<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
OR
[ ] 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 0-20835
THE LEAP GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4079500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22 West Hubbard Street, Chicago, Illinois 60610, (312) 494-0300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
N/A
---
(Former Name, Former Address & Former Fiscal Year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods as 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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Outstanding Shares at
Class December 11, 1997
------------------------------ ----------------------------
Common Stock - $0.01 par value 13,614,667
1
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The Leap Group, Inc.
Form 10-Q
for the period ended
October 31, 1997
Index
<TABLE>
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets --
October 31, 1997 (Unaudited)
and January 31, 1997 3
Consolidated Statements of Operations --
Three Months and Nine Months Ended
October 31, 1997 and 1996 (Unaudited) 5
Consolidated Statements of Cash Flows --
Nine Months Ended
October 31, 1997 and 1996 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
</TABLE>
2
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Part I. Financial Information
Item 1. Financial Statements
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
----------- -----------
1997 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................................................... $ 6,062,800 $32,312,749
Accounts receivable (net of allowance of
$793,000 and $30,000 respectively)........................................ 4,179,228 4,793,937
Costs in excess of billings (net of allowance of
$208,000 and $40,000 respectively)........................................ 1,178,018 218,721
Prepaid expenses.................................................................. 394,345 279,796
----------- -----------
Total current assets........................................................... 11,814,391 37,605,203
----------- -----------
Property and Equipment
Land.............................................................................. 873,224 158,921
Building and improvements......................................................... 3,726,811 491,900
Computer equipment................................................................ 3,886,196 804,534
Furniture and equipment........................................................... 1,167,599 259,074
----------- -----------
9,653,830 1,714,429
Less accumulated depreciation..................................................... (2,212,011) (525,068)
----------- -----------
Net property and equipment..................................................... 7,441,819 1,189,361
----------- -----------
Other Assets
Intangible assets................................................................. 16,750,667 -
Deferred income tax asset......................................................... 3,672,914 -
Other assets...................................................................... 3,011,509 1,065,048
----------- -----------
Other assets................................................................... 23,435,090 1,065,048
----------- -----------
Total Assets........................................................................ $42,691,300 $39,859,612
=========== ===========
</TABLE>
3
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THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
----------- -----------
1997 1997
---- ----
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................................... $ 3,088,575 $ 1,834,331
Accrued expenses................................................................... 205,679 809,939
Accrued restructuring costs........................................................ 1,149,712 -
Billings in excess of costs........................................................ 273,212 214,264
Notes payable...................................................................... 6,116,240 -
Current portion of capital lease obligations....................................... 308,538 52,066
----------- -----------
Total current liabilities....................................................... 11,141,956 2,910,600
Long-Term Liabilities
Deferred income tax liability...................................................... 294,326 294,326
Capital lease obligations.......................................................... 569,821 71,999
----------- -----------
Total long-term liabilities..................................................... 864,147 366,325
Total Liabilities.................................................................... 12,006,103 3,276,925
----------- -----------
Commitments and Contingencies (Note 10)
Stockholders' Equity
Preferred stock, $.01 par value, 20,000,000 shares authorized,
no shares issued or outstanding.................................................. - -
Common stock, $.01 par value; 100,000,000 shares authorized,
13,614,667 and 13,600,000 shares issued and outstanding as of
October 31, 1997 and January 31, 1997, respectively.............................. 136,146 136,000
Additional paid in capital......................................................... 35,579,654 35,581,344
Retained earnings (Accumulated deficit)............................................ (4,879,473) 865,343
----------- -----------
30,836,327 36,582,687
Less cost of common stock held in treasury
(50,000 shares as of October 31, 1997).......................................... (151,130) -
----------- -----------
Total Stockholders' Equity.................................................... 30,685,197 36,582,687
----------- -----------
$42,691,300 $39,859,612
Total Liabilities and Stockholders' Equity........................................... =========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
4
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THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------------------- ------------------------------------
1997 1996 1997 1996
---------------- ----------------- ----------------- -----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues ................................... $ 7,182,491 $ 4,990,339 $19,226,576 $12,280,442
Operating expenses:
Direct costs and related
expenses .............................. 2,779,777 2,818,924 7,850,803 7,312,504
Salaries and related expenses .......... 4,970,052 1,108,752 12,937,968 2,800,004
General and administrative
expenses .............................. 3,225,856 451,026 7,052,889 1,200,930
Restructuring expense .................. 1,149,712 - 1,149,712 -
----------- ----------- ----------- -----------
Total operating expenses ............ 12,125,397 4,378,702 28,991,372 11,313,438
----------- ----------- ----------- -----------
Operating (loss)/income .................... (4,942,906) 611,637 (9,764,796) 967,004
Interest (expense)/income, net ........... (45,657) 85,795 347,067 (12,329)
----------- ----------- ----------- -----------
(Loss)/income before
income taxes ........................ (4,988,563) 697,432 (9,417,729) 954,675
Income tax benefit/(expense) ............... 1,949,968 (262,198) 3,672,914 (262,198)
----------- ----------- ----------- -----------
Net (loss)/income .......................... $(3,038,585) $ 435,234 $(5,744,815) $ 692,477
=========== =========== =========== ===========
Per share data:
Net (loss)/income per share ............ $ (0.22) $ 0.04 $ (.42) $ 0.07
=========== =========== =========== ===========
Shares used in per share
computation ........................... 13,614,667 11,442,013 13,613,037 10,553,124
=========== =========== =========== ===========
</TABLE>
The accompanying notes to the financial statements are an
integral part of these statements.
5
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
October 31,
------------
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) / income ....................................................... $ (5,744,815) $ 692,477
Adjustments to reconcile net (loss) / income to
net cash used in operating activities:
Depreciation and amortization ......................................... 1,356,767 271,524
Deferred income taxes ................................................. (3,672,314) -
Changes in operating assets and liabilities:
Accounts receivable ................................................. 4,064,593 (4,206,292)
Costs in excess of billings ......................................... (45,646) 370,386
Prepaid expenses .................................................... (131,487) (3,617)
Other assets ........................................................ 57,744 (112,210)
Accounts payable .................................................... 1,102,056 1,459,095
Accrued expenses .................................................... (1,504,260) 496,396
Accrued restructuring costs ......................................... 1,149,712 -
Billings in excess of costs ......................................... (251,052) -
----------- -----------
Net cash used in operating activities....................................... (3,618,702) (1,032,241)
----------- -----------
Cash flows from investing activities:
Acquisition, net of cash .................................................. (22,667,891) -
Capital expenditures ...................................................... (3,579,751) (392,253)
Capitalized software development costs .................................... (524,512) -
Issuance of notes receivable .............................................. (1,773,778) -
------------ -----------
Net cash used in investing activities....................................... (28,545,932) (392,253)
----------- -----------
Cash flows from financing activities:
Net proceeds related to common stock issuance ............................. (1,544) 35,994,027
Payments for treasury stock ............................................... (151,130) -
Net borrowings/(repayments) on:
Notes payable ......................................................... 6,116,240 (459,378)
Mortgage payable ...................................................... - (418,214)
Note payable to an officer.............................................. - (400,000)
Repayment of capital lease financing .................................. (48,881) -
------------ -----------
Net cash provided by financing activities................................... 5,914,685 34,716,435
------------ -----------
Net (decrease) / increase in cash and cash equivalents ...................... (26,249,949) 33,291,941
Cash and cash equivalents, at beginning of period ........................... 32,312,749 47,981
------------ -----------
Cash and cash equivalents, at end of period ................................. $ 6,062,800 $33,339,922
============ ===========
Supplementary disclosure of cash paid during the period:
Interest paid ............................................................. $ 750,347 $ 135,461
============ ===========
Schedule of noncash investing and financing activities:
Equipment purchased under capital lease
obligations............................................................... $ 829,478 $ 50,463
============ ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
6
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- Basis of Presentation
The accompanying unaudited consolidated financial statements and related notes
to the consolidated financial statements include the results of The Leap Group,
Inc. (the "Company") and its wholly-owned subsidiaries.
