ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________
Commission file number: 000-20786
LEAPFROG SMART PRODUCTS, INC.
(Name of Small Business Issuer in its Charter)
COLORADO 7372 05-1076959
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Numbers) Identification
No.)
1011 Maitland Center Commons 1011 Maitland Center Commons
Maitland, Florida 32751 Maitland, Florida 32751
(Address and Telephone Number of (Address of Principal Place of
Business or Principal Executive Offices) Intended Principal Place of
Business)
Jon Gerster, Chief Financial Officer
Leapfrog Smart Products, Inc.
1011 Maitland Center Commons
Maitland, Florida 32751
(407) 838-0400
(Name, address and telephone number of agent for service)
Copies to:
Mark T. Thatcher, Esq.
Adam S. Clavell, Esq.
Nadeau & Simmons, P.C.
1250 Turks Head Building
Providence, Rhode Island 02903
TELEPHONE (401) 272-5800
FACSIMILE (401)272-5858
Securities registered pursuant to Section 12(b) of the Securities Exchange
Act:
NONE
Securities registered pursuant to section 12(g) of the Securities Exchange
Act:
COMMON STOCK, NO PAR VALUE PER SHARE
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [ ]
State issuer's revenues for its most recent fiscal year: $ 972,724
The aggregate market value of the 7,010,373 shares of Common Stock held by
non-affiliates was $2,081,380 as of March 31, 2001. For purposes of the
foregoing calculation only, each of the issuer's officers and directors is
deemed to be an affiliate. The market value of the shares was calculated
based on the market value of such shares on such date.
As of December 31, 2000, 8,977,845 shares of the issuer's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The following documents are incorporated by reference into this report:
1. Information required by Part III of this Form 10-KSB is incorporated
by reference by the Company from its Definitive Information Statement
on Schedule 14C filed with the Commission on January 18, 2000.
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
PART I
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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 that 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 continue increasing;
-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.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
LEAPFROG SMART PRODUCTS, INC.--DESCRIPTION OF THE BUSINESS
Leapfrog Smart Products, Inc., (the Company) develops, designs, and
licenses software exclusively for Smart Card applications, and related
database management systems. The primary focus of the Company is software
and hardware solutions for biometric technologies developed for user
authentication and access control for both computer networks and physical
environments. Two patents are pending and additional patent applications
are in process.
The Company works with customers and strategic partners domestically and
internationally to deliver comprehensive, integrated and customized smart
card based systems, providing software, hardware, personalization and full
implementation.
The company currently has 41 full-time employees including 15 software
engineers and 13 technical sales and marketing professionals. The senior
management team is composed of business, legal, financial and technical
professionals with successful careers in their respective areas. There are
two majority owned subsidiaries, Conduit Healthcare Solutions and Leapfrog
Global Products (LGIC) and a joint venture, Smart Products International
Pte, Ltd. (SPI), based in Singapore.
Approximately $9,000,000 and 35,000 engineering hours have been invested
developing a suite of proprietary software programs, which are now being
offered in the market. The Company is a recognized leader in providing
Smart Card software and hardware solutions.
Current company Smart Card products and applications include personal
identification, e-purse transactions, loyalty point storage, physical and
logical access, and portable storage of personal information, including
medical records. The Company is transitioning from research and
development to full commercial rollout of products and services. The
products and technology are being marketed through indirect sales channels,
strategic partners, value-added resellers and in-house technical sales
staff.
The Company has developed contracts and strategic relationships for
specific areas including University Campus, Healthcare, and Government
markets. The Company has forged Strategic Business Relationships to take
advantage of these contracts and partnerships. Under these arrangements
Leapfrog will receive revenue from engineering fees, technology license,
and products royalty fees.
Since recognized industry technology leaders have yet to emerge in these
many markets, the Company has a unique opportunity to gain significant
market share. The essential elements for success are in place: a creative,
productive technology and engineering group, a talented and experienced
sales team, a proven management team, and a technology leadership position.
Leapfrog was selected as the exclusive Smart card software applications
provider to Electronic Data Systems Corporation (EDS) for the first major
US Government Smart card initiative; a Smart Access Common ID Contract by
the General Services Administration (GSA). EDS is one of five prime
contractors named for the estimated $1.5 billion contract.
Further, the Company installed the first hospital Smart Card patient managment
system in the U.S. and will be installing three more in the first quarter of
2001. Other major contracts to provide Smart Card software, systems and
solutions, are in negotiation and management believes that these will be signed
in 2001.
The Company has written and sold software applications to the following
customers:
Bronson Methodist Hospital Smart Tracker 55
Disney Realty Tracker
Envoy Secure Pak/Commander
Loyalty Card, Inc. Community Card
Illco Unican Control Point
Munroe Regional Hospital System Smart Tracker 55
National Safety Depot Community Card
Super Show Interactive Kiosk
University of Central Florida Control/Point Biothentic
United States Navy Biothentic
Woods & Water RV Resort Control Point
Whiskey Creek RV Resort Control Point
Revenues to date have been generated from the sale of software and hardware
related items such as Smart Card readers/writers used in pilot evaluation
programs, software-testing programs, and specialized software. Leapfrog is
focused on selling custom software solutions, hardware, and packaged
commercial-off-the-shelf products.
LEAPFROG'S MARKETS
The greatest opportunities for the Company's products at present are in the
access control and security markets. Other significant markets include
corporate and college campus markets, Healthcare, and Federal Government.
The security industry encompasses logical (computer network) and physical
access across many industries. Campus includes corporations, associations,
universities, and other institutions. Healthcare includes physicians,
physician organizations, pharmacies and hospitals. Government includes
Federal, State, and Local entities.
1. SECURITY SYSTEMS OVERVIEW
Logical (Computer Network) Access
The proliferation of the Internet in network computing, remote access,
telecommunications, wireless communications and information management has
exposed big holes in network security. It is difficult for MIS or IT
managers to verify network users and the information/data that is being
manipulated. The large number of disparate security solutions makes it
even more difficult for security administrators to authenticate users,
provide access control and protect the integrity of information.
According to a study completed by the Computer Security Institute (CSI),
the Federal Bureau of Investigation (FBI) and the Computer Intrusion Squad,
70% of Fortune 1000 companies polled experienced unauthorized use of a
computer system and 59% of the attacks came from Internet connections.
When we translate these network breeches into dollars lost from theft of
proprietary information the average loss was $1,136,409. Looking at the
destruction of data from the "Melissa" virus alone statistics report an
estimated $80 billion dollars lost. These statistics support the case for
increased network security for every business and institution.
Leapfrog Smart Products, Inc. offers the latest in biometric and Smart Card
technology to enable network managers to implement stronger user
authentication, access control policies, and deploy Public Key
Infrastructure (PKI) encryption and digital certificates. By replacing user
names and passwords with finger print identification network,
administrators can reduce password administration costs, speed up the login
process and secure the network with stronger user authentication,
encryption and non-repudiation.
Leapfrog's biometric Smart hardware and software product line called
BiothenticTM is targeting the network security market. The Company will be
compatible with all major network security software companies and can
leverage their reseller channels by offering a high margin, value-add to
their existing solution in their existing customer base. This sales model
will provide an immediate sales channel and reduce the need for product
support by Leapfrog. International Biometrics Group reports U.S. biometric
revenue in 1999 at $58.4 million with projected growth to $594 million in
2003.
PHYSICAL ACCESS
Leapfrog offers a robust, feature rich "Intelligent Access Control" IAC
software application for use with a smart card door locking system. The IAC
software is easily integrated and compatible with all smart card lock
systems. Leapfrog's application integration provides the user with the
flexibility of being inter-operable with all card manufacturers and their
operating systems. Within the physical access control market, Smart Card
technology is fragmented. Leapfrog has positioned itself to be a leading
provider of Intelligent Access Control software for smart card systems that
will provide compatibility and continuity between manufacturers.
Leapfrog can offer the Intelligent Access Control IAC product in a stand-
alone environment or provide both a Network solution and a Time &
Attendance component. In addition to these products, the company has found
that the access control market has a strong demand for a combination smart
card/biometric reader to work in both a stand-alone and network
environment. Providing this solution will give an additional distinct
competitive advantage.
2. CAMPUS CARDS OVERVIEW
There are over 3700 higher education campuses in the U.S. and an additional
800+ in Canada. Over 1500 presently support card systems of which less than
1% employ smart card technology. With the added presence of corporate
campuses in a regional area, building a COMMUNITY CARD presence beginning
with seeded sites and expanding these through direct sales to neighboring
campuses offers an attractive first step toward scaled distribution.
Corporate campuses in nearly every industry use personalized cards. Both
of these markets will migrate to Smart Cards and identification software to
increase revenue, cut administrative costs, improve security and enhance
customer service.
The Leapfrog management team is experienced in the sale, implementation,
integration and support of a closed architecture, distributed, multi-
application smart card system of over 700,000 cards in North America.
These Smart Card Systems include:
(a) CAMPUS (E SMART, ESECURE, EVOTE, E MEMBER, EVALUE, ETICKET) - a
"one-card" solution combined with a multi-application suite targeted
for vertical markets such as higher education campuses.
(b) ENTERPRISE (E SMART, E SECURE, E VALUE, ETICKET) - Corporate
campuses to leverage off our established one-card solution with a
focus on secure access, both logical and physical, as a channel
market.
(c) ASSOCIATION MANAGEMENT (ESMART, EMEMBER, EVOTE, ETICKET) -
Professional/non-professional associations (unions, clubs) with a
common focus and a need for managing their member's activities
(continuing education) over a broad regional area.
Once established in a community there will be a critical need to continue
growth of distribution through merchants and a concentrated loyalty
program. The Solutions' strategy includes identification of loyalty
marketing firms for strategic partnerships together with chambers of
commerce that have a vested interest in growing a public presence.
The Corporate and campus ID Card segment is a high margin business and The
Company is using both direct and indirect marketing channels to penetrate
this market. Leapfrog is licensing solutions to existing ID Card solution
providers seeking to provide Smart Card based systems. In 1999, the two
leading identification card system providers in the U.S. had combined sales
of $500 million out of $3.5 billion for the industry at large.
Leapfrog has developed an ID card system that is bringing a new degree of
operational efficiency to organizations. The card serves as an
identification badge/card that provides an array of additional functions
including building access control, computer network access control, payment
services, cashless commerce, loyalty, data tracking, and data portability.
The Campus ID Card segment of Leapfrog's Sales and Marketing Plan is
focused on Higher Education, Corporate Campuses, and Association
Memberships that use cardholder identification and one or more additional
primary functional requirements for the card system.
Leapfrog is focusing on single site installations of multi-application
smart card systems including multiple purses, loyalty, eMember, eVote,
eTicket, time & attendance, access control, SmartTracker and dedicated
purses for use of specified merchants, such as campus bookstores, fast-food
restaurants surrounding campus sites. For legacy systems such as libraries
and meal plans already installed at client sites, the IC card will include
an ABA compliant stripe for the integration of these applications to
provide a "one-card" solution. The magnetic stripe will provide the
instrument for offering banking services where financial institutions are
desired. All cards issued will include this suite of applications
Leapfrog licenses a card management system with purse architecture to be
used as a platform and integrate the application suite noted above. The
company has licensed Smart City products produced by Product Technologies
Inc., of Hartford, CT and Proton World. The Smart City system is currently
installed worldwide and at 37 campuses in North America.
3. HEALTHCARE OVERVIEW
Approximately 200 million Europeans carried Smart Cards for health care
identification at the end of 1999. Many countries with national health
care systems are deploying Smart Card technology to reduce the costs
associated with delivering services. The largest operating system is in
Germany with over 80 million cards. In France, the project called "Sesam
Vitale" has deployed over 30 million Smart Cards.
In 1999, total revenues for the healthcare industry in the U.S. were
approximately $1 trillion dollars with approximately 11%, or $110
billion, paid out for needless or redundant tests. Approximately $35
billion was lost to Medicare fraud alone in 1998. In 1996, the Federal
Government enacted the Health Insurance Portability and Accountability
Act (HIPAA). Security and privacy of individual's medical records is
the cornerstone of HIPAA.
Recent modifications to the Health Insurance Portability and Accountability
Act of 1996 (HIPAA) will expand the Smart Card market substantially. HIPAA
has recognized "the Smart card" as a "Secure Token" for the portability of
medical and insurance information. Applications for this technology will
include secure access to medical information, logical and physical access
for employees and medical staff. Smart Cards will soon become the standard
for insurance companies to provide coverage information for their members.
Leapfrog develops biometric and Smart Card based medical record and
communication products. Conduit Healthcare Solutions markets these
products in the healthcare market. These products address the growing
need in the healthcare industry for better access to and sharing of
patient information and greater privacy. Providing on-line and off-line
information and communication, Conduit's products will provide rapid
access to medical records and facilitate payments for medical treatment.
