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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1997, or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3916
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 W. HUBBARD STREET, CHICAGO, IL 60610
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
(312) 494-0300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each Class on which registered
------------------- -------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (Par Value $.01 Per Share)
(Title of Class)
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 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 _____
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy statement or informa-tion
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of Common Stock, $.01 par value, held by non-
affiliates of the Registrant, as of April 21, 1997 was $21,623,335 (based upon
the closing sale price of the Common Stock on the Nasdaq National Market on
April 21, 1997, and, for the purpose of this calculation only, assuming that all
of the Registrant's directors and officers are affiliates.) There were
13,614,667 shares of Registrant's Common Stock, $.01 par value, outstanding as
of April 21, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended January 31, 1997 ("the 1997 Annual Report") (Parts II and IV).
(2) Portions of the Registrant's Notice of Annual Meeting and Proxy Statement
issued in connection with the Annual Meeting of Stockholders to be held on
June 3, 1997 (the "1997 Proxy Statement") (Part III).
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THE LEAP GROUP, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED
JANUARY 31, 1997
INDEX
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PART I
Item Page
- ---- ----
<S> <C>
1. Business............................................... 3
2. Properties............................................. 8
3. Legal Proceedings...................................... 8
4. Submission of Matters to a Vote of Security Holders.... 8
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters................................... 9
6. Selected Financial and Operating Data.................. 9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 9
8. Financial Statements and Supplementary Data............ 9
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 9
PART III
10. Directors and Executive Officers of the Registrant..... 10
11. Executive Compensation................................. 10
12. Security Ownership of Certain Beneficial Owners and
Management............................................. 10
13. Certain Relationships and Related Transactions......... 10
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................... 11
Signatures.................................................. 13
</TABLE>
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PART I
ITEM 1. BUSINESS.
THE COMPANY
The Leap Group, Inc. ("Leap" or "the Company") is a strategic and creative
communication services company that develops and implements integrated brand
marketing campaigns using traditional and new media primarily for market leading
clients. The Company's marketing and communications services combine
comprehensive strategic brand marketing skills, award-winning creative talent,
and the production capabilities of world class full service advertising agencies
with the technological expertise to exploit new interactive and other digital
media. Leap's mission is to build brand equity for its clients. Leap focuses on
establishing long-term marketing partnerships with marquee clients of national
and international scope that position the Company as the steward for major
brands with correspondingly significant advertising budgets.
Leap is a Delaware corporation which was incorporated in March 1996 to act as
the parent company for three wholly-owned subsidiaries--The Leap Partnership,
Inc. ("Leap Partnership"), an Illinois corporation established in September,
1993; Lilypad Services, Inc. ("Lilypad"), an Illinois corporation established
in September, 1995; and Tadpole Productions, Inc. ("Tadpole"), an Illinois
corporation established in September, 1995.
In September 1996, the Company raised $40 million in its Initial Public
Offering (the "Offering") of common stock. A portion of the proceeds from the
Offering, approximately $1.3 million, was used to retire substantially all of
the Company's debt, and the balance of the proceeds will provide added capital
to the Company so that it may continue to pursue talent, products, technologies
and potential acquisitions that are complementary to the Company's business.
In December 1996, the Company formed a new wholly-owned subsidiary--Quantum
Leap Communications, Inc. ("QLC"), a Delaware corporation. QLC was created to
help advertisers communicate more effectively with targeted consumers in non-
traditional ways, primarily using new media over the Internet.
In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR Communications, Inc. ("YAR"). Through a staff representing nearly 40
nationalities, YAR provides culturally relevant marketing and advertising for
global clients and for all major U.S. ethnic and global markets. YAR's clients
include AT&T, Western Union, Nike, American Airlines, Walt Disney, L.L. Bean,
MetLife, Citibank, EDS, Allstate, Medtronic, Datascope, Calvin Klein, CNN,
General Electric, Eli Lilly, Alta Vista, Owens-Corning, Turner Broadcasting,
USA Poultry and Egg Council, FMC, and R.C. Cola.
The Company is headquartered in Chicago with offices in Los Angeles, New York,
San Francisco, and Moscow. The Company's executive offices are located at 22 W.
Hubbard Street, Chicago, Illinois, 60610. The Company's telephone number at that
address is (312) 494-0300. The Company's Internet address is:
http://www.leapgroup.com. Information contained on the Company's Internet site
shall not be deemed a part of this Report.