The unaudited consolidated financial statements for the three and nine month
periods ended October 31, 1997 and 1996, reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim periods.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's Annual Report on Form 10-K/A as filed with the
Securities and Exchange Commission on June 24, 1997.
The results of operations for the three and nine month periods ended October 31,
1997, are not necessarily indicative of the results of operations to be expected
for the entire fiscal year ending January 31, 1998.
NOTE 2 -- Initial Public Offering
In October 1996, the Company completed its initial public offering (the
"offering") and issued 4,000,000 shares of its common stock at a per share price
of $10.00. The Company received proceeds of approximately $35.7 million in
cash, net of underwriting discounts, commissions and other costs. The Company
used $2.86 million of the proceeds to repay certain of the Company's debt,
including all notes payable to banks, a loan secured by a mortgage on the
Company's office building, and a note to an officer of the Company. The Company
has invested the remaining proceeds in short-term U.S. Treasury Notes and Bills,
certificates of deposit, and a money market fund. The Company uses the
remaining net proceeds of the offering for working capital or other general
corporate purposes, including possible acquisitions and to expand or acquire new
facilities for its business. During the nine months ended October 31, 1997, and
as discussed further in Note 3, the Company paid $23,332,000 to repay amounts
payable to banks for principal balances, accrued interest, and other related
costs associated with the acquisition of YAR Communications, Inc. Additionally,
$600,000 of the proceeds were used to purchase a commercial office building in
Los Angeles and $151,000 to purchase the Company's stock on the open market
under the Company's Stock Repurchase Program, as described in Notes 7 and 11,
respectively.
NOTE 3 -- Acquisition
In April 1997, the Company acquired 100% of YAR Communications, Inc. ("YAR") for
$20 million plus additional payments if YAR achieves certain revenue and
earnings goals during fiscal years 1998, 1999 and 2000. YAR provides culturally
relevant marketing and advertising for global clients in over 40 different
nationalities and for all major U.S. ethnic and global markets. The acquisition
was initially financed using the Company's available lines of credit. On
September 30, 1997, the Company retired $23,332,000 in outstanding debt related
to the acquisition with available cash from investments and operations. The
amount repaid included the original purchase price of YAR plus related taxes,
accrued interest, and legal and accounting fees associated with the transaction.
7
<PAGE>
The acquisition was accounted for using the purchase method of accounting, and,
accordingly, the purchase price was allocated to the assets acquired and the
liabilities assumed based upon the fair values at the date of acquisition. The
excess of the purchase price over the fair values of the net assets acquired and
net liabilities assumed was recorded as goodwill, which is being amortized on a
straight-line basis over 20 years. At October 31, 1997, the amount of goodwill
recorded was $17,212,425 less $461,758 in accumulated amortization for the seven
months since the acquisition.
The results of YAR have been included in the consolidated financials since April
1, 1997. The following summary, prepared on a pro forma basis, combines the
Company's and YAR's unaudited consolidated results of operations for the three
months and nine months ended October 31, 1997. Prior to the acquisition by the
Company, YAR prepared its financial statements on a calendar year basis.
Beginning with the Company's current fiscal year, YAR's fiscal year has been
conformed to the Company's fiscal year. YAR's results for the period from
February 1, 1996 to October 31, 1996 are reflected below for pro forma purposes
only.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Pro Forma Summary (unaudited) October 31, 1996 October 31, 1996
---------------------------------------------
<S> <C> <C>
Revenues $ 6,844,000 $22,679,000
Net income $ 863,000 $ 2,786,000
Net income per share $ .08 $ .26
Shares used in per share computation 11,442,013 10,553,124
</TABLE>
The pro forma results are not necessarily indicative of what would have occurred
if the acquisition had been in effect for the periods presented. In addition,
they are not intended to be a projection of future results.
NOTE 4 -- Restructuring Plan
During the quarter ended October 31, 1997, the Company implemented a plan to
restructure the operations at the Los Angeles office of the Company's wholly-
owned subsidiary, The Leap Partnership, Inc. ("Leap") due to continued losses at
the office. The cost of the plan was accounted for in accordance with the
guidance set forth in Emerging Issues Task Force Issue 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring.)" ("EITF 94-3").
A pretax charge of $1,149,712 was recorded which represents employee termination
and severance costs and other related costs that were incurred as a direct
result of the plan. As of October 31, 1997, no amounts have yet been paid under
the plan, but all such costs are expected to be paid within less than a year of
the plan's inception.
NOTE 5 -- Note Receivable from Strategic Partner
In February 1997, the Company loaned $1 million to Vivid Publishing, Inc.
("VPI"), an Internet production house, in exchange for a convertible debenture.
The debenture is convertible into 10% of the common stock of VPI at the
Company's option, and is secured by a pledge of VPI's common stock. Under the
debenture, the Company may at its option loan up to an additional $1.0 million
on substantially the same terms. In March 1997, the Company exercised this
option and has loaned an additional $714,000 to VPI. The loans to VPI bear
interest at the prime rate plus 2% per annum, with interest paid semiannually.
The $1.7 million note receivable is included in Other Assets, $59,800 of accrued
interest on the loans is included in Other Assets and $118,100 of Interest
Income has been recognized through October 31, 1997.
NOTE 6 -- Loss of Significant Client
In March 1997, a client representing approximately 25% and 6% of revenues during
the years ended January 31, 1997 and 1996, respectively, gave the Company a
notice of termination effective June 10, 1997.
8
<PAGE>
NOTE 7 -- Purchase of Real Estate
In May 1997, The Leap Partnership, Inc., a wholly owned subsidiary of the
Company, purchased a commercial office building for $2 million to provide
facilities for its Los Angeles office. $1.4 million was financed by the seller
over a one year term at 9% with an option to renew the note for one additional
year. The balance of the purchase price was paid by the Company.
NOTE 8 -- Net Income Per Share
Net income per share is computed by dividing net income by the weighted average
number of common shares and dilutive common stock equivalent shares outstanding
during the year in accordance with the treasury stock method.
In accordance with certain Securities and Exchange Commission Staff Accounting
Bulletins, the per share computation for periods prior to the offering include
all common and common stock equivalent shares issued within 12 months of the
offering as if they were outstanding for all periods presented using the
treasury stock method and the initial public offering price.
NOTE 9 -- Recently Issued Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share". The
purpose of SFAS No. 128 is to simplify the computation of earnings per share
("EPS") and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries and with that of the International Accounting
Standards Committee. The effective date for the application of SFAS No. 128 for
both interim and annual periods is after December 15, 1997. Earlier application
is not permitted. The Company does not expect the application of SFAS No. 128
to have a material impact on its EPS calculation.