Conduit's primary source of revenue is from the development of systems
and license fees. Income is generated through transaction franchise and
database management fees. Smart Tracker 55 is the first loyalty
membership program using Smart Cards for tracking usage as well as
storing basic medical information for seniors. A full-scale deployment
of Smart Tracker 55 was made at Munroe Regional Hospital in Ocala,
Florida, during 1999. This membership based card for HMOs/PPOs and
specific hospital groups that provides coverage and critical medical
information to automate the supporting bureaucracy required for medical
care. Conduit's target markets are hospitals, seniors' programs, managed
care companies, insurance companies, emergency response systems and
physicians. Conduit has already completed contracts with 4 hosptials in
North America for Smart Tracker 55.
Conduit is also working with Federal entities such as the Veterans Affairs
Administration, the Department of Defense, Medicare, and Medicaid. With no
competition in the seniors' market, this revolutionary program is expected
to gain significant market share and thus position the Company securely
within the largest sector of the U.S. economy.
4. GOVERNMENT OVERVIEW
The federal government is currently a significant domestic market for Smart
Card systems. The "GSA Common Access ID Card" program was recently awarded
to five consortium teams. This $1.5 billion contract is the largest Smart
Card program in the history of the United States. Electronic Data Systems
(EDS) led one of the five winning teams. By contract, Leapfrog is the
exclusive Smart Card software provider to the EDS team.
The government contract is designed to provide federal agencies with
interoperable, multi-application Smart Cards. The cards will be used to
provide basic visual identification and authentication as well as secure
access for e-commerce. The Company will benefit substantially from this
first major US government initiative.
The Company will also be a provider of Smart Card solutions to EDS for the
US Navy and Marine Corps landmark Intranet contract. This contract is the
largest federal information technology contract in history, valued at more
than $4.1 billion over five years. A three-year option in the contract is
valued at more than $6.9 billion. The company projects substantial revenue
from these projects over the next five years.
Leapfrog is one of two Smart Card software development companies to have a
proprietary General Services Administration (GSA) IT schedule. This GSA
schedule is generating revenue for Leapfrog through the resale of product
lines from various vendors such as Micron Technology, Inc.
PRODUCTS
BIOTHENTIC SCR-100
The BiothenticTM SCR100 is a biometric Smart Card reader. The Biothentic
SC-100 reader is actually a combination of three technologies: biometrics,
security, and Smart Cards. The Biothentic SCR 100 brings to the security
market a device capable of providing user authentication, access control,
and secures communication.
The Benefits of solutions to users are:
Authenticate themselves to the recipient
Send encrypted data with keys on a Smart Card
Make purchases using an e-purse
Access secure web sites such as medical
repositories, virtual universities
SMARTTRACKER 55
Smart Tracker 55 is a Smart Card/biometric software solution designed by
the Company to improve the efficiency of day-to-day administrative and
communication tasks of the varied participants in the healthcare industry.
These include physicians, hospitals, pharmacies, insurance companies and
other healthcare providers. Unique features of the system include the
secure transfer of private healthcare information and other pertinent
patient management data.
Currently the Smart Tracker 55 system is implemented in hospitals to manage
seniors programs. The flexibility of the platform, however, makes it
possible to adapt the system to any affinity-based program.
CONTROL POINT
Control Point is a solution that provides Smart Card enabled access
control. The Access Control Point software is compatible with all Smart
Card lock systems. A unique graphical user interface offers security
administrators a simple, easy-to-use enrollment system for assigning door
rights (for stand alone and network devices), card privileges, defining
user groups and blacklisting. Furthermore, the system is ODBC (Open
Database Connectivity) compliant for simple integration with existing
databases. The Control Point software will control a standalone system, a
network system, or a combination of both stand-alone or network.
The Control Point software system was developed primarily to meet the
growing need for Smart Cards in the access control industry. The demand
for multiple applications on a single card has been the catalyst for the
explosive growth of Smart Cards over the years. The Control Point
system has been designed to offer standard features for access control, as
well as enhanced features for advanced security providing seamless
integration into existing installations. Critical information is stored
directly on the Smart Card, allowing the user the convenience of having
remote locations that can be programmed from a central location with
specific expiration dates.
Also, the Company's strategy includes the resale of turnkey products
integrated to card management systems such as SmartCity and Proton. Each is
a purse platform with sophisticated back office processing systems
providing secure transaction processing and settlement. SmartCity is
supported by Product Technologies Inc. (PTI) a company from Hartford, CT
owned by ICL/Fujitsu. An advantage to the SmartCity product is the
inclusion of a loyalty scheme that would have to be purchased separately on
the Proton platform. The following is a short discussion of the software
products included in the Companies offerings:
SMARTCITY is a turnkey smart card-based e-purse (electronic purse)
application that also provides a multi-application
development platform and tools to systems integrators. SmartCity is an
object-oriented client-server application supporting EMV-compatible
(Europay, MasterCard, and Visa specifications), Microsoft Smart Card for
Windows, and other smart reloadable e-purse smart cards and disposable
memory cards. It also supports secure multi-party loyalty applications that
can be integrated with e-purse applications.
The flexible, yet extremely secure design architecture of the system allows
it to be easily customized to each card issuer's requirements. Audited
transactions, multi-issuer, multiple purses and currencies, debit and
credit purses, and foreign language support are standard features of the
system. Utilizing a single smart card, SmartCity can additionally provide
support for physical access control, logical access, secure Internet
access, identification, electronic ticketing, and other custom
applications.
Designed as a host system independent application, integration with
existing payment systems, credit/debit card authorization networks, ATM
networks, merchant POS systems, and other infrastructures is seamlessly
achieved. SmartCity is a field proven system with more than 70
installations on 5 continents in financial and multi-application
environments.
Proton is smart card management software developed by and for the large
banks. It involves a complete suite of purchasing and revalue
functionality; in particular, it has a broad set of systems interfaces that
enable the product to conduct credit and debit authorizations on the
national interchange networks.
Proton's front end is similar to Smart City. The differences lie in the
back office, which is more scalable and built for nationally distributed
transaction volumes. Proton will allow us to position ourselves as a
processing node that could easily be integrated into a bank's data
processing stream; it will employ the banks' technologies, and implement
the same control standards of high professional care.
EMEMBER{TM} is a stand-alone application capable of functioning as a single
application on a smart card or in concert with the eSmart{TM} platform and
other Leapfrog software. The product is a web-based application generated
from the demographic database provided by the client. The data is used to
populate and update information on smart cards with up to five parameters,
including expiration date, which can limit physical and logical access and
reward cardholders with the benefits of membership in desired
organizations.
The functionality of eMember{TM} breaks into two main areas; updating the
information on your Leapfrog card and/or checking that information in
various formats to limit access to a location or database. The eMember{TM}
utility will facilitate this functionality by "interpreting" existing
demographic codes for use with codes stored on the Leapfrog card.
EVOTE{TM} is a stand-alone web-based Smart card application that is
configurable as either a strict voting application for campus elections,
Association Membership surveys, Executive management elections, or general
market/product surveys. As a traditional election format, it allows the
easy set-up and configuration of candidates, positions, voting eligibility
(as determined by data on Smart card) per candidate, dates & timeframes
when voting is allowed, and general voter eligibility management and
tracking. For Association membership surveys or product/marketing surveys
it facilitates the set-up of the survey via a Wizard that allows the
creation of up to 30 questions per product/topic/subject, the grouping of
products/topics/subjects into a categories (Pre-defined or Administrator
defined), captures demographic data stored in a standard format on the
smart card, marks the card as having responded to the given survey, and
provides reporting and statistical tools for each of the various
categories/products/topics/subjects and demographics.
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 focused on Product Development.
Major efforts in product sales began in mid-2000 after additional capital
became available to fund sales and marketing efforts.
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, 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.
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, but rather marketers of limited
applications only, which do not currently encroach on LEAPFROG markets, but
become 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases its headquarters facility in Maitland,
Florida, which is owned by Geneva College. The space for the headquarters
facility is leased to the Company. The following tabulates certain
information with respect to the lease currently executed between the
Company and Geneva College. The lease has annual increases of $.50 per
square foot per year.
Current
Square Monthly
Location Footage Rental Expiration
----------------------- ---------------- ----------- -------------
Executive Offices 14,500 $19,790 November, 2004
1011 Maitland Center Commons
Maitland, Florida 32751
ITEM 3. LEGAL PROCEEDINGS
Leapfrog and its subsidiary, Leapfrog Global IC Products, Inc. ("LGIC")
were named in an action (Valenti vs. Leapfrog Smart Products, Inc. ("LSP")
et al) alleging that the companies failed to disclose certain corporate
records as required by Florida Law. LSP's special Florida litigation
counsel has advised the company that the remedies asked for in the
complaint against LSP are not available because LSP is a Colorado
corporation. In any event, the plaintiff is seeking primarily equitable
relief, and not monetary damages except attorney's fees, against both LSP
and LGIC. As such, even if the suit was successful, it would not
materially impact the financial condition of either LSP or LGIC.
REAL PROVENCHER V. LEAPFROG SMART PRODUCTS, INC., F/K/A ALBARA CORPORATION,
AND AMERICAN SECURITIES TRANSFER INCORPORATED was filed in the U.S.
District Court for the Southern District of Texas, Houston Division.
Plaintiff, a shareholder of the Company, has filed the following claims
against the Company: 1) the Company breached its statutory duty to register
and transfer Plaintiff's shares in the Company; 2) the Company violated his
statutory right under Rule 144(k) of the Securities Act of 1934 to
terminate restrictions to sell his shares; 3) the Company committed common
law and statutory fraud; 4) breach of contract under a Bleed Out Agreement;
5) and tortuous interference with Plaintiff's contract to sell 77,300
shares of stock. Plaintiff has alleged actual damages of $2,576,000 plus
attorney's fees, and pre-and post-judgement interest.
The Company filed a lawsuit styled LEAPFROG SMART PRODUCTS, INC. V. REAL
PROVENCHER , in the U.S. District Court of the Middle District of Florida,
Orlando Division with the following claims: 1) breach of contract under a
Consulting Agreement; 2) breach of contract under the terms of a Bleed Out
Agreement; 3) violation of Rule 16 of the Securities Act of 1934; 4)
fraudulent misrepresentation and common law fraud; and 5) violation of Rule
144 of the Securities Act of 1934. The Company alleged compensatory
damages, costs, and further relief, as the court finds appropriate. The
Florida Court has transferred venue to the U.S. District Court for the
Southern District of Texas, Houston Division and the two cases have been
consolidated.
As part of a consulting agreement with Provencher, a warrant with an
effective date of February 18, 2000 was issued for the right to purchase
500,000 shares of common stock at $3.50 per share on or after April 30,
2000. The warrant expires on January 31, 2010. The exercise price of
$3.50 was to be adjusted to $0.035 in the event the Company did not close
an equity offering raising an aggregate of at least $2.5 million by July
16, 2000; which did not occur. Although, Provencher has not attempted to
exercise the warrants, as part of the lawsuit the Company is attempting to have
the warrants declared null and void due to the alleged non-performance under the
Consulting Agreement.
Discovery is underway in the case. Some settlement discussions have begun
but no settlement has occurred at this time. The Company is unable to determine
the likelihood of an unfavorable outcome in this case and is not able to
estimate the potential loss to the Corporation at this time. Accordingly, the
financial statements include no provisions or liability related to the ultimate
outcome of this matter.
The Company was party to a lawsuit brought by Publicard, Inc. regarding the
repayment of $100,000 in notes due to them from the Company. It was the
Company's position that although these notes were recorded with interest
accruing, the notes should be offset with certain costs incurred by the
Company. This lawsuit was settled on February 2, 2001, requiring that the
Company repay $90,000 in nine $10,000 monthly installments beginning
February 2001.
The lessor of the Company's former office space has sued the Company for breach
of contract and lien foreclosure based on the Company's breach of lease and
failure to pay rent. Damages requested are $270,400, plus attorney's fees and
costs. The Company has brought a counter suit against the lessor for a
declaratory action, breach of lease, tortious interference with an advantageous
business relationship, and breach of good faith and fair dealings regarding
reletting the property The Company has accrued an insignificant portion of the
lessor's claims in an amount equal to the unpaid lease payments that would have
been due under the lease through December 31, 2000. No other amounts have been
recorded in the accompanying financial statements for theis uncertainty, as
managment cannot reasonably extimate the ultimate outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of fiscal year 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
During the 1999 and 2000 fiscal years, the Company's common stock traded on
the over-the-counter market and was quoted in 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
Second Quarter $ 6.31 $ 2.63
Third Quarter $ 4.69 $ 1.44
Fourth Quarter $ 1.94 $ 0.31
On December 31, 2000, the reported bid for the Company's
common stock was $0.375.