The Company's common stock is traded on the NASDAQ National Market under the
symbol LEAP.
LEAP'S CORE STRENGTHS
Leap's central mission is to build brand equity for its clients by designing
and implementing strategic brand marketing plans and comprehensive advertising
campaigns that are driven by premier talent and creative content and employ both
traditional and new media. Management believes that certain core strengths have
been, and will continue to be, integral to Leap's success in achieving this
goal.
Roster of Marquee Clients. Leap has successfully competed for and serviced
major accounts. Leap's clients include Digital City, U.S. Robotics, Tommy Armour
Golf, The Chicago Tribune Company, Ameritech Corporation, R.J. Reynolds, Pizza
Hut and The University of Notre Dame. Leap attributes its success in attracting
such clients to the reputations of Leap and its senior management, as well as
its other core strengths, and believes that these factors, coupled with the
client roster itself, will enhance Leap's ability to attract additional
significant clients of national and international scope. Leap also believes in
providing pro-bono services
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to worthy organizations and has to date provided services to the Brain Injury
Association and the Partnership for a Drug Free America.
Strategic Orientation. Leap specializes in the strategic positioning of
brands. Beginning with a thorough appraisal of the needs, wants, impressions and
opinions of the client's customers and the position of the client's brand in its
marketplace in relationship to customers, competitors and retailers, Leap
develops a distinct identity for the brand. Fusing the brand strategy with
client goals, objectives and information, Leap then develops a strategic
platform that serves as the grounding for all brand messages across all media.
Talent and Creative Distinction. Leap maintains a multidisciplinary talent
strategy as one of its core principles. Recognizing that the best strategic
platform is useless without creative executions that inform, engage and
entertain consumers, Leap's management places heavy emphasis on creativity in
the selection and training of personnel. The Company believes that its success
in attracting such creatives is in part attributable to the reputations of
Frederick Smith, George Gier, Joseph A. Sciarrotta and Thomas R. Sharbaugh, who
in the aggregate have over 70 years of advertising experience. Among numerous
accolades received by these men for their work, Messrs. Gier and Sciarrotta were
each named a National Creative All-Star for 1994 by Adweek magazine. While
employed by DDB Needham, Messrs. Smith, Gier and Sciarrotta were best known for
their campaigns for Anheuser-Busch, Inc.'s Bud Light brand. The team created and
produced the memorable "Yes I am!" and "Ladies Night" commercials for Bud
Light. Mr. Sharbaugh has a wealth of experience in brand stewardship acquired
during 18 years in marketing at Anheuser-Busch, Inc. ("Anheuser-Busch") and
Sears Roebuck and Co. ("Sears"). Mr. Sharbaugh oversaw the "Softer Side of
Sears" campaign, which was an important part of the fundamental repositioning
of Sears' retail operations. In addition, during his tenure at Anheuser-Busch,
Mr. Sharbaugh oversaw noteworthy campaigns, such as "This Bud's For You,"
"Gimme a Light," "Spuds McKenzie" and "the Bud Bowl," that contributed to
Budweiser's stronghold on the top position in the beer market and Bud Light's
emergence as the leading light beer.
Leap's employees include experienced writers, art directors, graphic
designers, Web designers, producers and strategic thinkers. Leap's talent
strategy targets skilled individuals who, in addition to being creative, are
adept marketers attuned to the brand strategy and business objectives of
clients. The Company believes that it has to date, despite intense competition
for talent, been successful in attracting and retaining superior creative and
strategic thinkers as well as highly skilled programmers and interactive media
developers. All Leap employees are called upon to contribute beyond their
primary areas of expertise.
The depth of Leap's talent extends well beyond its senior management. Leap's
strategy is to recruit the very best talent available, and the work of Leap's
employees (all of whom share the title "Creative Partner") has received numerous
accolades and awards. Despite its short history, Leap has achieved international
recognition for creative advertising. The Company received a ''Clio'' award for
Special Effects for its 1995 Super Bowl Campaign for the Miller Brewing Company,
was a finalist in two categories at the 1995 London International Advertising
Awards and has received more than a dozen awards from the Chicago Show.