NOTE 10 -- Litigation
In September, 1995, the Spin Doctors (also known as Modigliani, Inc.), a
recording and performing group, and Mow B'Jow Music, Inc., their music
publisher, filed a lawsuit against Leap, the Miller Brewing Company and
Trivers/Myers Music (collectively "the defendants") in the United States
District Court, Central District of California. On May 21, 1997, the lawsuit
was settled within the limits of the Company's insurance policy. On May 23,
1997, the case was formally dismissed by the court pursuant to the settlement
agreement.
NOTE 11 -- Stock Repurchase Program
On June 2, 1997, the Company's Board of Directors approved a Stock Repurchase
Program by which the Company may repurchase up to 1,000,000 shares of the
Company's outstanding common stock from time to time. The total cost of the
program cannot exceed $3,000,000. Company stock may be repurchased on the open
market or in negotiated transactions, depending upon the stock price, market
conditions and other factors. The repurchased shares will be held as treasury
shares and will be available for general corporate purposes. As of October 31,
1997,
9
<PAGE>
the Company has purchased 50,000 shares at an aggregate cost of $151,130. As of
October 31, 1997, the Company has remaining authorization under the Stock
Repurchase Program to acquire up to an additional 950,000 shares at a cost not
to exceed $2,848,870.
NOTE 12 -- Subsequent Events
Line of Credit
- --------------
In November 1997, one of the Company's wholly-owned subsidiaries, YAR
Communications, Inc., ("YAR") obtained a new line of credit from a The Chase
Manhattan Bank to provide working capital financing and funds for other general
corporate purposes of the subsidiary. The line of credit is secured by certain
assets of YAR, including accounts receivable, equipment and general intangibles,
and provides for borrowings up to a maximum principal amount of $5 million. The
interest rate on the line is equal to the prime rate.
Litigation
- ----------
On or about November 4, 1997, a case, Steve Rabosky v. The Leap Partnership,
Inc., et al, was filed in the Superior Court of the State of California for the
County of Orange. The action is in regard to Mr. Rabosky's employment with Leap
and seeks unspecified damages. Leap has denied the claims asserted against it
and will vigorously defend its position in this matter. The Company does not
believe the outcome of this Litigation will have a material effect on the
results of the Company. The Company is not a party to any other litigation.
Acquisition
- -----------
On November 11, 1997, One World Communications, Inc., a wholly-owned subsidiary
of the Company, purchased the fixed assets of Kang & Lee Advertising, Inc. and
K&L West Advertising, Inc. (jointly referred to as "Kang & Lee") for
consideration of $1.3 million in cash. The assets acquired constitute
equipment, other physical and intangible property or assets used by Kang & Lee
in its advertising business. One World Communications will continue to use
these assets for the same purpose. Kang & Lee will also receive payments equal
to forty percent of the annual pre-tax income of Kang & Lee for each of the next
three years, ending on October 31, 2000. The cash consideration paid to Kang &
Lee was financed with borrowings under a line of credit made available by The
Chase Manhattan Bank.
The acquisition will be accounted for using the purchase method of accounting
and, accordingly, the purchase price will be allocated to the assets acquired
and the liabilities assumed based upon the fair values at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired and net liabilities assumed will be recorded as goodwill, which
will be amortized on a straight-line basis over 20 years.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's consolidated financial statements, accompanying
notes thereto and other financial information appearing in the Company's Annual
Report on Form 10-K/A which was filed with the Securities and Exchange
Commission on June 24, 1997.
In reviewing the Company's consolidated financial statements and the discussion
of the Results of Operations that appears below, the following should be taken
into consideration. In April 1997, the Company acquired YAR Communications,
Inc. ("YAR") in a business combination accounted for under the purchase
accounting method. In accordance with the purchase accounting method, YAR's
results have been included within the Company's results since the acquisition as
of April 1, 1997.
Results of Operations
THREE MONTHS ENDED OCTOBER 31, 1997 AND OCTOBER 31, 1996
Revenues
- --------
Revenues increased to $7.2 million for the three months ended October 31, 1997
from $5.0 million for the three months ended October 31, 1996, an increase of
$2.2 million or 44%. The increase is primarily due to the addition of YAR
revenues of approximately $4.7 million during the quarter offset in part by a
$1.2 million decrease due to the loss of a key client, as further described
below under Dependence on Key Clients and Projects, and decreased production
activities since the prior year quarter.
Direct Costs and Related Expenses
- ---------------------------------
Direct costs and related expenses generally consist of production costs which
include services such as filming, animation, editing, special effects,
photography and illustrations, artwork, computer design and various related
production services which are generally outsourced, along with contract labor,
talent and other costs related to creative executions which may include
traditional media as well as new technologies and multimedia. Direct costs and
related expenses decreased slightly to $2.78 million for the three months ended
October 31, 1997 from $2.82 million for the three months ended October 31, 1996,
a decrease of $39,000 or 1%. The decrease was primarily attributable to an
overall decrease in production activities when compared to the prior year
quarter which was offset in part by the addition of $1.4 million of YAR's direct
production expenses for the three months ended October 31, 1997. As a
percentage of revenues, direct costs and related expenses decreased to 39% for
the three months ended October 31, 1997, due to a change in the mix of services
performed during the period, from 57% for the three months ended October 31,
1996.
Salaries and Related Expenses
- -----------------------------
Salaries and related expenses consist primarily of salaries and wages for
employees, related payroll tax expenses, group medical and dental insurance
coverages and recruiting expenses. Salaries and related expenses increased to
$5.0 million for the three months ended October 31, 1997 from $1.1 million for
the three months ended October 31, 1996, an increase of $3.9 million or 348%.
The increase in expense reflects in part the addition of 194 new employees from
YAR which represents $2.5 million in salaries and related expenses for the three
months ended October 31, 1997. Excluding YAR, the increase in expense primarily
reflects the addition of 24 new employees since the prior year period to service
new clients and to strengthen the Company's creative and management team in
Chicago and in the recently opened Los Angeles office (see Note 4 to the
Consolidated Financial Statements).
11
<PAGE>
General and Administrative Expenses
- -----------------------------------
General and administrative expenses include space and facilities expenses,
corporate expenses, depreciation and amortization, insurance, legal and
accounting fees and management information system expenses. General and
administrative expenses increased to $3.2 million for the three months ended
October 31, 1997 from $451,000 for the three months ended October 31, 1996, an
increase of $2.8 million or 615%. The increase is primarily due to the addition
of YAR's general and administrative expenses of $1.2 million for the three
months ended October 31, 1997, and to additional depreciation and amortization,
including goodwill amortization of $215,000 associated with the YAR acquisition,
and facilities costs to support the Company's growth.
Interest Income and Expense
- ---------------------------
Interest income totaled $334,000 and $147,000 for the three months ended October
31, 1997 and 1996, respectively. The interest income was offset by interest
expense of $380,000 and $61,000, resulting in net interest expense of $46,000
and $86,000 for the three months ended October 31, 1997 and 1996, respectively.
In October 1996, the Company retired substantially all of its debt with proceeds
from the Company's Initial Public Offering (the "offering.") On September 30,
1997, the Company retired $23,332,000 of notes payable to banks related to the
acquisition of YAR Communications, Inc. Remaining proceeds from the offering
were invested in short-term U.S. Treasury Notes and Bills, certificates of
deposit, and in a money market fund and earned the interest income during the
quarters ended October 31, 1997 and 1996. Interest expense during the quarter
ended October 31, 1997, resulted from financing costs related to the YAR
acquisition, real estate and other capital expenditures, and daily working
capital requirements. Interest expense during the quarter ended October 31,
1996, stemmed from increased borrowings prior to the receipt of the offering
proceeds.