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 $19,500 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.
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data as set forth below for the years ended
December 31, 1999 and 2000 and the balance sheet data at December 31, 1999
and 2000, have been derived from our combined financial statements and
notes, which have been audited by Moore Stephens Lovelace, P.A.,
independent auditors, whose report is included in this Annual Report.
The following financial data should be read in conjunction with the
consolidated financial statements and notes and management's discussion and
analysis of financial condition and results of operations included in this
prospectus.
Year Ended Year Ended
December 31, December 31,
1999 2000
-------------- --------------
STATEMENT OF OPERATIONS
-------------------------------------
Revenues $ 121,533 $ 972,724
Cost of Operations $ 44,199 $ 905,805
Selling and Administrative
Expenses $ 2,737,851 $ 6,993,060
Other Income (Expenses) $ (437,123) $ (500,603)
Net Loss $(3,097,640) $(7,426,744)
Net Loss per common
Share, basic and diluted $ (0.72) $ (1.09)
Weighted average common
shares outstanding 4,280,158 6,866,964
BALANCE SHEET DATA
---------------------------------
The balance sheet data as of December 31, 2000 excludes the
underlying shares to warrants and options.
Periods Ended December 31,
----------------------------------
1999 2000
--------------- --------------
Working capital deficit $(1,924,309) $(2,531,095)
Total assets $ 752,977 $ 1,110,066
Total long-term liabilities $ - -
Total liabilities $ 2,257,597 $ 3,063,922
Stockholders' deficit $(1,504,620) $(1,953,856)
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OR
PLAN OF OPERATION
The following discussion should be read in conjunction with the Financial
Statements and notes thereto.
GENERAL
Management's discussion and analysis contains various "forward looking
statements." Such statements consist of any statement other than a
recitation of historical fact and can be identified by the use of
forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or use of negative or other variations or
comparable terminology.
We caution that these statements are further qualified by important factors
that could cause actual results to differ materially from those contained
in the forward-looking statements, that these forward-looking statements
are necessarily speculative, and there are certain risks and uncertainties
that could cause actual events or results to differ materially from those
referred to in such forward-looking statements.
PLAN OF OPERATION
LEAPFROG did not have any external sources of working capital during 2000
and minimal revenues during 2000 except for the sale of stock to
individuals and the issuance of notes payable. 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 company will
have sufficient funds to continue significant development, marketing and
manufacturing activities. The funding obtained during 2000 from the sales
of stock to individuals and issuances of notes payable were less than
expected and accordingly, liquidity was very tight during the year.
From the period January 1, 2001 through March 31, 2001, additional debt of
$1.5 million was issued to third parties.
There is no assurance that the Company 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.
Results of Operations-
Year Ended December 31, 2000 as Compared to Year Ended December 31, 1999
Revenues and Gross Profits:
----------------------------------
LEAPFROG is a development stage company with virtually no revenues in 1999
and only start up revenues in 2000. Revenues for the year ended December
31, 2000 increased $851,000, from $122,000 to $973,000, a 700% increase
compared to the year ended December 31, 1999. Approximately $589,000 of the
revenues for the year ended December 31, 2000 were for purchases by the U.
S. Government made through the Company's General Administrative Services
("GSA") contract. In addition to these GSA contract revenues, the
remaining increase in revenues of $262,000 during 2000 was due to the
recognition of revenue on the percentage of completion method for three
substantially complete projects involving both hardware and software
installation and development in the logical access and healthcare loyalty
products. The completions of these projects will serve as working models
for future sales. All revenues from these projects 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 for the year ended December 31, 2000 decreased to $67,000 from
$77,000 in the same period in 1999. The gross profit on the GSA contract
revenues was $22,000 or 4% of the revenues. The gross margin on the
remaining revenues was $45,000 or 12%. This 12% margin is lower than is
expected on future sales but the projects implemented during 2000 were
primarily first time implementations and therefore more time intensive to
install. The gross profit for 1999 was higher in amount and percentage due
to several factors. There were several small projects in 1999 with low
incremental direct costs to the Company that will not be a recurring source
of revenue in the future. These gross margins are not necessarily
indicative of margins expected in future years.
Total Operating Expenses:
-------------------------------
Total operating expenses for the year ended December 31, 2000, increased
$4.3 million from $2.7 million to $7.0 million, a 155% increase compared to
the same period in 1999. This increase is net of $118,000 and $76,000 in
software development expenditures that have been capitalized during the
year ended December 31, 2000 and 1999, respectively. In the fourth quarter
of 2000, expense was recognized of $1.2 million for stock options issued
below market value. After deducting this charge from total operating
expenses the remaining balance of $5.8 million represents a 113% increase
of $3.1 million over the prior year. Over half of this remaining increase
is primarily associated with the increase in average number of employees
from 21 in 1999 to 39 in 2000. Consulting fees also increased primarily
due to payment for services of consultants to assist in maintaining a
public market presence to attract investors. General and administrative
expenses increased also with increased legal and accounting costs for SEC
filings, negotiations with investors and litigation, and in most 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 2001.
Personnel and related expenses increased $2.8 million or 234% to $4.1
million for the year ended December 31, 2000 compared to the $1.2 million
for the same period in 1999. In the fourth quarter of 2000, expense was
recognized of $1.2 million for stock options issued below market value.
After deducting this charge from personnel expenses the remaining balance
of $2.9 million represents a 138% increase of $1.7 million over the prior
year. This remaining increase was due to the increase in average number
of employees from 21 in 1999 to 39 in 2000. In addition, average salaries
increased as more expertise was brought into the Company in sales,
engineering and to cover the administration of a public company.
Consulting fees increased by $459,000 from the $392,000 incurred for the
year ended December 31, 1999 to $851,000 for the year ended December 31,
2000. 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. In
2000, consultants were employed for the same purposes as in 1999, but
expenses increased in 2000 primarily due to payment for services of
consultants to assist in maintaining a public market presence to attract
investors.
General and administrative expenses increased to $2.0 million for the year
ended December 31, 2000 from $1.1 million for the same period in 1999.
This $919,000 or 86% increase was due largely to increased legal and
accounting costs for SEC filings, negotiations with investors and
litigation. General and administrative expenses also increased 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. For
the first time, Board of Director fees of $154,000 were accrued in 2000 and
insurance costs increased for Directors and Officers insurance by
approximately $50,000.
Depreciation and amortization expenses increased $36,000 or 66% to $92,000
for the year ended December 31, 2000 compared to $55,000 for the same
period in 1999. 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.
Other income and expense:
--------------------------------
Interest expense for the year ended December 31, 2000 decreased $66,000
from $433,000 to $368,000 when compared to the same period in 1999. 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.
In January of 2000, $550,000 in debentures were issued with 75,000 shares
of common stock as an incentive to enter into these agreements. These
shares resulted in $56,250 in interest expense begin recorded. Also,
included in interest expense was $55,000 attributable to the value of the
stock options issued with the $100,000 related party note on April 28,
2000. During 2000, interest expense was accrued on all the debt incurred
in 1999, but for a full year. The interest related to stock issued with
debentures and options issued with the notes that was more in 1999 than in
2000 offset the usual interest accrued on the debt.
Net loss:
----------
The net loss for the year ended December 31, 2000 increased $4.3 million
from $3.1 million to $7.4 million, a 140% increase compared to the year
ended December 31, 1999. This increase is net of $118,000 and $76,000 in
software development expenditures that were capitalized during the years
ended December 31, 2000 and 1999, respectively.
This increase in the net loss is primarily associated with the increases in
operating expenses incurred as additional personnel were hired and the
costs of becoming and maintaining a publicly traded company were incurred.
Not only were payroll and related occupancy and overhead expenses almost
doubled with the increase in average number of employees from 21 in 1999 to
39 in 2000, but legal and accounting fees and consulting fees increased
with the hiring of outside expertise for SEC filings, investor relations
and litigation. The increase in the loss includes the fourth quarter $1.2
million charge for employee stock options issued below market. The net
loss per share of common stock increased from $.72 per share in 1999 to
$1.09 in 2000. This increase is primarily due to the increase in losses
realized partially offset by an increase in the weighted average number of
common shares outstanding from 4,280,158 for the year ended December 31,
1999 to 6,866,964 for the year ended December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities increased $1.9 million from $2.4
million for the year ended December 31, 1999 to $4.3 million for the year
ended December 31, 2000. The increase in the cash used for operations is
a direct increase in the net loss of the Company offset by the buildup of
accounts payable balances and the $1.2 million charge for employee stock
options issued below market which is a non-cash expense.
Net cash used by investing activities increased $2,000 from $237,000 for
the year ended December 31, 1999 to $239,000 for the year ended December
31, 2000. The increase was minimal because the decrease in acquisitions of
property and equipment were offset by the additional capitalization of
software costs in 2000. Management expects the cash invested in this area
to increase as funds are available.
Net cash provided by financing activities increased $2.0 million from $2.6
million for the year ended December 31, 1999 to $4.6 million for
the year ended December 31, 2000. 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 2000 included the issuance of common and
preferred stock providing $4.0 million in the aggregate and the issuance of
notes payable that provided a net of $579,000 after repayment of principal
in the amount of $502,000.
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.
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 much of Leapfrog's debt financing has been short-term notes
payable.
These notes may 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 may 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.
Subsequent Events After December 31, 2000
On April 2, 2001, the Company entered into an agreement for the sale of
approximately 82% of Conduit with closing to be within 120 days with a two-
year right-of-first refusal to purchase the remaining shares of Conduit
held by the Company at an equivalent price per share. The sale of Conduit
includes licensing rights for the Company's software assets solely related
to the healthcare industry in the United States, which includes, but is not
limited to hospitals, physician offices, pharmacies, insurance companies,
managed care organizations, clinics, dental offices, chiropractic,
podiatry, ocular health, governmental healthcare agencies, providers and
payors, ambulances, nursing homes, and home healthcare agencies. In
exchange for selling the controlling interest in Conduit, the purchaser
will pay the Company $510,000 and provide Conduit with $1.9 million to fund
its ongoing business as well as guaranteeing software development fees of
$3.0 million pursuant to the terms of a software development agreement
which Conduit and the Company executed in connection with the stock
purchase agreement. The purchaser is required to pay the Company $250,000
by May 29, 2001. Between that date and closing, the purchaser will pay the
Company not less than 20% of all cash collected, up to a maximum of
$510,000, including the $250,000 paid by May 29, 2001, in any private
offering of Conduit's securities undertaken to satisfy the purchaser's
obligation to provide the Conduit funding. The balance if any will be paid
at closing. Additionally, the Company would be responsible for satisfying
the future exercises, if any, of the outstanding stock options of Conduit
as of the date of the definitive agreement.
In March 2001, Leapfrog Merger, Inc. changed its name to Leapfrog Smart
Products, Inc.
In February 2001, the Company issued a note to a shareholder and noteholder
for $2.0 million to be funded in various installments from January 25, 2001
through May 15, 2001. Through April 3, 2001, the Company has received
approximately $1.5 million of this funding. The note is secured by all
assets of the Company. Interest accrues at 12% and is due and payable
quarterly beginning July 1, 2001. The note matures on July 1, 2002. The
note or any portion thereof, is convertible into shares of the Company's
common stock at the rate of $1.00 per share. As part of this financing
agreement, the noteholder received an option to purchase up to 1,000,000
share of the Company's common stock at $1.00 per share through June 30,
2002.
Proceeds from this note were used to repay the $200,000 remaining balance
on a note that was secured by all assets of the Company and was due in
January 2000.
The Company is currently renegotiating the terms of much of the outstanding
debt. The $100,000 note with the bank has been extended until October 1,
2002. Many of the debenture holders agreed to take new notes in place of
the debentures. Notes have been issued that brought $477,000 of the debt
outstanding at December 31, 2000 current. The majority of the new notes
call for repayment of the principal and interest over 24 month periods
either beginning in March or August 2001.
On January 16, 2001 the Board of Directors approved employment contracts
with three key employees. The terms of the contracts extend to dates
ranging from January 24, 2002 to September 30, 2003. The agreements call
for aggregate salaries of $390,000 with annual 4% increases. These
agreements call for the issuance of an aggregate of 1,100,000 stock options
to purchase common stock of the Company. The options all have a strike
price of $1.00 each with various vesting dates through January 1, 2002 and
expiration dates ranging from January 16, 2004 through December 31, 2005.
The other material provision to one of the contracts involves the payment
of a cash bonus equal to 1% of the Company's net profits, defined as net
earnings before insurance, taxes and amortization. Another contract
requires the payment of a cash bonus equal to 4% of the Company's income
from U. S. operations, defined as net income before taxes, minority
interests, extraordinary items, amortization of intangible assets, interest
on long-term debt and any incentive compensation to employees.
