LEAPFROG Merger, Inc. ("Albara Subsidiary" or the "Merger Surviving
Corporation") is a wholly owned subsidiary of ALBARA duly organized and
validly existing under the laws of the State of Florida, with its
registered office located in the city of Orlando, County of Orange, State
of Florida, and its principal executive office at 101 Maitland Center
Commons, Maitland, FL 32751; LEAPFROG is a corporation duly organized and
validly existing under the laws of the state of Florida, with its
registered office located in the city of Orlando, County of Orange, State
of Florida, and its principal executive office at 101 Maitland Center
Commons, Maitland, FL 32751, and its phone number is (407) 838-0400; and
Real Provencher is the President of ALBARA.
The respective boards of directors of ALBARA, Albara Subsidiary and
LEAPFROG deemed it desirable and in the best interests of their respective
corporations, for ALBARA to acquire the outstanding capital stock of
LEAPFROG by merging LEAPFROG into Albara Subsidiary in exchange for the
issuance of shares of the common stock of ALBARA and have proposed,
declared advisable and approved such merger (the "LEAPFROG Merger")
pursuant to this Agreement, which Agreement has been duly approved by
resolutions of the respective boards of directors of ALBARA, Albara
Subsidiary and LEAPFROG. This Agreement requires that a shareholders'
meeting be called by ALBARA for the purposes of approving the LEAPFROG
Merger prior to closing.
The number of shares voted for the Plan of Merger was, with respect to each
corporation, sufficient for approval.
CONVERSION OF SHARES IN THE MERGER
On the Effective Date, by virtue of the LEAPFROG Merger each share of
LEAPFROG Common Stock and each LEAPFROG option to purchase LEAPFROG Common
Stock issued and outstanding immediately prior to the Effective Date shall
be converted into the right to receive from ALBARA the following
consideration (in the aggregate, the "LEAPFROG Consideration"):
(i) Issuance of Shares and Options in connection with the LEAPFROG Merger.
The aggregate number of ALBARA Shares of common stock to be issued or
reserved for issuance in connection with the LEAPFROG merger shall be
Seven Million Seven Hundred Seventy-Five Thousand Nine Hundred
Ninety-Nine (7,775,999). As soon as practicable after the LEAPFROG
Merger becomes effective, ALBARA shall cause its transfer agent (the
"Transfer Agent") to issue to the shareholders of LEAPFROG, on a pro
rata basis, an aggregate of Five Million Three Hundred Fifty Thousand,
Forty-Nine (5,350,049) Shares of ALBARA common stock in exchange for
all the existing shares of LEAPFROG stock. Additionally, on the
Effective Date, ALBARA shall issue option agreements to the option
holders of LEAPFROG, on a pro rata basis, and reserve Shares of ALBARA
common stock as a result of those option agreements totaling Two
Million Four Hundred Thirty-Four Thousand Nine Hundred Fifty
(2,434,950). In addition, on the Effective Date, ALBARA shall reserve
Twenty-Five Thousand (25,000) shares of ALBARA common stock for
possible issuance in connection with an existing LEAPFROG Convertible
Debt security. The calculation of pro rata distributions for the
purposes of this section shall be made by dividing the aggregate number
of ALBARA Shares of common stock to be issued or reserved for issuance
in connection with the LEAPFROG merger by the aggregate number of
LEAPFROG Shares of common stock issued or reserved as a result of
options, warrants, convertible securities or other commitments. No
other issuance of securities is required to effect the LEAPFROG Merger.
<PAGE> 50
(ii)Fractional Interests. No fractional shares of common stock of ALBARA or
certificate or scrip representing the same shall be issued. In lieu
thereof each holder of LEAPFROG Shares or LEAPFROG Options having a
fractional interest arising upon such conversion will be rounded up
into one full additional share of ALBARA common stock;
(iii)Status of Common Stock. All Shares of common stock of ALBARA into
which LEAPFROG Shares are converted as herein provided shall be fully paid
and non-assessable and shall be issued in full satisfaction of all rights
pertaining to such Shares;
ITEM 5. EXHIBITS.
INDEX TO EXHIBITS
(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:
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
x 5(a) Opinion re Legality of Securities Issued
# 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
xx 10.7 Representation Agreement
#### 16 Letter on Change in Certifying Accountant
# 21 Subsidiaries of the Registrant
x 23(a) Consent-Legal
x 23(b) Consent-Auditor
xx 27 Financial Data Schedule
x 99.1 Safe Harbor Compliance Statement
<PAGE> 51
-----------------------------
x filed herewith
xx previously filed with the Company's Annual Report on Form 10-KSB on
April 17, 2000
# previously filed with the Company's Definitive Information
Statement on Schedule 14C on January 18, 2000.
## 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> 52
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the registration statement to be
signed on its behalf by the undersigned hereunto duly authorized.
LEAPFROG SMART PRODUCTS, INC.
/s/Randolph Tucker
DATE: September 7, 2000 By: RANDOLPH TUCKER
Name:
Title: CEO
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Randolph Tucker, his true and lawful
attorneys-in-fact and agents with full power of substitution and
re-substitution, for then and in their name, place and stead, in any and
all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement and to file the same with all
exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done, as fully
to all intents and purposes as they might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any
of them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
This power of attorney may be executed in counterparts.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
------------------------- ----------------------- -------------
Signature Title Date
/s/ Randolph Tucker Chief Executive Officer September 7, 2000
------------------------- & Director
Randolph Tucker
/s/ James Gornto Chief Financial Officer September 7, 2000
------------------------- & Secretary
James Gornto
/s/ James Grebey Chief Technical Officer September 7, 2000
------------------------- & Director
James Grebey
/s/ Dale Grogan President September 7, 2000
------------------------- & Director
Dale Grogan
/s/ Bruce Starling Chairman September 7, 2000
------------------------- & Director
Bruce Starling