Income Taxes
- ------------
The combined federal and state effective income tax rates were 39.0% and 37.6%
for the three months ended October 31, 1997 and 1996, respectively. The
increase in the effective tax rate is due to the utilization of prior year
cumulative net operation loss carryforwards which reduced income tax expense for
the three months ended October 31, 1996. At October 31, 1997, no valuation
reserve has been provided against deferred tax assets since, in management's
opinion, it is more likely than not that those tax assets will be realized based
on available tax operating loss carrybacks, expected reversals of taxable
temporary differences, and estimates of future taxable income.
NINE MONTHS ENDED OCTOBER 31, 1997 AND OCTOBER 31, 1996
Revenues
- --------
Revenues increased to $19.2 million for the nine months ended October 31, 1997
from $12.3 million for the nine months ended October 31, 1996, an increase of
$6.9 million or 57%. The net increase of $6.9 million is primarily attributable
to the addition of $11.5 million of YAR revenues, offset in part by a decrease
of $1.2 million of revenues due to the loss of a key client, as further
described below under Dependence on Key Clients and Projects, and decreased
production activities since the prior nine month period ended October 31, 1996.
Direct Costs and Related Expenses
- ---------------------------------
Direct costs and related expenses increased to $7.9 million for the nine months
ended October 31, 1997 from $7.3 million for the nine months ended October 31,
1996, an increase of $538,000 or 7%. The increase was primarily attributable to
the addition of $3.6 million of YAR's direct production expenses offset by an
overall decrease in production activities. As a percentage of revenues, direct
costs decreased 19% due to a change in the mix of services performed during the
period.
12
<PAGE>
Salaries and Related Expenses
- -----------------------------
Salaries and related expenses increased to $12.9 million for the nine months
ended October 31, 1997, from $2.8 million for the nine months ended October 31,
1996, an increase of $10.1 million or 362%. The increase in expense reflects in
part the addition of 194 new employees from YAR which represents $5.4 million in
salaries and related expenses for the nine months ended October 31, 1997.
Excluding YAR, the increase in expense primarily reflects the addition of 24 new
employees since the prior year to service new clients and to strengthen the
Company's creative and management team in Chicago and in the recently opened Los
Angeles office (see Note 4 to the Consolidated Financial Statements).
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased to $7.1 million for the nine
months ended October 31, 1997 from $1.2 million for the nine months ended
October 31, 1996, an increase of $5.6 million or 487%. The increase is
primarily due to the addition of YAR's general and administrative expenses of
$2.6 million for the nine months ended October 31, 1997, and to additional
professional services fees associated with investor relations, legal and
accounting services, and depreciation and amortization, including goodwill
amortization of $462,000 associated with the YAR acquisition, and increased
facilities costs.
Interest Income and Expense
- ---------------------------
Interest income totaled $1.2 million and $147,000 for the nine months ended
October 31, 1997 and 1996, respectively. The interest income was offset in part
by interest expense of $858,000 and $159,000, resulting in net interest income
of $347,000 and net interest expense of $12,000 for the nine months ended
October 31, 1997 and 1996, respectively. In October 1996, the Company retired
substantially all of its debt with proceeds from the offering. On September 30,
1997, the Company retired $23,332,000 of notes payable to banks related to the
acquisition of YAR Communications, Inc. Remaining proceeds from the offering
were invested in short-term U.S. Treasury Notes and Bills, certificates of
deposit, and in a money market fund and earned the interest income from October
1996, when the proceeds were first received. Interest expense during the nine
months ended October 31, 1997, resulted from financing costs related to the YAR
acquisition, real estate and other capital expenditures, and daily working
capital requirements. Interest expense during the nine months ended October 31,
1996, stemmed from increased borrowings prior to the receipt of the proceeds.
Income Taxes
- ------------
Combined federal and state income tax rates were 39.0% and 27.5% for the nine
months ended October 31, 1997 and 1996, respectively. The increase in the
effective tax rate is due to the utilization of prior year cumulative net
operation loss carryforwards which reduced income tax expense for the nine
months ended October 31, 1996. At October 31, 1997, no valuation reserve has
been provided against deferred tax assets since, in management's opinion, it is
more likely than not that those tax assets will be realized based on available
tax operating loss carrybacks, expected reversals of taxable temporary
differences, and estimates of future taxable income.
Liquidity and Capital Resources
Since its inception, the Company has primarily financed its operations and
investments in property and equipment through cash generated from bank
borrowings, loans from a Company officer and equipment leases. As a result of
the public offering in late September 1996, the Company raised approximately
$35.7 million in cash, net of underwriting commissions and other offering costs,
of which $1.3 million was used to repay Company debt at the time of the
offering. In September 1997, the Company retired $23.3 million in notes payable
related to the acquisition of YAR Communications, Inc. The balance of the net
proceeds from the offering were invested in short-term U.S. Treasury Notes and
Bills, certificates of deposit, and in a money market fund.
13
<PAGE>
The Company's net working capital decreased to $0.4 million at October 31, 1997
from a working capital balance of $34.7 million at January 31, 1997, primarily
due to the repayment of the short-term financing used to fund the acquisition of
YAR and other working capital requirements. The Company's cash and cash
equivalents decreased $26.2 million during the nine months ended October 31,
1997. The decrease in cash and cash equivalents during the period is primarily
attributable to (i) a decrease in cash provided from operating activities of
$3.6 million; (ii) an increase in cash used in investing activities of $28.5
million which is attributable to the acquisition of YAR, the financing of a
strategic partner, Vivid Publishing, Inc., and expenditures for property,
equipment, and software development costs; and (iii) offset by an increase in
cash provided by financing activities of $5.9 million needed to fund the
acquisition, the opening of the Los Angeles office, the creation of a new
subsidiary, Quantum Leap Communications, Inc., the loan to a strategic partner,
and other working capital requirements.
In October 1996, the Company obtained a line of credit facility, secured by
certain assets of the Company. The Company will be provided with credit up to
the lesser of (i) $24 million or (ii) 90-95% of the Company's available cash
and cash equivalent balances. The line of credit bears interest at the London
Interbank Offered Rate ("LIBOR") plus .5%. In April 1997, the Company had
borrowed approximately $20 million on this line of credit to finance the
acquisition of YAR Communications, Inc. In September 1997, the Company repaid
the $23,332,000 related to the acquisition by using proceeds from the Company's
offering. As of October 31, 1997, the Company had borrowed $543,000 against
this line of credit to finance the purchase of the Los Angeles office building.
In February 1997, the Company obtained an additional line of credit from a bank
to provide working capital financing and funds for other general corporate
purposes of the Company. The line of credit is secured by substantially all the
assets of the Company, and provides for borrowings up to a maximum principal
amount of $8 million. The interest rate on the line is equal to LIBOR plus 2%.
On December 12, 1997, the Company was notified by the Bank that a financial
covenant was no longer being met. The Company has met with the Bank in regard to
obtaining a waiver and amending the line of credit in order to be in compliance.
As of October 31, 1997, the outstanding balance on this line was $4,173,000.
In November 1997, one of the Company's wholly owned subsidiaries obtained an
additional line of credit from a bank to provide working capital financing and
funds for other general corporate purposes of the subsidiary. The line of
credit is secured by substantially all the assets of the subsidiary, and
provides for borrowings up to a maximum principal amount of $5 million. The
interest rate on the line is equal to the prime rate.