In January 2001, the Board of Directors elected the following officers:
Co-CEO's Dale Grogan and Les Bromwell
Chairman of the Board Randolph Tucker
President, Leapfrog Smart Products, Inc. Les Bromwell
Chief Operating Officer Perry Dunn
Chief Financial Officer Jon Gerster
Chief Technology Officer Damian Szigeti
Vice President for Sales and Marketing Vince Ley
Vice President for Investor Relations Ken Clinton
President, LGIC Gary Wolfson
Controller/Treasurer Nana Li
The appointment of Jon Gerster as CFO was after the resignation at the
beginning of January 2001 of Jim Gornto as CFO.
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 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.
MARKET RISKS AND OTHER BUSINESS FACTORS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward
looking statements" by creating a safe harbor to protect companies from
securities law liability in connection with forward looking statements. We
intend to qualify both our written and oral forward looking statements for
protection under the Reform Act and any other similar safe harbor
provisions.
Generally, forward looking statements include expressed expectations of
future events and the assumptions on which the expressed expectations are
based. All forward looking statements are inherently uncertain as they are
based on various expectations and assumptions concerning future events and
they are subject to numerous known and unknown risks and uncertainties
which could cause actual events or results to differ materially from those
projected.
Due to those uncertainties and risks, the investment community is urged not
to place undue reliance on our written or oral forward looking statements.
We undertake no obligation to update or revise our forward looking
statements to reflect future developments. In addition, we undertake no
obligation to update or revise forward looking statements to reflect
changed assumptions, the occurrence of unanticipated events or changes to
future operating results over time.
EVOLVING INDUSTRY STANDARDS; RAPID TECHNOLOGICAL CHANGES
The Company's success in its business will depend in part upon its
continued ability to enhance its existing products and services, to
introduce new products and services quickly and cost effectively to meet
evolving customer needs, to achieve market acceptance for new product and
service offerings and to respond to emerging industry standards and other
technological changes. There can be no assurance that the Company will be
able to respond effectively to technological changes or new industry
standards. Moreover, there can be no assurance that competitors of the
Company will not develop competitive products, or that any such competitive
products will not have an adverse effect upon the Company's operating
results.
Moreover, management intends to continue to implement "best practices" and
other established process improvements in its operations going forward.
There can be no assurance that the Company will be successful in refining,
enhancing and developing its operating strategies and systems going
forward, that the costs associated with refining, enhancing and developing
such strategies and systems will not increase significantly in future
periods or that the Company's existing software and technology will not
become obsolete as a result of ongoing technological developments in the
marketplace.
SUFFICIENCY OF CASH FLOWS
Because current cash balances and projected cash generation from operations
are not sufficient to meet the Company's cash needs for working capital and
capital expenditures during 2001, management intends to seek additional
equity or obtain additional credit facilities. The sale of additional
equity could result in additional dilution to the Company's shareholders. A
portion of the Company's cash may be used to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
products or technologies.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109") issued by the Financial Accounting Standards Board ("FASB"),
under which deferred tax assets and liabilities are provided on differences
between the carrying amounts for financial reporting and the tax basis of
assets and liabilities for income tax purposes using the enacted tax rates.
Under SFAS 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized, if on the weight of available evidence,
it is more likely than not that some portion or the entire deferred tax
asset will not be realized.
FEDERAL INCOME TAX ASPECTS OF INVESTMENT IN THE COMPANY
The discussion contained herein has been prepared by the Company and is
based on existing law as contained in the Code, amended United States
Treasury Regulations ("Treasury Regulations"), administrative rulings and
court decisions as of the date of this Registration Statement. No assurance
can be given that future legislative enactments, administrative rulings or
court decisions will not modify the legal basis for statements contained in
this discussion. Any such development may be applied retroactively to
transactions completed prior to the date thereof, and could contain
provisions having an adverse affect upon the Company and the holders of the
Common Stock. In addition, several of the issues dealt with in this summary
are the subjects of proposed and temporary Treasury Regulations. No
assurance can be given that these regulations will be finally adopted in
their present form.
ITEM 8. FINANCIAL STATEMENTS
The financial statements are included beginning at page F-1. See page F-2
for the Table of Contents to the Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
As previously reported on a Current Report on Form 8-K dated March 17,
2000, LEAPFROG dismissed Thomas Leger & Company, P.A., whose address is
1235 Loop West, Suite 907, Houston, Texas. Thomas Leger & Company, P.A. was
previously engaged as the principal accountant to audit the registrant's
(then Albara'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.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS;
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act, requires the Company's officers,
directors and persons who beneficially own more than ten percent of the
Common Stock to file reports of securities ownership and changes in such
ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten percent beneficial owners also are
required by rules promulgated by the Securities and Exchange Commission to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon review of the copies of such forms furnished to the
Company, or written representations that no Form 5 filings were required,
the Company believes that during 2000 all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten percent
beneficial owners were complied with on a timely basis.
Committees of the Board
------------------------------------
The Board of Directors delegates certain of its authority to a Compensation
Committee and an Audit Committee.
The primary function of the Compensation Committee will be to review and
make recommendations to the Board with respect to the compensation,
including bonuses, of the Company's officers and to administer the
Company's Compensatory Stock Consulting Plan.
The function of the Audit Committee is to review and approve the scope of
audit procedures employed by the Company's independent auditors, to review
and approve the audit reports rendered by both the Company's independent
auditors and to approve the audit fee charged by the independent auditors.
The Audit Committee will report to the Board of Directors with respect to
such matters and recommends the selection of independent auditors.
MANAGEMENT
(a) The Company's directors as of December 31, 2000:
NAME TITLE AGE
Dale Grogan President & Director
Randolph Tucker CEO, Treasurer & Director
Ron Breland Director
Bruce Starling Chairman & Director
Van Staton Director
George Stuart Director
Dennis Lehr Director
Dr. Les Bromwell Director
Bill Baker Director
(b) The Company's officers as of December 31, 2000: See response to Item
2(a) above.
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 Gornto CFO 1011 Maitland Center Commons
Maitland, FL 32751
Perry Dunn 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:
COMMON STOCK
------------------------------------------------------------------------------
NAME AND ADDRESS NUMBER OF PERCENT
OF BENEFICIAL OWNER SHARES OF CLASS OPTIONS
------------------------------------------------------------------------------
Ron Breland 8,800 0.10% 1,025,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Dale Grogan 331,000 3.69% 925,574
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
------------------------------------------------------------------------------
NAME AND ADDRESS NUMBER OF PERCENT
OF BENEFICIAL OWNER SHARES OF CLASS OPTIONS
------------------------------------------------------------------------------
Bruce Starling 189,858 2.11% 50,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Van Staton 313,629 3.49% 50,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Randolph Tucker 520,500 5.80% 936,052
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Bill Baker 7,500 .08% -
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Dennis Lehr 25,612 .29% 12,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Dr. Les Bromwell 92,843 1.03% 12,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Jim Gornto 3,000 0.03% 35,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Perry Dunn 11,730 0.13% 36,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751<
Song Ru Hua 500,000 5.57% -
108 Powers Court #110
Sterling, VA 20166
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.
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 CEO of Leapfrog Smart Products, he has been instrumental in creating the
infrastructure and corporate environment. Mr. Tucker has been able to
assemble some of 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-founder 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.
WILLIAM BAKER, Director
Mr. Baker currently holds the title of President and CEO of the Motion
Picture Academy and EVP of the Motion Picture Academy Association,
positions held since 1994. Mr. Baker's tenure with the Association began
in December 1991, when he was named Senior VP and Director, Worldwide
Piracy. Prior to joining the MPA/MPAA, Mr. Baker enjoyed a very
successful career with the Federal Bureau of Investigation, which he began
in 1965. At the time of his retirement from the FBI in 1991, Mr. Baker
held the position of Assistant Director, Criminal Investigative Division,
responsible for all criminal investigations. While on hiatus from the FBI,
Mr. Baker also served as Director of Public Affairs for the Central
Intelligence Agency.
Throughout his career, Mr. Baker has been recipient of numerous awards,
including the Edmund J. Rudolph Award (1992), at the Attorney General's
40{th} Annual Awards Ceremony. Mr. Baker has also been bestowed the U.S.
Marshal's Star for lifetime achievement in law enforcement and
the rare title of Distinguished Executive by President Bush in recognition
of his outstanding accomplishments in advancing the FBI's investigative
mission.
Mr. Baker is a graduate of the University of Virginia and a US Air Force
veteran, assigned to the office of Special Investigations.
DR. LES BROMWELL, Director
Leslie G. Bromwell studied at the Massachusetts Institute of Technology,
where he received degrees in Chemical Engineering and in Civil Engineering.
During his study at MIT he participated in numerous research projects
involving both Chemical and Civil Engineering.
After receiving his doctorate from MIT in 1966, Dr. Bromwell joined the
faculty of the Department of Civil Engineering. From 1966 to 1972, he
taught undergraduate and graduate courses in engineering. Dr. Bromwell also
directed sponsored research projects and supervised graduate students in
their thesis research. After leaving MIT in 1972, he returned to Florida
and started an engineering company in Lakeland, Bromwell & Carrier, Inc.,
which in 1997 became BCI Engineers & Scientists, Inc.
Dr. Bromwell received registration as a Professional Engineer in eight
states. He represented industrial clients, government agencies,
contractors, architects, and engineers on projects involving environmental
and geotechnical problems and issues. He served on consulting boards and
task forces for the U.S. Army Corps of Engineers, the National Aeronautics
and Space Administration, and the State of Florida. Dr. Bromwell was a
member of NASA's Lunar Science Team, a group of experts responsible for
scientific investigations during the Apollo manned missions. As a member
of this team, he participated in the development of new instruments for
conducting lunar surface experiments, in the training of astronauts for
surface activities, and in the testing of lunar samples returned to earth.
In 1989, he became President of Consolidated Minerals, Inc., a Leesburg,
Florida, based company engaged in mining, agriculture, and power
generation. As President of CMI, he led the development of new
technologies and their implementation through several start-up subsidiary
companies and foreign joint ventures in China and Brazil. In 1997, CMI
merged with Florida Crushed Stone Company. In 1998, Dr. Bromwell also was
named President of an affiliated company, US Nutraceuticals, LLC. USN
harvests botanical ingredients for herbal products and manufactures high
quality herbal extracts using proprietary supercritical fluid extraction
technology. In October 2000, Dr. Bromwell resigned from FCS and USN, and
became Chairman and CEO of Leapfrog Global IC Products, Inc. a subsidiary
of Leapfrog Smart Products, Inc.
DENNIS J. LEHR, Director
Mr. Lehr became Of Counsel to Hogan & Hartson in 1994. In addition to his
part-time law practice, Mr. Lehr has worked as a private consultant for
domestic and international businesses on financing issues. These
activities have taken him five times to China, as well as several trips to
Germany, Switzerland and Liechtenstein. During his career with the firm,
Mr. Lehr has traveled extensively and has lectured in Australia, Canada,
China, Russia and Switzerland. In 1992, he was part of a technical
assistance mission sponsored by the State Department that traveled to
Russia and Kazakhstan. Mr. Lehr was the capital markets "expert" on this
trip, which was lead by the then Solicitor General, Kenneth Starr. In
addition to his activities in the American Bar Association, as a business
consult and with Hogan & Hartson Mr. Lehr acts as a part-time consultant to
the Securities and Exchange Commission.
Mr. Lehr's practice of law is concentrated in the areas of banking,
financial institutions and securities law. His education includes a B.A.
from New York University, L.L.B. from Yale University and L.L.M. from New
York University.
JIM GORNTO, CFO
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. He
served in Vietnam in the United States Army-Airborne Division of Special
Forces.
PERRY DUNN, Chief Operating Officer
Perry Dunn joined the Leapfrog team in October 1999 after a distinguished
30-year career in the United States Marine Corps. During the decade of the
90's he served in several senior positions in the Fleet Marine Forces, in
the Pentagon, and in the Department of Defense acquisition corps. He was
the Commanding Officer of Marine Helicopter Squadron 167 in North Carolina;
Special Assistant to the Navy and Marine Corps Acquisition Executive;
Deputy Director of Asian and Pacific Affairs for the Secretary of Defense;
and Director of Marine Corps Acquisition Programs in Orlando, Florida. His
vast experience throughout his career, positions him well to oversee and
coordinate the daily operations of Leapfrog Smart Products.
Perry earned his Bachelor's of Science Degree from the United States Naval
Academy, and gained his Master's Degree in Business Administration from the
University of West Florida. In the local community he is especially active
in service to his church and in supporting the Chamber of Commerce as a
member of the Education Committee and Community Service Committee of
Leadership Orlando Alumni. He is a graduate of Leadership Orlando, Class
45.
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 eight 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.
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.
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.