The Company believes that existing credit facilities together with the remaining
net proceeds of the offering and funds from operations, will be sufficient to
meet the Company's cash requirements for at least the next twelve months. The
Company's long-term capital requirements will depend on numerous factors,
including the rates at which the Company grows, expands its personnel and
infrastructure to accommodate growth and invests in new technologies. The
Company has various ongoing needs for capital, including working capital for
operations, project development costs and capital expenditures to maintain and
expand its operations. In addition, as part of its strategy, the Company
evaluates potential acquisitions of, or alliances with, businesses that extend
or complement the Company's business. The Company may in the future consummate
acquisitions or alliances which may require the Company to make additional
capital expenditures, and such expenditures may be significant. Future
acquisitions and alliances may be funded with available cash from the net
proceeds of the offering, seller financing, institutional financing, issuance of
common stock of the Company and/or additional equity or debt offerings.
Seasonality
Depending upon its client mix at any time, the Company could experience
seasonality in its business. Such seasonality arises from the timing of product
introductions and business cycles of the Company's clients and could be material
to the Company's interim results. Such cycles vary from client to client, and
the overall impact on the Company's results of operations cannot be predicted.
In addition, the advertising industry as a whole exhibits seasonality.
Typically, advertising expenditures are highest in the fourth calendar quarter
and lowest in the first calendar quarter, particularly in January. Although the
Company has too limited an operating history to exhibit any discernible seasonal
trend, as the Company matures, management believes that the business and results
of operations could be affected by the overall seasonality of the industry.
14
<PAGE>
Dependence on Key Clients and Projects
An important part of the Company's strategy is to develop in-depth, long-term
relationships with a select group of clients in a variety of industries.
Consistent with such strategy, a large portion of the Company's revenues has
been and is expected to continue to be concentrated among a relatively limited
number of nationally recognized clients. For the quarter ended October 31, 1997,
one client accounted for 36.1% of consolidated revenues. In the quarter ended
October 31, 1996, four clients accounted for 31.1%, 24.8%, 19.1% and 10.0% of
consolidated revenues. Due to the nature of the advertising business, any of the
Company's clients could at any time in the future, and for any reason, reduce
its marketing budget, engage another entity or take in-house all or part of the
business performed by the Company. The Company has taken steps to minimize the
risk of losing any client and the impact it would have on the Company.
Consistent with the Company's strategy to develop long-term strategic alliances
with clients, the Company has entered into agreements with its clients that are
typically for longer terms and are typically on a retainer or fee basis.
The Company has developed propriety software that the Company can license over
extended periods of time. The Company is currently working on developing
additional proprietary content and software that can generate additional
recurring licensing and other revenues. The Company has not yet generated
significant revenues from this type of billing arrangement and no assurance can
be given by the Company that significant revenue streams will be generated in
the future.
Even though the Company has taken steps to grow existing and new business,
diversify its client base, negotiate a greater percentage of retainer and fee
based arrangements with clients, and to develop new potential revenue streams
from licensing of proprietary software and other content, these steps may not
fully mitigate the impact that the loss of any significant account may have on
the Company's operations. In March 1997, a client representing 15.9% of
revenues for the quarter ended April 30, 1997, gave the Company a notice of
termination effective June 10, 1997. Management believes that the loss of the
client will have an impact on the Company's results of operations, particularly
in the short-term. Given the Company's existing plans to grow the business with
the acquisition of YAR, new business development and other strategic investments
as described above, Management believes that the loss in revenue will be
replaced and will therefore not have a materially adverse effect on the
Company's operating results beyond the short-term.
Note Regarding Forward-Looking Statements
This report contains forward-looking statements (within the meaning of the
Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties. When used in this report, the words "anticipate," "believe,"
"estimate," and "expect" and similar expressions as they relate to the Company
or its management are intended to identify such forward-looking statements. A
number of important factors could cause the Company's actual results,
performance or achievements for fiscal 1998 and beyond to differ materially from
that expressed in such forward-looking statements. These factors are set forth
in the Company's Registration Statement on Form S-1 (File No. 333-05051) under
the heading "Risk Factors" and include, without limitation, risks associated
with the expansion of the Company's business and the management of growth,
competition in the Company's industry, uncertainties relating to the developing
market for new media, changing technologies, material changes in economic
conditions in the markets served by the Company's clients, the Company's
dependence on key clients, strategic business relationships, projects and key
personnel, and seasonality.
15
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
In September, 1995, the Spin Doctors (also known as Modigliani, Inc.),
a recording and performing group, and Mow B'Jow Music, Inc., their
music publisher, filed a lawsuit against Leap, the Miller Brewing
Company and Trivers/Myers Music (collectively "the defendants") in the
United States District Court, Central District of California. On May
21, 1997, the lawsuit was settled within the limits of the Company's
insurance policy. On May 23, 1997, the case was formally dismissed by
the courts pursuant to the settlement agreement. The Company is not a
party to any other litigation.
On or about November 4, 1997, a case, Steve Rabosky v. The Leap
Partnership, Inc., et al, was filed in the Superior Court of the State
of California for the County of Orange. The action is in regard to Mr.
Rabosky's employment with Leap and seeks unspecified damages. Leap has
denied the claims asserted against it and will vigorously defend its
position in this matter. The Company does not believe the outcome of
this Litigation will have a material effect on the results of the
Company. The Company is not a party to any other litigation.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits: See Exhibit Index appearing on page 17, which is
incorporated herein by reference.
b. Reports on Form 8-K: During the period covered by this report,
no report on Form 8-K was filed by the Company.
Items 2, 3, 4 And 5 Are Not Applicable And Have Been Omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEAP GROUP, INC.
--------------------
(Registrant)
Date: December 15, 1997 By: /s/ FREDERICK A. SMITH
--------------------------------------------------
Frederick A. Smith, Acting Chief Executive Officer
(Principal Executive Officer)
Date: December 15, 1997 By: /s/ PETER VEZMAR
--------------------------------------------------
Peter Vezmar, Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
The Leap Group, Inc.
EXHIBIT INDEX
Exhibit
Number Exhibits
------ --------
10.1 Line of Credit Agreement, dated November 5, 1997, between
YAR Communications, Inc. and The Chase Manhattan Bank
(aka The Chemical Bank)
11. Statement Regarding Computation of Per-Share Earnings
27. Financial Data Schedule
17
<PAGE>
Exhibit 10.1
Line of Credit Agreement,
dated November 5, 1997, between
YAR Communications, Inc. and
The Chase Manhattan Bank
(a.k.a. The Chemical Bank)
<PAGE>
EXHIBIT 10.1
[LOGO OF CHEMICAL BANK]
Chemical Bank
MASTER GRID NOTE
New York N.Y.
--------------------,
November 1997
--------------------,
$ 5,000,000.00
-----------------------
On the due date for each Advance or on Demand (as recorded on the grid
attached hereto or on any additional pages thereof) for value received, the
undersigned hereby promises to pay to the order of CHEMICAL BANK (hereinafter
the "Bank") at its offices at 600 Fifth Avenue, New York, N.Y. the principal sum
of the aggregate unpaid principal amount of each Advance (as recorded on the
grid attached hereto or on any additional pages thereof) made by the Bank to the
undersigned. The undersigned further promises to pay interest on the unpaid
principal amount of each Advance (computed on the basis of the actual number of
days elapsed on the basis of a 360-day year) on ___________________(specific
date) and the 1st day of each month (insert "month", "third month," "quarter",
etc.) thereafter, and at maturity, at the per annum rate of interest recorded
for such Advance on the grid attached hereto or on any additional pages thereof,
but in no event higher than the maximum interest rate permitted under applicable
law. Advances for which the designated rate of interest is or includes "Prime
Rate", "Prime", "P" or similar designations (e.g., "P + 1%") shall be read to
refer to a floating rate equalling or based upon the Bank's Prime Rate, and
shall be adjusted on the date of each change thereof. Prime Rate shall be the
rate of interest as is publicly announced at the Bank's principal office from
time to time as its prime rate. Interest on any past due amount, whether at the
due date thereof or by acceleration, shall be paid at a rate of one percent per
annum in excess of the above stated rate, but in no event higher than the
maximum permitted under applicable law. Time for payment extended by law shall
be included in the computation of interest.
If any principal of any Advance hereunder which bears interest at a fixed
rate of interest is paid prior to the scheduled maturity date set forth on the
grid attached hereto or on any additional pages thereof (whether by
acceleration, prepayment or otherwise), the undersigned also agrees to pay to
the Bank, on demand, such amount as is reasonably determined by the Bank to
represent the aggregate losses, costs, and expenses incurred or suffered by the
Bank as a result of such payment (including losses, costs and expenses resulting
from not receiving the rate of interest set forth above for the entire loan
period and/or the liquidation or redeployment of funds). A certificate of the
Bank setting forth the foregoing amount shall, absent manifest error, be
conclusive and binding for all purposes.
The undersigned hereby grants to the Bank a lien on, security interest in
and right of set-off against all moneys, securities and other property of the
undersigned and the proceeds thereof now or hereafter delivered to remain with
or in transit in any manner to the Bank, its correspondents or its agents from
or for the undersigned, whether for safekeeping, custody, pledge, transmission,
collection or for any other purpose, or coming into possession, control or
custody of the Bank, Chemical Securities, Inc., or any other affiliate of the
Bank in any way, and, also, any balance of any deposit account and credits of
the undersigned with, and any other claims of the undersigned against, the Bank,
Chemical Securities, Inc., or any other affiliate of the Bank at any time
existing (all of which are hereinafter collectively called "Collateral"), as
collateral security for the payment of this note and all other liabilities and
obligations now or hereafter owed by the undersigned to the Bank, contracted
with or acquired by the Bank, whether joint, several, direct, indirect,
absolute, contingent, secured, unsecured, matured or unmatured (all of which are
hereafter collectively called "Liabilities"), hereby authorizing the Bank at any
time or times, without notice or demand, to apply any such Collateral or any
proceeds thereof to any of such Liabilities in such amounts as it in its sole
discretion may select, whether contingent, unmatured or otherwise and whether
any other collateral security therefor is deemed adequate or not. Undersigned
authorizes the Bank to deliver to others a copy of this note as written
notification of the undersigned's transfer of a security interest in the
Collateral. The Bank further is authorized at any time or times, without demand
or notice to the undersigned, to transfer to or register in the name of its
nominee or nominees all or any part of the Collateral and to exercise any and
all rights, power and privileges (except that prior to an Event of Default the
Bank shall not have the right to vote or to direct the voting of any
Collateral). The collateral security and other rights described herein shall be
in addition to any other collateral security described in any separate agreement
executed by the undersigned.
In the event of; default in the prompt payment of any Liabilities; default
in any other indebtedness of the undersigned (which, for the purposes of this
sentence, means the undersigned or any guarantor, surety or endorser of, or any
person or entity which has pledged any of its property to secure, any
Liabilities); complete or partial liquidation or suspension of any business of
the undersigned; dissolution, merger, consolidation or reorganization of the
undersigned; death of or loss of employment by an individual or any member of
any partnership (if the undersigned is an individual or a partnership); failure
to furnish any financial information or to permit inspection of any books or
records at the Bank's request; a representation, warranty or statement of the
undersigned proving false in any material respect when made or furnished;
general assignment for the benefit of creditors or insolvency of the
undersigned; commencement of any proceeding supplementary to any execution
relating to any judgment against the undersigned; attachment, distraint, levy,
execution or final judgment against the undersigned or against the property of
the undersigned; assignment by the undersigned of any equity in any of the
Collateral without the written consent of the Bank; appointment of a receiver,
conservator, rehabilitator or similar officer for the undersigned, or for any
property of the undersigned; tax assessment by the United States Government or
any state or political subdivision thereof against the undersigned; the taking
of possession of, or assumption of control over, all or any substantial part of
the property of the undersigned by the United States Government, or any state or
political subdivision thereof, foreign government (de facto or de jure) or any
agency of any thereof; calling of a meeting of creditors, assignment for the
benefit of creditors or bulk sale or notice thereof; any mortgage, pledge of or
creation of a security interest in any assets without the consent of the holder
of this note; filing of a petition in bankruptcy, commencement of any proceeding
under any bankruptcy or debtor's law (or similar law analogous in purpose or
effect) for the relief, reorganization, composition, extension, arrangement or
readjustment of any of the obligations by or against the undersigned; then, and
in any of those events (each, an "Event of Default"), all Liabilities, although
otherwise unmatured or contingent, shall forthwith become due and payable
without notice or demand and notwithstanding anything to the contrary contained
herein or in any other instrument. Further, acceptance of any payments shall not
waive or affect any prior demand or acceleration of these Liabilities, and each
such payment made shall be applied first to the payment of accrued interest,
then to the aggregate unpaid principal or otherwise as determined by the Bank in
its sole discretion. The undersigned hereby irrevocably consents to the in
personam jurisdiction of the federal and/or state courts located within the
State of New York over controversies arising from or relating to this note or
<PAGE>
the Liabilities and irrevocably waives trial by jury and the right to interpose
any counterclaim or offset of any nature in any such litigation. The undersigned
further irrevocably waives presentment, demand, protest, notice of dishonor and
all other notices or demands of any kind in connection with this note or any
Liabilities. The undersigned shall be jointly and severally liable hereon.
The Bank may, at its option, at any time when in the judgment of the Bank
the Collateral is inadequate or the Bank deems itself insecure, or upon or at
any time after the occurrence of an Event of Default, proceed to enforce payment
of the same and exercise any of or all the rights and remedies afforded the Bank
by the Uniform Commercial Code (the "Code") or otherwise possessed by the Bank.
Any requirement of the Code for reasonable notice to the undersigned shall be
deemed to have been complied with if such notice is mailed, postage prepaid, to
the undersigned and such other persons entitled to notice, at the address shown
on the records of the Bank at least four (4) days prior to the time of sale,
disposition or other event requiring notice under the Code.
The undersigned agrees to pay to the Bank, as soon as incurred, all costs
and expenses incidental to the care, preservation, processing, sale or
collection of or realization upon any or all the Collateral or incurred in
connection with the enforcement or collection of this note, or in any way
relating to the rights of the Bank hereunder, including reasonable inside or
outside counsel fees and expenses. Each and every right and remedy hereby
granted to the Bank or allowed to it by law shall be cumulative and not
exclusive and each may be exercised by the Bank from time to time and as often
as may be necessary. The undersigned shall have the sole responsibility for
notifying the Bank in writing that the undersigned wishes to take advantage of
any redemption, conversion or other similar right with respect to any of the
Collateral. The Bank may release any party (including any partner of any
undersigned) without notice to any of the undersigned, whether as co-makers,
endorsers, guarantors, sureties, assigns or otherwise, without affecting the
liability of any of the undersigned hereof or any partner of any undersigned
hereof.