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
Beginning in June, 2000, all Directors are paid $3,000 per
meeting in addition to reasonable travel expenses.
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.
FOREIGN CORRUPT PRACTICES ACT
Some of the Company's operations are transacted in Asia. To the extent that
we conduct operations and sell our products outside the U.S., we are
subject to the Foreign Corrupt Practices Act which makes it unlawful for
any issuer to pay or offer to pay, any money or anything of value to any
foreign
official, foreign political party or foreign political party official or
any candidate for foreign political office (foreign official) or any person
with knowledge that all or a portion of such money or thing of value will
be offered, given, or promised, directly or indirectly, to any foreign
official.
We have not made any offers, payments, promises to pay, or authorization of
any money or anything of value to any foreign official and have implemented
a policy to be followed by our officers, directors, employees and anyone
acting on its behalf, that no such payments can and will be made. We have
made all employees cognizant of the need for compliance with the Foreign
Corrupt Practices Act and any violation of our policy will result in
dismissal. Further, we conduct periodic reviews of this policy with all
employees to ensure full compliance.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to, earned by or paid
to our chief executive officer and each executive officer whose
compensation exceeded $100,000 for the year ended December 31, 2000.
SUMMARY COMPENSATION TABLE
Name and Automobile Other Annual
Principal Position Year Salary($) Allowance ($) Compensation($)
------------------- ---------- --------- ------------- ---------------
Chief Financial Officer 2000 100,000 6,000 (A)
Gornto,
Jim
Director & President 2000 130,000 8,000 (B)
Grogan, (annualized)
Dale 1999 87,500
(annualized)
1998 75,000
1997 64,583
Director & CEO 2000 145,605 8,000 (C)
Tucker, (annualized)
Randolph 1999 98,750
(annualized)
1998 85,000
1997 80,833
____________________________
(A) Mr. Gornto was granted 1,000 options to purchase Company common
stock on 9/15/00 with immediate vesting. These options expire on
9/15/03 and have a strike price of $1.75. Mr. Gornto was also
issued 9,000 options to purchase Company common stock on 12/22/00
with immediate vesting. These options expire on the earlier of
12/22/03 or 90 days after termination of employment and have a
strike price of $0.25.
Prior to the merger with Albara Corporation in February 2000, Mr.
Gornto had been granted 25,000 options which remain outstanding.
These options were granted on 4/20/99 with immediate vesting, a strike
price of $1.75 and an expiration date of 12/31/03.
(B) Mr. Grogan has an employment contract with the Company. The
contract, dated May 1, 2000, granted a salary of $125,000 with
annual 4% increases in September. The contract granted 25,000
shares of stock that were issued in December 2000. Under this
contract Mr. Grogan was granted 375,000 options to purchase Company
common stock on 9/15/00 with immediate vesting and another 375,000
which vested on January 1, 2001. These options expire on 12/15/05
and have a strike price of $1.00. Additionally, the contract
entitles Mr. Grogan to a 1% commission on all investment funds
into the Company from May 1, 2000 through May 1, 2001 and a
$1,000,000 life insurance policy funded by the Company. For the
year ended December 31, 2000, the Company has accrued commissions
of $27,911, of which only $22,428 has been paid.
Mr. Grogan is also entitled to Board of Directors fees for Leapfrog
Smart Products, Inc. (LSP) and for Leapfrog Global IC Products, Inc.
(LGIC). For the year ended December 31, 2000, directors fees of
$14,000 and $7,000 were accrued for LSP and LGIC, respectively, of
which $14,000 of the LSP fees were paid.
Mr. Grogan was granted 1,000 options to purchase Company common stock
on 9/15/00 with immediate vesting. These options expire on 9/15/03
and have a strike price of $1.75. Mr. Grogan was also issued 15,000
options to purchase Company common stock on 12/22/00 with immediate
vesting. These options expire on the earlier of 12/22/03 or 90 days
after termination of employment and have a strike price of $0.25.
Prior to the merger with Albara Corporation in February 2000, Mr.
Grogan had been granted the following options which remain
outstanding:
Grant Vesting Strike Expiration Number of
Date Date Price Date Options
---------- ---------- ------- ----------- -------------
10/1/98 10/1/98 $ .25 10/1/01 16,257
10/1/98 10/1/98 $ 1.00 10/1/01 12,317
12/23/98 12/23/98 $ 1.75 12/23/01 15,000
9/15/99 3/15/01 $ 1.00 9/15/04 100,000
(C) Mr. Tucker has an employment contract with the Company. The
contract, dated May 1, 2000, granted a salary of $140,000 with
annual 4% increases in September. The contract granted 25,000
shares of stock that were issued in December 2000. Under this
contract Mr. Tucker was granted 375,000 options to purchase Company
common stock on 9/15/00 with immediate vesting and another 375,000
which vest on January 1, 2001. These options expire on 12/15/05
and have a strike price of $1.00. Additionally, the contract
entitles Mr. Tucker to a 1% commission on all investment funds
into the Company from May 1, 2000 through May 1, 2001 and a
$1,000,000 life insurance policy funded by the Company. For the
year ended December 31, 2000, the Company has accrued commissions
of $27,911, of which none have been paid.
Mr. Tucker is also entitled to Board of Directors fees for Leapfrog
Smart Products, Inc. (LSP) and for Leapfrog Global IC Products, Inc.
(LGIC). For the year ended December 31, 2000, directors fees of
$14,500 and $7,000 were accrued for LSP and LGIC, respectively, of
which $9,000 of the LSP fees were paid.
Mr. Tucker was granted 1,000 options to purchase Company common stock
on 9/15/00 with immediate vesting. These options expire on 9/15/03
and have a strike price of $1.75. Mr. Tucker was also issued 15,000
options to purchase Company common stock on 12/22/00 with immediate
vesting. These options expire on the earlier of 12/22/03 or 90 days
after termination of employment and have a strike price of $0.25.
Prior to the merger with Albara Corporation in February 2000, Mr.
Tucker had been granted the following options which remain
outstanding:
Grant Vesting Strike Expiration Number of
Date Date Price Date Options
---------- ---------- ------- ----------- -------------
10/1/98 10/1/98 $ .25 10/1/01 34,694
10/1/98 10/1/98 $ .25 10/1/01 15,887
10/1/98 10/1/98 $ 1.00 10/1/01 3,971
12/23/98 12/23/98 $ 1.75 12/23/01 15,500
9/15/99 3/15/01 $ 1.00 9/15/04 100,000
Compensation of Directors
As of June 2000, all directors of the Company are paid $3,000 per meeting
in addition to reasonable travel expenses.
Directors' and Officers' Insurance
The Company has purchased 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.
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.
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.
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 materially indebted to
the Company at any time during the period ended December 31, 2000 or since
that date.
EMPLOYMENT AGREEMENTS
The CEO, Randolph Tucker, and the President, Dale Grogan each have
employment agreements with the Company. The agreements were both entered
into on May 1, 2000 as a continuation of their contracts signed September
15, 1999 and are the same except for the base salary. The base
salaries for Tucker and Grogan are $150,000 and $125,000, respectively,
with an automatic 4% increase each September 15{th}. The contract term is
through April 30, 2003.
The contracts grant 25,000 shares of freely traded stock to each. The
contracts each granted 750,000 stock options with a $1.00 strike price that
expire on December 31, 2005. Fifty percent of the options vested
immediately with the other fifty percent vesting on January 1, 2001.
The contracts grant a cash bonus of five percent (5%) of the Company's
income from operations, defined as net income before taxes, minority
interests, extraordinary items, amortization of intangible assets, interest
on long-term debt and this incentive compensation.
The contract also requires a monthly automobile allowance of $500,
appropriate membership dues and subscription fees, payment for outside
disability insurance, "piggy back" registration rights for all stock owned,
a $1,000,000 term-life insurance policy and one percent (1%) commission for
all investment funds into the Company and any of its subsidiaries from May
1, 2000 until May 1, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of the ownership of
Leapfrog Smart Products, Inc. outstanding common stock on December 31, 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.:
COMMON STOCK
------------------------------------------------------------------------------
NAME AND ADDRESS NUMBER OF PERCENT
OF BENEFICIAL OWNER SHARES OF CLASS OPTIONS
------------------------------------------------------------------------------
Ron Breland 8,800 0.10% 1,025,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Dale Grogan 331,000 3.69% 925,574
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Bruce Starling 189,858 2.11% 50,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Van Staton 313,629 3.49% 50,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Randolph Tucker 520,500 5.80% 936,052
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Bill Baker 7,500 .08% -
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Dennis Lehr 25,612 .29% 12,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Dr. Les Bromwell 92,843 1.03% 12,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Jim Gornto 3,000 0.03% 35,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Perry Dunn 11,730 0.13% 36,000
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
Song Ru Hua 500,000 5.57% -
C/O Leapfrog
Smart Products, Inc.
1011 Maitland Center Commons
Maitland, FL 32751
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the transactions described below, the Company did not
secure an independent determination of the fairness and reasonableness of
such transactions and arrangements with affiliates of the Company. However,
in each instance described below, the directors reviewed and unanimously
approved the fairness and reasonableness of the terms of the transactions.
The Company believes that the transactions described below were fair and
reasonable to the Company on the basis that such transactions were on terms
at least as favorable as could have been obtained from unaffiliated third
parties. The transactions between officers and directors of the Company, on
the one hand, and the Company, on the other, have inherent conflicts of
interest.
The Company is a party to a Representation Agreement with Selbre
Associates, a Maryland corporation, 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.
We believe that all transactions with our officers, shareholders and each
of our affiliated companies have been made on terms no less favorable to
our company than those available from unaffiliated parties. In the future,
we intend to handle transactions of a similar nature on terms no less
favorable to Leapfrog than those available from unaffiliated parties.
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.
The Company intends to indemnify its officers and directors to the full
extent permitted by Colorado law. Under Colorado law, a corporation may
indemnify its agents for expenses and amounts paid in third party actions
and, upon court approval in derivative actions, if the agents acted in good
faith and with reasonable care. A majority vote of the Board of Directors,
approval of the stockholder or court approval is required to effectuate
indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act, as amended, may be permitted to officers, directors or persons
controlling the Company, the Company has been advised that, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in such 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 an officer,
director or controlling person of the Company in the successful defense of
any action, suit or proceeding) is asserted by such officer, director 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 such Act and will be governed by the final
adjudication of such issue.
Transactions between the Company and its officers, directors, employees and
affiliates will be on terms no less favorable to the Company than can be
obtained from unaffiliated parties. Any such transactions will be subject
to the approval of a majority of the disinterested members of the Board of
Directors.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
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
# 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
#### 16 Letter on Change in Certifying Accountant
# 21 Subsidiaries of the Registrant
x 23(a) Consent-Legal
xx 27 Financial Data Schedule
x 99.1 Safe Harbor Compliance Statement
-----------------------------
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 and through the third quarter of the 2000
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.
C O N T E N T S
________
Page
NUMBER
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Shareholders'
Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
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 sheets of Leapfrog
Smart Products, Inc. and Subsidiaries (a development stage company) as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, changes in shareholders' equity (deficit), and cash flows for
the years then ended and for the period April 11, 1996 (date of inception)
through December 31, 2000. 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 audits. 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, 2000. 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, 2000, is based solely on the report of the other auditors.
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, 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, 2000 and 1999, and the results of
its operations and its cash flows for the years then ended and for the
period April 11, 1996 (date of inception) through December 31, 2000 in
conformity with generally accepted accounting principles.
F-1
Board of Directors
Leapfrog Smart Products, Inc. and Subsidiaries
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 $13,000,000 and as of December 31,
2000, it has a working capital deficit of approximately $2,500,000.
Additionally, the Company incurred a net loss of approximately $7,400,000
and had negative cash flows from operations of approximately $4,300,000 in
the year ended December 31, 2000. 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 this uncertainty.
/s/ Moore Stephens Lovelace, P.A.
Certified Public Accountants
Orlando, Florida
March 8, 2001, except for Note 9,
as to which the date is April 2, 2001.
The accompanying notes are an integral part of the financial statements.