Upon any transfer of this note, the undersigned hereby waiving notice of
any such transfer, the Bank may deliver the Collateral or any part thereof to
the transferee who shall thereupon become vested with all the rights herein or
under applicable law given to the Bank with respect thereto and the Bank shall
thereafter forever be relieved and fully discharged from any liability or
responsibility in the matter; but the Bank shall retain all rights hereby given
to it with respect to any Liabilities and Collateral not so transferred. No
modification or waiver of any of the provisions of this note shall be effective
unless in writing, signed by the Bank, and only to the extent therein set forth;
nor shall any such waiver be applicable except in the specific instance for
which given. This agreement sets forth the entire understanding of the parties,
and the undersigned acknowledges that no oral or other agreements, conditions,
promises, understandings, representations or warranties exist in regard to the
obligations hereunder, except those specifically set forth herein.
If the undersigned is a partnership, the agreement contained shall remain
in force and applicable, notwithstanding any changes in the individuals
composing the partnership or any release of any partner or partners and their
partners shall not thereby be released from any liability. If this note is
signed by more than one party, the terms "undersigned", as used herein, shall
include and mean the "undersigned and each of them" and each undertaking herein
contained shall be their joint and several undertaking, provided, however, that
in the phrases "of the undersigned", "by the undersigned", "against the
undersigned", "for the undersigned", "to the undersigned", and "on the
undersigned", the term "undersigned" shall mean the "undersigned or any of
them", and the Bank may release or exchange any of the Collateral belonging to
any of the parties hereto and it may renew or extend any of the liabilities of
any of them and may make additional advances or extensions of credit to any of
them or release or fail to set off any deposit account or credit to any of them
or grant other indulgences to any of them, all from time to time, before or
after maturity hereof, with or without further notice to or assent from any of
the other parties hereto. Each reference herein to the Bank shall be deemed to
include its successors, endorsees and assigns, in whose favor the provisions
hereof shall also inure. Each reference herein to the undersigned shall be
deemed to include the heirs, executors, administrators, legal representatives,
successors and assigns of the undersigned, all of whom shall be bound by the
provisions hereof.
The provisions of this note shall be construed and interpreted and all
rights and obligations hereunder determined in accordance with the laws of the
State of New York, and as to interest rates, applicable Federal law.
Y A R Communications, Inc. /s/ Peter Vezmar
- ---------------------------------- -----------------------------------
Address: 220 Fifth Avenue Address:
------------------------ --------------------------
New York, NY 10001
All references to Chemical Bank,
The Chase Manhattan Bank, N.A.
or The Chase Manhattan Bank,
(National Association) shall mean
The Chase Manhattan Bank, a
New York State chartered bank.
<PAGE>
[LOGO OF CHASE MANHATTAN BANK] Security Agreement
(General Purpose)
This Agreement made this 5th day of November , 19 97 , between THE
--- -------- ----
CHASE MANHATTAN BANK (herein called "Bank") and Y A R Communications, Inc.
--------------------------------
(herein called "Borrower").
1. DEFINITIONS OF TERMS USED HEREIN. (a) "Borrower" includes all
individuals executing this agreement as parties hereto and all members of a
partnership when Borrower is a partnership, each of whom shall be jointly and
severally liable individually and as partners hereunder. (b) "Liability" or
"liabilities" includes all liabilities (primary, secondary, direct, contingent,
sole, joint or several) due or to become due, or that may be hereafter
contracted or acquired, of Borrower (including Borrower and any other person) to
Bank, including without limitation all liabilities arising under or from any
note, loan or credit agreement, letter of credit, guaranty, draft, acceptance,
interest rate or foreign exchange agreement or any other instrument or agreement
of (or the responsibility of) the Borrower or any loan, advance or other
extension of credit or financial accommodation to Borrower by Bank. (c)
"Proceeds" means whatever is received when Collateral is sold, exchanged,
leased, collected or otherwise disposed of and includes the account arising when
the right to payment is earned under a contract. (d) "Security Interest" means a
lien or other interest in Collateral which secures payment of a liability or
performance of an obligation. (e) "Collateral" means the property described in
Section 2 hereof and the following described property of the Borrower.
All present and future accounts, contract rights, general intangibles,
instruments, documents, and chattel paper, all returned and repossessed goods
relating thereto, all proceeds thereof, and all books, records and other
property relating to any of the foregoing.
All terms used herein which are also defined in the New York or any other
applicable Uniform Commercial Code shall also have at least the meanings herein
as therein defined.
2. SECURITY INTEREST. As security for the payment of all loans and other
extensions of credit or other financial accommodations now or in the future made
by Bank to Borrower and all other liabilities of Borrower to Bank, Borrower
hereby grants to Bank a security interest in the above described Collateral and
all and any Proceeds arising therefrom and all and any products of the
Collateral.
DELETE IF NOT { The proceeds of the loan hereby obtained by Borrower will be
APPLICABLE { used to purchase the Collateral.
Borrower represents and warrants that it is the sole and lawful owner of
the Collateral, free and clear of any liens and encumbrances, and has the right
and power of pledge, sell, assign and transfer absolute title thereto to Bank
and that no financing statement covering the Collateral, other than the Bank's,
is on file in any public office.
To further secure the liabilities, the Borrower hereby grants, pledges and
assigns to the Bank a continuing lien, security interest and right of set-off in
and to all money, securities and all other property of the Borrower, and the
proceeds thereof, now or hereafter actually or constructively held or received
by or for the Bank, Chase Securities Inc. or any other affiliate of the Bank for
any purpose, including safekeeping, custody, pledge, transmission and
collection, and in and to all of the Borrower's deposits (general and special)
and credits with the Bank, Chase Securities Inc. or any other affiliate of the
Bank. Borrower authorizes Bank to deliver to others a copy of this Agreement as
written notification of the Borrower's transfer of a security interest in the
foregoing property. The Bank is hereby authorized at any time and from time to
time, without notice, to apply all or part of such money, securities, property,
proceeds, deposits or credits to any of the Liabilities in such amounts as the
Bank may elect in its sole and absolute discretion, although the Liabilities may
then be contingent or unmatured and whether or not the collateral security may
be deemed adequate.
3. USE OF COLLATERAL. Until default, Borrower may use the Collateral in
any lawful manner. If the Collateral is or is about to become affixed to realty,
Borrower will, at Bank's request, furnish the Bank a writing executed by the
mortgagee of the realty whereby the mortgagee subordinates its rights and
priorities to the Bank's security interest in the Collateral. If the Collateral
is or may become subject to a landlord's lien, the Borrower will at Bank's
request, furnish the Bank with a landlord's waiver satisfactory in form to the
Bank.
{ If goods, the Collateral will be used primarily as
COMPLETE {
IF { ----------------------------------------------------------------
APPLICABLE { (Equipment in business, inventory for sale or lease,
{ Farming, Personal, Family or Household.)
4. INSURANCE. Borrower will have and maintain insurance on the Collateral
until this Agreement is terminated against all expected risks to which it is
exposed, including fire, theft and collision, and those which the Bank may
designate, such insurance to be payable to Bank and Borrower as their interest
may appear; all policies shall provide for thirty (30) days' written minimum
cancellation notice to the Bank. Bank may act as attorney for Borrower in
obtaining, adjusting, settling and cancelling such insurance.