F-2
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
ASSETS
2000 1999
---------- ----------
CURRENT ASSETS
Cash $ 107,413 $ 18,529
Accounts receivable 113,092 6,554
Inventory 122,382 52,639
Prepaid expenses 172,060 219,740
Notes receivable-related parties 15,900 26,600
Other receivables 1,980 9,226
---------- ----------
TOTAL CURRENT ASSETS 532,827 333,288
PROPERTY AND EQUIPMENT, NET 238,457 267,073
OTHER ASSETS
Related-party advances 107,009 43,116
Notes receivable-related parties - 5,000
Deposits 38,136 8,600
Capitalized software costs, net of
accumulated amortization of $24,884 and
$7,600 respectively 169,137 68,400
Costs in excess of fair market value of
assets acquired, net of accumulated
amortization of $5,500 and $2,500
respectively 24,500 27,500
---------- ----------
$1,110,066 $ 752,977
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable $1,452,956 $1,859,049
Notes payable-related parties 355,258 75,258
Accounts payable 1,043,453 223,474
Accrued expenses 212,255 99,816
---------- -----------
TOTAL CURRENT LIABILITIES 3,063,922 2,257,597
MINORITY INTEREST - -
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Convertible Preferred Stock-no par value;
10,000,000 shares authorized
Series A-125,000 and -0- shares issued and
outstanding 480,000 -
Series F-(aggregate liquidation preference
of $19,500); 195 and -0- shares isssued and
outstanding 14,625 -
Common Stock-no par value; 30,000,000 shares
authorized; 8,977,845 and 5,189,769 shares
issued and outstanding 10,488,908 4,006,025
Deficit accumulated during development stage (12,937,389) (5,510,645)
-------------- ------------
(1,953,856) (1,504,620)
-------------- ------------
$ 1,110,066 $ 752,977
============== ============
The accompanying notes are an integral part of the financial statements.
F-3
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development State Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000 and 1999
Cumulative
From
April 11, 1996
(Inception)
Through
2000 1999 December 31, 2000
------------ ------------ ------------------
REVENUES $ 972,724 $ 121,533 $ 1,853,514
COST OF SALES 905,805 44,199 1,496,234
------------ ------------ ------------------
GROSS PROFIT 66,919 77,334 357,280
OPERATING EXPENSES
Personnel and related expenses 4,057,722 1,216,809 6,614,471
Consulting fees 851,342 392,308 2,075,114
General and administrative 1,992,186 1,073,256 3,404,854
Depreciation and amortization 91,810 55,478 223,009
------------ ------------ ------------------
TOTAL OPERATING EXPENSES 6,993,060 2,737,851 12,317,448
OTHER INCOME (EXPENSE)
Other income, net 40,512 3,095 62,434
Interest expense (367,603) (433,341) (859,266)
Loss on disposal of assets (23,512) (6,877) (30,389)
Equity interest in loss of
subsidiary (150,000) - (150,000)
------------ ------------ ------------------
TOTAL OTHER INCOME (LOSS) (500,603) (437,123) (977,221)
------------ ------------ ------------------
NET LOSS $(7,426,744) $(3,097,640) $ (12,937,389)
============ ============ ================
NET LOSS $(7,426,744) $(3,097,640) $ (12,937,389)
PREFERRED DIVIDENDS IN
ARREARS (24,494) -
------------- ------------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $(7,451,238) $(3,097,640)
============= =============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (1.09) $ (0.72)
============= ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 6,866,964 4,280,158
============= ============
The accompanying notes are an integral part of the financial statements.
F-4
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT)
Deficit Total
Preferred Stock Common Stock Accumulated Shareholders'
No Par Value No Par Value During Equity
-------------------- -------------------- Development (Deficit)
Shares Amount Shares Amount Stage
Common Stock
issued to
founding
shareholders
on April 11,
1996 - - 1,414,000 $ 168,100 - $ 168,100
Net loss for
the period
ended
December 31,
1996 - - - - (245,429) (245,429)
----------- ---------- ------------ ---------- ---------- ------------
Balance-
December 31,
1996 - - 1,414,000 168,100 (245,429) (77,329)
Issuance of
Common Stock - - 1,070,846 429,500 - 429,500
Net loss for
the year
ended
December 31,
1997 - - - - (649,827) (649,827)
------------ ----------- ------------- --------- ----------- --------------
Balance-
December 31,
1997 - - 2,484,846 597,600 (895,256) (297,656)
Issuance of
Common Stock - - 1,066,373 964,811 - 964,811
Issuance of
Common Stock
for Conversion
of Notes
Payable - - 216,000 216,000 - 216,000
Net Loss for the
Year ended
December 31,
1998 - - - - (1,517,749) (1,517,749)
----------- ----------- ------------- ------- ----------- -----------
Balance-
December 31,
1998 - - 3,767,219 1,778,411 (2,413,005) (634,594)
Issuance of
Common Stock
for Cash - - 474,879 1,141,504 - 1,141,504
Issusance of
Common Stock
on excerics
of options - - 64,075 16,019 - 16,019
Issuance of
Common Stock
for Services - - 424,135 699,995 - 699,995
Issuance of
Common Stock
for Payment
of Debt - - 33,333 50,000 - 50,000
Issuance of
Common Stock
for
Acquisition
of Minority
Interest
Position in
Subsidiary - - 40,000 30,000 - 30,000
Issuance of
Common Stock
Related to
Debt
Financing - - 386,128 290,096 - 290,096
Net Loss for
the Year ended
December 31,
1999 - - - - (3,097,640) (3,097,640)
------------ ---------- ------------ --------- --------- -----------
Balance-
December 31,
1999 - - 5,189,769 4,006,025 (5,510,645) (1,504,620)
Issuance of
Common Stock
for Cash - - 2,446,310 3,539,107 - 3,539,107
Issuance of
Common Stock
on exercise
of options - - 29,500 66,186 - 66,186
Intrinsic
value of
Options
Issued to
Employees - - - 1,167,580 - 1,167,580
Issuance of
Common Stock
and Stock
Options
for services - - 323,800 887,869 - 887,869
Issuance of
Common Stock
relative to
debt
financing - - 76,666 62,081 - 62,081
Issuance of
Common Stock
for conversion
of debentures
and related
accrued
interest - - 295,003 774,685 - 774,685
Issuance of
Series A
Preferred
Stock 125,000 480,000 - - - 480,000
Merger with
Albara
Corporation 195 14,625 616,797 (14,625) - -
Net Loss for
the year
ended
December 31,
2000 - - - - (7,426,744) (7,426,744)
------------ ---------- ---------- ----------- --------- ---------
Balance-
December 31,
2000 125,195 494,625 8,977,845 10,488,908 (12,937,389) (1,953,856)
============ ========= ============== ============ ==========
===========
The accompanying notes are an integral part of the financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative
from
April 11, 1996
(inception)
through
2000 1999 December 31, 2000
------------- ------------ -----------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net Loss $ (7,426,744) $ (3,097,640) $ (12,937,389)
Adjustments to reconcile
net loss to net cash
used in operating
activities
Depreciation 72,568 52,978 198,256
Depreciation and
amortization charged
to cost of sales 12,122 26,338 38,460
Amortization 19,242 2,500 21,742
Assets expensed to
research and
development 28,968 - 28,968
Loss on disposal of
assets, net 23,512 6,877 33,639
Loss on write-off of
related party note
receivable - 17,870 17,870
Common stock issued for
services and interest 994,886 990,091 2,002,480
Compensation to employees
for stock options issued
below market 1,167,580 - 1,167,580
Cash provided by (used in)
change in:
Accounts receivable (106,538) (3,554) (113,092)
Related party advances (63,893) (39,394) (107,009)
Other receivables 7,246 (9,226) (1,980)
INventory (69,743) (21,139) (122,382)
Prepaid expenses and
other assets 18,144 (222,130) (210,196)
Accounts payable 850,552 (124,199) 1,091,693
Accrued expenses 180,401 63,630 280,217
Deferred income - (11,500) -
Minority interest - 11,018 -
------------- ------------- -----------
NET CASH USED IN
OPERATING
ACTIVITIES (4,291,697) (2,357,480) (8,611,143)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property,
plant and equipment (107,512) (143,878) (537,611)
Net (increase) decrease in
notes-receivable-related
parties (13,654) (17,400) (63,124)
Capitalization of software
costs (118,021) (76,000) (194,021)
Proceeds from sale of
vehicles - - 8,473
------------ -------------- -----------
NET CASH USED IN
INVESTING
ACTIVITIES (239,187) (237,278) (786,283)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of
notes payable 801,902 1,402,326 3,217,768
Payments on notes payable (502,491) (18,434) (826,975)
Proceeds from
exercise of common stock
options 21,250 16,019 469,870
Proceeds from sales of common
and preferred stock 4,019,107 1,141,504 6,288,918
Proceeds from related-party
borrowings 280,000 37,300 362,658
Repayments of related-party
borrowings - (6,300) (7,400)
--------------- -------------- ------------
NET CASH PROVIDED
BY FINANCING
ACTIVITIES 4,619,768 2,572,415 9,504,839
--------------- --------------- ------------
NET INCREASE
(DECREASE)
IN CASH 88,884 (22,343) 107,413
CASH AT BEGINNING OF YEAR 18,529 40,872 -
--------------- --------------- -------------
CASH AT END OF YEAR $ 107,413 18,529 107,413
=============== =============== =============
The accompanying notes are an integral part of the financial statements
F-6
LEAPFROG SMART PRODUCTS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000 and 1999
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.
Effective February 18, 2000, Albara Corporation ("Albara"), a
Colorado corporation, acquired, through its wholly owned
subsidiary Leapfrog Merger, Inc., a Florida corporation, 100% of
the outstanding common stock of Leapfrog in exchange for 5,350,049
shares of Albara common stock. Additionally, the outstanding
stock options of Leapfrog 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
616,797 shares of its common stock and 195 shares of its Series F
Preferred Stock. As a result of the exchange, the former
shareholders of Leapfrog gained control of Albara. For accounting
purposes, the acquisition has been accounted for as a
recapitalization of Leapfrog with Leapfrog being treated as the
acquiring entity (reverse acquisition) with no goodwill recorded.
Accordingly, the historical financial statements prior to
February 18, 2000 are those of the original Leapfrog Smart
Products, Inc. and Subsidiaries with the related shareholders'
equity being retroactively restated to reflect the equivalent
number of Albara shares received in the merger after giving effect
to the differences in par value. In connection with the merger,
Albara changed its name to Leapfrog Smart Products, Inc. Leapfrog
recorded a charge to general and administrative expenses of
$64,000 for direct and other merger related costs pertaining to
the merger transaction. Merger transaction costs consisted
primarily of fees for legal, investment banking and other related
charges.
Leapfrog owns approximately 95% of the outstanding common stock of
Leapfrog Global IC Products, Inc. ("LGIC") and approximately 96%
of the outstanding common stock of Conduit Healthcare Solutions,
Inc. ("Conduit"). By licensing agreement, LGIC owns all of
Leapfrog's technology and distribution rights of its product line
outside of North America, except for the territories subsequently
granted to Smart Products International Pte., Ltd. The agreement
expires in 2009, calls for revenue sharing, and may be terminated
if certain performance measures are not met. Conduit was
originally incorporated in 1997 under the name Leapfrog Healthcare
Products, Inc. Certain employees and consultants of Leapfrog hold
stock options to purchase an aggregate of 10% of LGIC at an
exercise price of $11,500. These individuals also have the right
to receive additional options to purchase up to an additional 48%
of LGIC for $48,000 if certain performance measures are met.
F-7
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ORGANIZATION (CONTINUED)
Certain employees of and consultants to Leapfrog hold stock
options to purchase an aggregate of 17.8% of Conduit at an
exercise price of $2,250. In 2000, LGIC created Leapfrog China,
Inc., as a wholly owned subsidiary, for the purpose of pursuing
opportunities in Asia.
The consolidated financial statements include the accounts of
Leapfrog Smart Products, Inc., Leapfrog Merger, Inc., Conduit
Healthcare Solutions, Inc., Leapfrog Global IC Products, Inc. and
Leapfrog China, Inc. (collectively, the "Company"). The Company's
50% ownership interest in Smart Products International Pte., Ltd.
is accounted for on the equity method. 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.
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 readers and other parts for installing Smart
Card systems.
PREPAID EXPENSES
Prepaid expenses consists of the following at December 31, 2000
and 1999:
2000 1999
Prepaid consulting $ 100,103 $ -
Prepaid legal fees - 186,750
Prepaid license fees 25,760 25,760
Other 46,197 7,230
--------- ----------
$ 172,060 $ 219,740
========= ==========
In 1999, 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
provided using the straight-line method over the estimated useful
lives of the related assets, which range from three to seven
years.
F-8
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVESTMENT
During the year ended December 31, 2000, the Company funded
approximately $171,000 into a newly formed Singapore company,
Smart Products International Pte., Ltd. ("SPI"), for a 50%
ownership interest. SPI was formed to market, sell and distribute
the Company's software and hardware products throughout the Asia-
Pacific region (excluding the Peoples' Republic of China), and
also to market and sell those products elsewhere, as stated in the
joint venture agreement. SPI is managed and controlled by the 50%
shareholder located in Singapore; accordingly, this investment is
recorded on the equity method. Activity of SPI since its
inception has consisted primarily of start-up activities. In
2000, the Company charged to expense $150,000 for its equity
interest in the loss of SPI. The joint venture agreement provides
SPI with an exclusive license for the marketing and distribution
rights to the Company's core products and core technologies,
developed through January 15, 2001, throughout the SPI exclusive
territory. The initial term of the license commences May 31, 2001
and is for a period of twenty 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, 2000 and 1999 were $638,832 and $293,643,
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 amortized 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 ceases 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 estimated 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, 2000 and 1999, was $17,284 and $7,600, respectively.
EXCESS OF COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED
During the year ended December 31, 1999, the Company acquired an
additional 16% ownership interest in Conduit 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. The excess
of costs over fair value of net assets acquired has been
capitalized and is being amortized using the straight-line method
over ten years.
The Company assesses the recoverability of intangible assets,
including excess of cost over fair value of assets acquired, if
facts and circumstances suggest that their carrying amount may
have been impaired. In making its assessment, the Company gives
consideration to the undiscounted cash flows from the use of such
assets, the estimated fair value of such assets, and other factors
that may affect the recovera-bility of such assets. If such an
assessment indicates that the carrying value of intangible assets
may not be recoverable, the carrying value of intangible assets is
reduced.
F-9
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 AND EXPENSE RECOGNITION
Revenues are generally recognized when the product is delivered to
the customer or when the service has been performed and related
costs and expenses are recognized when incurred. Contracts for
the development of software and installation of the related
hardware that extend over more than one reporting period are
accounted for using the percentage-of-completion method of
accounting. Revenue recognized at the financial statement date
under these contracts is that portion of the total contract price
that costs expended to date bears to the total anticipated final
cost, based on current estimates of cost to complete. Revisions
in total costs and earnings estimates during the course of the
contract are reflected in the accounting period in which the
circumstances necessitating the revision become known. At the
time a loss on a contract becomes known, the entire amount of the
estimated loss is recognized in the financial statements. Costs
attributable to contract disputes are carried in the accompanying
balance sheet only when realization is probable. Amounts received
on contracts in progress in excess of the revenue earned, based
upon the percentage-of-completion method, are recorded as deferred
revenue and the related costs and expenses incurred are recorded
as deferred costs.
In 2000, the Company entered into a contract with the U.S. General
Services Administration ("GSA") to supply GSA with hardware and
software products related to Smart Card technologies and
applications. Significant portions of these contracts may be
fulfilled by subcontractors (the "Subcontractors") authorized by
the Company and GSA. Revenues earned under the GSA contract are
recorded by the Company at the gross amount billed to GSA and the
corresponding cost of sales is recorded at the amount serviced by
the Subcontractors under the GSA contract. Revenues and cost of
sales recognized under the GSA contract during the year ended
December 31, 2000 approximated $589,000 and $567,000,
respectively.
WARRANTY EXPENSE
The Company estimates future warranty costs based upon the
historical relationship of warranty costs to sales. To date,
warranty costs have not been significant.
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-9
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 after the deduction of preferred dividends in arrears
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
preferred stock and convertible promissory notes 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,
receivables and related-party advances. 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2000 and 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, 2000 and 1999, the Company incurred losses of
approximately $7,400,000 and $3,100,000, respec-tively, and had a
deficiency in working capital of approximately $2,500,000 and
$1,900,000 at December 31, 2000 and 1999, respectively. 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.
F-10
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LIQUIDITY AND PLAN OF OPERATIONS
At December 31, 2000 and 1999, the Company had cash of
approximately $107,000 and $19,000, respectively, and a deficiency
in working capital of $2,500,000 and $1,900,000, respectively.
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 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. However, there can be no assurance
that management's plans can be implemented, or that the Company
will continue as a going concern.
RECLASSIFICATIONS
Certain amounts in the 1999 financial statements have been
reclassified to conform with the 2000 presentation.
F-11
NOTE 2 - NOTES RECEIVABLE - RELATED PARTIES
Notes receivable - related parties consists of the following at
December 31, 200 and 1999:
2000 1999
Unsecured 6% promissory notes from employee /
stockholder, all principal and interest due at
maturity, matured December 2000. $ 11,000 $ 11,000
Unsecured 6% promissory note receivable from officer,
all principal and interest due at maturity, matured
December 2000. 1,500 1,500
Unsecured 6% promissory notes receivable from officer,
all principal and interest due at maturity, matured
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 3,400
------- -------
15,900 31,600
Less current portion (15,900) (26,600)
------- -------
Total notes receivable - related parties $ - $ 5,000
======= =======
NOTE 3 - RELATED PARTY - ADVANCES
During 1998, the Company advanced an officer of the Company
approximately $5,000. During 2000, the Company advanced
approximately an additional $6,000, which remains unpaid.
In 1999, the Company advanced a related entity approximately
$38,000. In 2000, the Company advanced the related party
approximately an additional $42,000. Of the total amount
advanced, $15,000 was satisfied in 2000. The unpaid balance at
December 31, 2000, is approximately $65,000.
In 2000, the Company advanced SPI approximately $21,000 for
working capital needs.
F-12
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment, net at December 31, 2000 and 1999,
consists of the following:
2000 1999
Computer equipment $ 194,016 $ 196,187
Software 74,598 60,350
Furniture and equipment 155,781 147,617
Leasehold improvements 8,767 -
Other 4,250 -
--------- ----------
437,412 404,154
Less accumulated depreciation and amortization (198,955) (137,081)
--------- ----------
Property and equipment, net $ 238,457 $ 267,073
========= ==========
NOTE 5 - NOTES PAYABLE
Notes payable, substantially all of which were past due, consists
of the following at December 31, 2000 and 1999:
2000 1999
Unsecured debentures, interest at 12% payable
quarterly, originally matured in 1999. During
1999, a portion of these notes were extended
through January 2000. The Company is currently
attempting to renegotiate an extended maturity
date on these notes (see Note 9). $ 697,000 $ 1,152,326
Notes payable, interest at 12% per annum,
principal and interest matured in January 2000,
collateralized by all assets. 200,000 250,000
Note payable to financial institution, interest
due in monthly installments at prime plus 1.5%,
guaranteed by certain stockholders and officers,
collateralized by all assets of the Company,
matures in February 2001. 100,000 -
Unsecured notes payable, matured in September and
October 1999, default interest at 10.75% per 100,000 100,000
annum.
Notes 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, past
due as of December 31, 2000. - 350,000
Unsecured convertible debentures, interest at
12%, matured in March 2000. 100,000 -
Unsecured note payable to shareholder, interest
at 10%, matures in May 2001. 100,000 -
Unsecured convertible debentures, interest at
prime plus 10%, matured in August 2000. 150,000 -
Other unsecured notes payable. 5,956 6,723
---------- -----------
1,452,956 1,859,049
Less current portion (1,452,956) (1,859,049)
----------- -----------
Total notes payable - long term $ - $ -
=========== ===========
NOTE 5 - NOTES PAYABLE (Continued)
Notes payable - related parties consists of the following at
December 31, 2000 and 1999:
2000 1999
Unsecured note payable to an officer and director,
interest at 8%, matures June 30, 2001. $ 140,000 $ -
Unsecured note payable to former Board member,
interest at 15% per annum, principal and interest past
due in May 2000. 100,000 -
Unsecured notes payable to former Board member and
stockholder, interest at 8% - 10% per annum, principal
and interest past due in June 2000 and December 2000.
90,258 50,258
Unsecured, noninterest-bearing promissory note payable
to former Board member, no specified maturity date.
10,000 10,000
Other unsecured notes payable, interest at 6% per
annum, principal and interest past due in November
1998 and January 1999. 15,000 15,000
--------- --------
Total notes payable - related parties 355,258 75,258
Less current portion (355,258) (75,258)
--------- --------
Total notes payable - related parties -
long term $ - $ -
========= =========
Cash paid for interest during 2000 and 1999, was approximately
$68,000 and $46,000, respectively.
NOTE 6 - SHAREHOLDERS' EQUITY
PRIVATE PLACEMENTS
During the year ended December 31, 2000, the Company issued
2,446,310 shares of its common stock in private placements at per
share prices ranging from $1.00 to $4.00. The Company received
$3,539,107 in net proceeds from these private placements. Related
commissions paid to officers of the Company during the year ended
December 31, 2000, approximated $86,000.
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 years ended December 31, 2000 and 1999, the Company
issued 323,800 and 424,135 shares of its common stock,
respectively, plus options, 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. The options were valued
using the Black-Scholes Option Valuation Model, or the cash value
of the service received.
F-13
NOTE 6 - SHAREHOLDERS' EQUITY (Continued)
OTHER ISSUANCES OF COMMON STOCK (CONTINUED)
During the years ended December 31, 2000 and 1999, the Company
issued 295,003 and 33,333 shares of its common stock,
respectively, in satisfaction of certain notes payable, related
interest charges and other payables if objectionably determinable.
As an incentive to several investors in debentures, 76,666 and
386,128 shares of stock were issued for a dollar value of $62,081
and $290,096 during the years ended December 31, 2000 and 1999,
respectively.
CONVERTIBLE PREFERRED STOCK
In March 2000, the Company issued 125,000 shares of Series A
Convertible Preferred Stock at $4 per share and received net
proceeds of $480,000. 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. The Company may not issue additional Series A Convertible
Preferred Stock or warrants, options or other rights to acquire
Series A Convertible Preferred Stock without the prior written
approval of holders of at least two-thirds of the outstanding
Series A Preferred shares under this issuance. 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. Unpaid and undeclared dividends in
arrears as of December 31, 2000, was $24,494.
The shares issued to Albara shareholders consisted of 616,797
shares of common stock and 195 shares of Series F Preferred Stock.
The Series F Preferred Stock is non-voting and the holders thereof
are entitled to receive dividends on a pro rata basis with holders
of common stock. These holders are entitled to a $100 per share
preference on any liquidation of the Company and shall share pro
rata with the common shareholders in any remaining amounts
distributed. Each share is convertible into 15 shares of common
stock.
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.
AUTHORIZED SHARES
In August 1999, the shareholders of the Company approved the
increase in the number of authorized shares of the Company's stock
from 5,000,000 to 6,000,000. As a result of its merger with
Albara in February 2000, the Company's authorized shares of no par
value common stock increased to 30,000,000 and its authorized
shares of no par value preferred stock increased to 10,000,000.
F-14
NOTE 6 - SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS
Activity related to the Company's stock options during the years
ended December 31, 2000 and 1999, was as follows:
OUTSTANDING OPTIONS
----------------------------
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
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
Grants 3,383,000 $2.12
Exercises (29,500) $0.72
Cancellations (54,000) $0.93
------------ --------------
DECEMBER 31, 2000 4,734,450 $1.90
============
Options Exercisable at
December 31, 2000 2,997,867 $1.80
============
The intrinsic value recorded for options issued to employees
during the year ended December 31, 2000, was $1,167,580.
The range of exercise prices for options outstanding at
December 31, 2000 was $.25 to $7.00. The following table
summarizes information about options outstanding at December 31,
2000:
OUTSTANDING OPTIONS
-------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER OF CONTRACTUAL AVERAGE
RANGE OF EXERCISE PRICES SHARES LIFE (IN YEARS) EXERCISE PRICE
$0.25 350,674 2.5 $0.25
$1.00 2,081,230 4.2 $1.00
$1.75 977,546 1.6 $1.75
$3.50 1,000,000 9.1 $3.50
$4.00 - $7.00 325,000 2.0 $4.92
---------
4,734,450 $1.90
=========
EXERCISABLE OPTIONS
-------------------
WEIGHTED
NUMBER OF AVERAGE
RANGE OF EXERCISE PRICES SHARES EXERCISE PRICE
$0.25 350,674 $0.25
$1.00 1,051,230 $1.00
$1.75 889,296 $1.75
$3.50 480,000 $3.50
$4.00 - $7.00 216,667 $4.69
-----------
2,997,867 $1.80
===========
The Company has an Incentive Stock Option Plan that allows for the
issuance of up to 350,000 shares thereunder. No options were
issued and outstanding under this plan as of December 31, 2000 and
1999.
F-15
NOTE 6 - SHAREHOLDERS' EQUITY (Continued)
STOCK OPTIONS (CONTINUED)
The Company accounts for its options and warrants according to
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and follows the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, if options or
warrants are granted to employees or 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 years ended
December 31, 2000 and 1999, reported below, has been estimated at
the dates of grant using the Black-Scholes Option Valuation Model
with the following assumptions:
2000 1999
Expected life (in years)
6.2 3.7
Risk-free interest rate
8.0% 8.0%
Volatility
103% 340%
Dividend yield
0.0% 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:
2000 1999
Pro forma net loss $ (9,351,000) $ (4,983,000)
Pro forma loss per share $ (1.36) $ (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.