<PAGE>
5. DEFAULT. Default shall exist hereunder (1) if the Borrower shall fail to
pay any amount of the Liabilities when due or if the Borrower shall fail to
keep, observe or perform any provision of this Agreement or of any note, or
other instrument or agreement between Borrower and Bank relating to any
Liabilities or if any default of Event of Default specified or defined in any
such note, instrument or agreement shall occur, (2) if the Borrower shall or
shall attempt to (a) remove or allow removal of the Collateral from the county
where the Borrower now resides or change the location of its chief executive
office or principal place of business, (b) sell, encumber or otherwise dispose
of the Collateral or any interest therein or permit any lien or security
interest (other than the Bank's) to exist thereon or therein, (c) conceal, hire
out or let the Collateral, (d) misuse or abuse the Collateral, or (e) use or
allow the use of the Collateral in connection with any undertaking prohibited by
law; (3) if bankruptcy or insolvency proceedings shall be instituted by or
against the Borrower, or (4) if the Collateral shall be attached, levied upon,
seized in any legal proceedings, or held by virtue of any lien or distress, or
(5) if the Borrower shall make any assignment for the benefit of creditors, or
(6) if the Borrower shall fail to pay promptly all taxes and assessments upon
the Collateral or the use thereof, or (7) if the Borrower shall die, or (8) if
the Bank with reasonable cause determines that its interest in the Collateral is
in jeopardy, or (9) if Borrower should fail to keep the Collateral suitably
insured, in the event of default or the breach of any undertaking of or
conditions to be performed by the Borrower (1) all liabilities shall become
immediately due and payable, and (2) the Borrower agrees upon demand to deliver
the Collateral to the Bank, or the Bank may, with or without legal process, and
with or without previous notice or demand for performance, enter any premises
wherein the Collateral may be, and take possession of the same, together with
anything therein; and the Bank may make disposition of the Collateral subject to
any and all applicable provisions of the law. If the Collateral is sold at
public sale, Bank may purchase the Collateral at such sale. The Bank, provided
it has sent the statutory notice of default, may retain from the proceeds of
such sale all reasonable costs incurred in the said taking and sale and also,
all sums then owing by the Borrower, and any surplus of any such sales shall be
paid to the Borrower.
6. GENERAL AGREEMENTS. (a) Borrower agrees to pay the costs of filing
financing statements and of conducting searches in connection with this
Agreement, (b) Borrower agrees to allow the Bank through any of its officers or
agents, at all reasonable times, to examine or inspect any of the Collateral and
to examine, inspect and make extracts from the Borrower's books and records
relating to the Collateral, (c) Borrower will promptly pay when due all taxes
and assessments upon the Collateral or for its use of operation or upon the
proceeds thereof or upon this Agreement or upon any note or other instrument or
agreement evidencing any of the liabilities. (d) At its option, the Bank may
discharge taxes, liens or security interests or other encumbrances at any time
levied or placed on the Collateral, and may pay for the maintenance and
preservation of the Collateral, and the Borrower agrees to reimburse the Bank on
demand for any payment made or any incurred by the Bank pursuant to the
foregoing authorization, including outside or in-house counsel fees and
disbursements incurred or expanded by the Bank in connection with this
Agreement. (e) Borrower hereby authorizes the Bank to file financing statements
and any amendments thereto without the signature of Borrower. Such authorization
is limited to the security interest granted by this Statement. (f) Borrower
agrees that the Bank has the right to notify (on invoices or otherwise) account
debtors and other obligors or payors on any Collateral of its assignment to the
Bank and that all payments thereon should be made directly to the Bank and that
the Bank has full power and authority to collect, compromise, endorse, sell or
otherwise deal with the Collateral on its own name or that of the Borrower at
any time. (g) The Borrower agrees to pay or reimburse the Bank on demand for all
costs and expenses incurred by it in connection with the administration and
enforcement of this Agreement and the administration, preservation,
protection, collection or realization of any Collateral (including outside or
in-house attorneys' fees and expenses). (h) The Bank shall not be deemed to have
waived any of its rights hereunder or under any other agreement, instrument or
paper signed by the Borrower unless such waiver is in writing and signed by the
Bank. No delay or omission on the part of the Bank in exercising any right shall
operate as a waiver thereof or of any other right. A waiver upon any one
occasion shall not be construed as a bar or a waiver of any right or remedy on
any future occasion. All of the rights and remedies of the Bank, whether
evidenced hereby or by any other Agreement, instrument or paper, shall be
cumulative and may be exercised singly or concurrently. (i) This Agreement shall
be governed by and construed in accordance with the laws of the State of New
York. (j) This Agreement, and the security interests, obligations, rights and
remedies created hereby, shall inure to the benefit to the Bank and its
successors and assigns and be binding upon the Borrower and its heirs,
executors, administrators, legal representatives, successors and assigns.
7. EXECUTION BY BANK. This Agreement shall take effect immediately upon
execution by the Borrower, and the execution hereof by the Bank shall not be
required as a condition to the effectiveness of this Agreement. The provision
for execution of this Agreement by the Bank is only for purposes of filing this
Agreement as a Security Agreement under the Uniform Commercial Code, if
execution hereof by the Bank is required for purposes of such filing.
Y A R Communications, Inc.
--------------------------------------
(Borrower)
By /s/ Peter Vezmar
-----------------------------------
220 Fifth Avenue
--------------------------------------
(Number and Street)
New York, NY 10001
--------------------------------------
(City, County, State)
Places of business in counties other
than above.
--------------------------------------
--------------------------------------
--------------------------------------
THE CHASE MANHATTAN BANK ________________
Bank Designation
By /s/ Aldo Quini, VP
---------------------------------------
(Name and Title)
Address 600 Fifth Avenue, 5th Floor
New York
----------------------------------
(Number, Street, City)
<PAGE>
EXHIBIT 11
The Leap Group, Inc.
STATEMENT REGARDING COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average of common
shares outstanding 9,614,667 9,600,000 9,613,037 9,600,000
Weighted average of common
shares issued in the offering 4,000,000 1,333,333 4,000,000 444,444
Effect of options granted within one
year prior to the offering, based on
the treasury stock method - 508,680 - 508,680
----------- ----------- ----------- -----------
Shares used in per share computation 13,614,667 11,442,013 13,613,037 10,553,124
Net (loss) income ($3,038,595) $435,234 ($5,744,815) $692,477
Net (loss) income
per common share ($.22) $0.04 ($.42) $0.07
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheets as of January 31, 1997 and October 31, 1997, the
Consolidated Statements of Operations for the Three Months and Nine Months ended
October 31, 1997 and 1996, and the Consolidated Statements of Cash Flows for the
Nine Months ended October 31, 1997 and 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 6,063
<SECURITIES> 0
<RECEIVABLES> 4,972
<ALLOWANCES> (1,289)
<INVENTORY> 0
<CURRENT-ASSETS> 11,318
<PP&E> 9,654
<DEPRECIATION> (2,212)
<TOTAL-ASSETS> 42,441
<CURRENT-LIABILITIES> 10,892
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 30,549
<TOTAL-LIABILITY-AND-EQUITY> 42,441
<SALES> 0
<TOTAL-REVENUES> 19,227
<CGS> 0
<TOTAL-COSTS> 7,851
<OTHER-EXPENSES> 21,140
<LOSS-PROVISION> 1,313
<INTEREST-EXPENSE> (347)
<INCOME-PRETAX> (9,418)
<INCOME-TAX> (3,673)
<INCOME-CONTINUING> (5,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,745)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
</TABLE>