WARRANTS
On January 31, 2000, a warrant was issued, which was effective on
February 18, 2000, to the former majority shareholder of Albara
for the right to purchase 500,000 shares of common stock at $3.50
per share on or after April 30, 2000. The warrant expires on
January 31, 2010. The warrant provides that the exercise price of
$3.50 shall be adjusted to $.035 in the event the Company has not
closed an equity offering raising an aggregate of at least
$2,500,000 by July 16, 2000. This warrant is currently in dispute
(see Note 8).
On September 1, 2000, 142,857 warrants were issued as part of a
common stock sale. These warrants can be exercised at $1.625
price per share until March 1, 2001.
On August 8, 2000, 100,000 warrants were issued as part of a
common stock sale. These warrants were exercisable at $2.50 price
per share until November 8, 2000. These warrants were not
exercised by the expiration date.
F-16
NOTE 7 - INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities at December 31, 2000 and 1999, are approximately as
follows:
2000 1999
Deferred tax liabilities $ (142,000) $ (20,000)
Deferred tax assets 549,000 122,000
Net operating losses 4,427,000 1,849,000
----------- -----------
Deferred tax assets,
net of 4,834,000 1,951,000
tax liabilities
Less valuation allowance (4,834,000) (1,951,000)
----------- -----------
Net deferred taxes $ - $ -
=========== ===========
As of December 31, 2000, the Company had a net operating loss
carryforward of approximately $11 million available to offset
future taxable income. The net operating loss carryforward
expires through the year 2019. This net operating loss does not
include amounts related to Albara prior to the merger, as certain
records have not been provided by Albara (see Note 9). Management
does not believe that there would be an adverse affect on the
financial statements if this information were made available.
Additionally, under U.S. federal tax laws, certain changes in
ownership of a company may cause severe limitations on future
utilization of these loss carryforwards. The Company has
established a valuation allowance to fully offset all deferred tax
assets, as their future realization is uncertain.
Differences between the Company's effective income tax rate and
the federal statutory rate at December 31, 2000 and 1999, are
primarily due to the deferred tax asset valuation allowance.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office space and office equipment under
noncancelable operating lease agreements, which expire through
June 2005.
Future minimum rental payments required under these leases are
approximately as follows:
YEAR ENDING
December 31, Amount
2001 $ 289,000
2002 268,000
2003 260,000
2004 261,000
2005 64,000
-----------
Total future minimum
rental payments $1,142,000
===========
Total rent expense incurred under these leases approximated
$271,000 and $87,000 for the years ended December 31, 2000 and
1999, respectively.
F-17
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS
The Chief Executive Officer and the President each have employment
agreements with the Company. The agreements were entered into on
May 1, 2000, as a continuation of their employment agreements
signed September 15, 1999 and are the same except for the base
salary. The aggregate base salaries under these agreements is
$275,000, with an automatic 4% increase each September 15{th}.
The agreements expire April 30, 2003.
The agreements grant 25,000 shares of freely traded stock to each.
The agreements each granted 750,000 stock options with a $1.00
strike price that expire on December 31, 2005. Fifty percent of
the options vested immediately with the other 50% vesting
January 1, 2001.
The agreements grant a cash bonus of 5% of the Company's income
from operations, defined as net income before taxes, minority
interests, extraordinary items, amortization of intangible assets,
interest on long-term debt and this incentive compensation.
The agreements also require a monthly automobile allowance of
$500, appropriate membership dues and subscription fees, payment
for outside disability insurance, "piggy back" registration rights
for all stock owned, a $1,000,000 term-life insurance policy and
1% commission for all investment funds into the Company and any of
its subsidiaries from May 1, 2000 until May 1, 2001.
Approximately $56,000 in commissions were earned under these
agreements during the year ended December 31, 2000.
CHINESE JOINT VENTURE
In November 1999, the Company entered into an agreement to form
a joint venture with Top Group, ("TOP") a Chinese corporation
registered in Chengdu, P.R. China. The Company's interest in the
joint venture was to be held by its wholly owned subsidiary
Leapfrog China, Inc. The purpose of Joint Venture Company was to adapt
the Company's products for application to suitable governmental and
private sector markets in 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. In
2000, the Company incurred difficulty in launching its
manufacturing, sales and marketing programs, as well as
disagreements with TOP. Accordingly, operations of this joint
venture have not been significant and primarily consist of start-
up costs, travel and research and development. The Company has,
for all practical purposes, ceased its participation in this joint
venture and is considering the dissolution thereof and is seeking
a new strategic joint venture partner in China. All costs
incurred by the Company related to this joint venture have been
expensed in the accompanying financial statements.
GUARANTY
In July 1999, the Company guaranteed a $150,000 promissory note of
three of its officers and/or shareholders (the "Group"). The
balance on this note as of December 31, 2000 was $150,000 and was
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.
F-18
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
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 and up to 260,000 additional stock options if certain
revenue targets are achieved by the Company. The consultant's
partner has the same options granted to him. 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. Expenses incurred
under this agreement during the years ended December 31, 2000 and
1999, approximated $69,000 and $43,000, respectively. During
1999, 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, 2000 and 1999,
approximately $61,000 and $13,000, respectively, was due to the
related party.
LITIGATION
Real Provencher v. Leapfrog Smart Products, Inc. f/k/a Albara
Corporation, and American Securities Transfer Incorporated was
filed in the U.S. District Court for the Southern District of
Texas, Houston Division. Plaintiff, a shareholder of the Company,
has filed the following claims against the Company: 1) the
Company breached its statutory duty to register and transfer
Plaintiff's shares in the Company; 2) the Company violated his
statutory right under Rule 144 of the Securities Act of 1934 to
terminate restrictions to sell his shares; 3) the Company
committed common law and statutory fraud; 4) breach of contract
under a Bleed Out Agreement; and 5) tortuous interference with
Plaintiff's contract to sell 77,300 shares of stock. Plaintiff
has alleged actual damages of $2,576,000 plus attorney's fees, and
pre- and post-judgment interest.
The Company filed a lawsuit styled Leapfrog Smart Products, Inc.
v. Real Provencher , in the U.S. District Court of the Middle
District of Florida, Orlando Division, with the following claims:
1) breach of contract under a Consulting Agreement; 2) breach of
contract under the terms of a Bleed Out Agreement; 3) violation of
Rule 16 of the Securities Act of 1934; 4) fraudulent
misrepresenta-tion and common law fraud; and 5) violation of
Rule 144 of the Securities Act of 1934. The Company alleged
compensatory damages, costs, and further relief, as the court
finds appropriate. The Florida Court has transferred venue to the
U.S. District Court for the Southern District of Texas, Houston
Division, and the two cases have been consolidated.
As part of a consulting agreement with Provencher, a warrant with
an effective date of February 18, 2000 was issued for the right to
purchase 500,000 shares of common stock at $3.50 per share on or
after April 30, 2000. The warrant expires on January 31, 2010.
The exercise price of $3.50 was to be adjusted to $0.035 in the
event the Company did not close an equity offering raising an
aggregate of at least $2.5 million by July 16, 2000, which did not
occur. Although Provencher has not attempted to exercise the
warrants, as part of the lawsuit the Company is attempting to have
the warrants declared null and void due to the alleged non-
performance under the consulting agreement.
Discovery is underway in the case. Some settlement discussions
have begun but no settlement has occurred at this time. The
Company is unable to determine the likelihood of an unfavorable
outcome in this case and is not able to estimate the potential
loss to the Company at this time. Accordingly, the financial
statements include no provision or liability related to the
ultimate outcome of this matter.
F-19
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION (CONTINUED)
The Company is also seeking certain financial records of Albara
for the period prior to the merger; however, management does not
believe the production of such records will have a significant
impact, if any, on the financial statements.
The Company was party to a lawsuit brought by Publicard, Inc.
regarding the repayment of $100,000 in notes due to them from the
Company. It was the Company's position that although these notes
were recorded with interest accruing, the notes should be offset
with certain costs incurred by the Company. This lawsuit was
settled on February 2, 2001, requiring that the Company repay
$90,000 in nine $10,000 monthly installments beginning February
2001.
The lessor of the Company's former office space has sued the
Company for breach of contract and lien foreclosure based on the
Company's breach of lease and failure to pay rent. Damages
requested are $270,400, plus attorney's fees and costs. The
Company has brought a counter suit against the lessor for a
declaratory action, breach of lease, Tortious interference with an
advantageous business relationship, and breach of good faith and
fair dealings regarding reletting of the property. The Company
has accrued a insignificant portion of the lessor's claims in an
amount equal to the unpaid lease payments that would have been due
under the lease through December 31, 2000. No other amounts have
been recorded in the accompanying financial statements for this
uncertainty, as management cannot reasonably estimate the ultimate
outcome.
The Company is party to various other legal proceedings; however,
management does not believe the ultimate outcomes to any of these
actions will have a material impact to the Company's financial
position.
NOTE 9 - SUBSEQUENT EVENTS
On April 2, 2001, the Company entered into an agreement for the
sale of approximately 82% of Conduit with closing to be within 120
days, with a two-year right-of-first refusal to purchase the
remaining shares of Conduit held by the Company at an equivalent
price per share. The sale of Conduit includes licensing rights
for the Company's software assets solely related to the healthcare
industry in the United States, which includes, but is not limited
to hospitals, physician offices, pharmacies, insurance companies,
managed care organizations, clinics, dental offices, chiropractic,
podiatry, ocular health, governmental healthcare agencies,
providers and payors, ambulances, nursing homes, and home
healthcare agencies. In exchange for selling the controlling
interest in Conduit, the purchaser will pay the Company $510,000
and provide Conduit with $1.9 million to fund its ongoing
business, as well as guaranteeing software development fees of $3
million pursuant to the terms of a software development agreement,
which Conduit and the Company executed in connection with the
stock purchase agreement. The purchaser is required to pay the
Company $250,000 by May 29, 2001. Between that date and closing,
the purchaser will pay the Company not less than 20% of all cash
collected, up to a maximum of $510,000, including the $250,000
paid by May 29, 2001, in any private offering of Conduit's
securities undertaken to satisfy the purchaser's obligation to
provide the Conduit funding. The balance, if any, will be paid at
closing. The future exercise of any outstanding options of
Conduit as of April 2, 2001 would be the obligation of the Company
to satisfy.
In March 2001, Leapfrog Merger, Inc. changed its name to Leapfrog
Smart Products, Inc.
F-20
NOTE 9 - SUBSEQUENT EVENTS (CONTINUED)
In February 2001, the Company issued a note to a shareholder and
noteholder for $2 million to be funded in various installments
from January 25, 2001 through May 15, 2001. Through April 3,
2001, the Company has received approximately $1.5 million of this
funding. The note is secured by all assets of the Company.
Interest accrues at 12% and is due and payable quarterly beginning
July 1, 2001. The note matures on July 1, 2002. The note or any
portion thereof, is convertible into shares of the Company's
common stock at the rate of $1.00 per share. As part of this
financing agreement, the noteholder received an option to purchase
up to 1,000,000 shares of the Company's common stock at $1.00 per
share through June 30, 2002.
Proceeds from this note were used to repay the $200,000 remaining
balance on a note that was secured by all assets of the Company
that was due in January 2000.
The Company is currently renegotiating the terms of much of the
outstanding debt. The $100,000 note with the bank has been
extended until October 1, 2002. Many of the debenture holders
agreed to take new notes in place of debentures. Notes have been
issued that brought $477,000 of the debentures outstanding at
December 31, 2000 current. The majority of the new notes call for
repayment of the principal and interest over 24 month periods
either beginning in March or August 2001.
On January 16, 2001, the Board of Directors approved employment
contracts with three key employees. The terms of the contracts
extend to dates ranging from January 24, 2002 to September 30,
2003. The agreements call for aggregate salaries of $390,000 with
annual 4% increases. These agreements call for the issuance of an
aggregate of 1,100,000 stock options to purchase common stock of
the Company. The options all have a strike price of $1.00 each
with various vesting dates through January 1, 2002 and expiration
dates ranging from January 16, 2004 through December 31, 2005.
The other material provision to one of the contracts involves the
payment of a cash bonus equal to 1% of the Company's net profits,
defined as net earnings before insurance, taxes and amortization.
Another contract requires the payment of a cash bonus equal to 4%
of the Company's income from U.S. operations, defined as net
income before taxes, minority interests, extraordinary items,
amortization of intangible assets, interest on long-term debt and
any incentive compensation to employees.
F-21
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEAPFROG SMART PRODUCTS, INC.
By: /s/ Les Bromwell
------------------------------
Les Bromwell, CEO and President
Date: April 16, 2001
In accordance with the Exchange Act, this report has been signed below by
the following persons in the capacities and on the dates indicated.
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
------------------------- ----------------------- -------------
/s/ Les Bromwell CEO & President April 16, 2001
-------------------------
Les Bromwell
/s/ Jon Gerster CFO April 16, 2001
-------------------------
Jon Gerster