Organizational Model and Creative Process. Leap operates with an
organizational structure that differs significantly from the traditional agency
model. Instead of functional departments organized in a vertical hierarchy, Leap
is a flat organization built around cross-functional work teams. Employees with
varied skill sets (such as writers, art directors, graphic designers, Web
designers, programmers, account planners, producers or media planners) are
brought together as needed to service each client's specific needs. Unlike the
traditional agency model, Leap's structure enables the client to deal directly
with the creative and other team members and also does not grant any one person
proprietary control over a creative concept. Management believes that this flat
open structure yields better communications, shorter cycle times, more
responsive services, more efficient use of resources, and a richer flow of
creative ideas. Management also believes that this unusual structure has enabled
Leap to create a culture and working environment that is attractive to creative
talent. Leap has used this to its advantage, bringing together top level
marketing practitioners, creative minds and technical talent selected for their
balance of strategic understanding and creative capabilities. In addition, Leap
has used advanced technology to link its people, assets and ideas into a
flexible, fast-acting organization.
Integrated Services Approach. Leap provides a full range of strategic,
creative, interactive and production services for both traditional and new media
projects. Leap's strategies are designed to integrate the most effective and
beneficial aspects of a wide array of media. Creative executions may include
television, print, outdoor and radio advertisements, as well as promotions,
direct mail, package design and logo design. Leap will also develop and execute
digital interactive solutions including World Wide Web sites, CD-ROMs and
interactive presentations.
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Technological Sophistication and Expertise. Management believes that the
Company is in the forefront in the application of new marketing communications
technology. The Company provides creative services for itself and its clients by
developing and maintaining sites on the Internet's World Wide Web. In addition,
Leap creates and implements interactive marketing solutions in a variety of
digital media including CD-ROMs. The Company's Creative Partners include skilled
programmers and interactive media developers. Management believes that Leap's
investment in technology serves as a competitive advantage in recruiting and
retaining talented employees.
With the creation of Quantum Leap, the Company has added a strategic focus on
developing proprietary content and new distribution systems that allow
advertisers to communicate more effectively in non-traditional ways. An
example of Quantum Leap technologies and products includes Quantum Objects.
Quantum Objects, Version 1.0, is a new Internet publishing application that
allows real time customization and updating of on-line information. The first
commercial application of this technology is an arts and entertainment guide for
The Chicago Tribune Company.
Leap is networked to the Internet through a 1.5 Mbps T1 line. The Company has
developed an intranet Web site to allow easy distribution of information
internally in a secured environment, and its clients can view and proof both
print and graphics remotely through password protected Web pages. Proofing and
annotation of audio and video work is accomplished with Emotion's Creative
Partner content distribution system. Leap's programmers are versed in Basic,
Pascal, C/C++, Java, Perl, Lingo and Hypertalk. Leap develops Internet projects
on a number of platforms including Macintosh and Windows NT servers. Leap also
utilizes two Sun Microsystems Sparc Servers, one in-house and one offsite. The
in-house Sparc Server is used for development of Web projects and beta testing
new technologies for companies, including Netscape and Macromedia, before they
are released to the public for general sale. Completed work is transferred to a
Sun Sparc 20, which is housed at a location that contains Chicago's Network
Access Point, one of the hubs at which the world's telecommunications providers
(such as Sprint and MCI) share information between networks. This Sparc 20 is
monitored 24 hours a day, 7 days a week to ensure optimal connectivity and
functionality.
LEAP'S STRATEGY
Leap's strategy embodies the following key elements to build its business and
succeed in its mission:
Focus on Brand Stewardship. Leap's objective is to develop and nurture long-
term relationships with existing and new clients who have entrusted the Company
with the stewardship of their brands and the responsibility for designing,
creating and delivering key consumer messages over traditional and new media.
Leap has thus far been successful in winning additional assignments from several
clients who initially retained Leap to undertake a single project in Web design
or a specific brand advertising assignment. As such clients worked with Leap and
experienced its integrated, value-added approach, other assignments and
additional responsibilities followed. For example, Leap received an initial
assignment to do the strategic positioning and creative development for Tommy
Armour's 855s irons. Leap's scope of work for Tommy Armour grew to include
assignments for a World Wide Web site, new club design, logo design, package
design and material used at the point-of-purchase. Similarly, Leap was initially
engaged by U.S. Robotics to develop advertising for its modem division. Leap has
since received assignments to redesign and develop a number of U.S. Robotics'
Web sites. Leap is also working on adapting U.S. Robotics' installation software
CD-ROM to an advertising/marketing new media tool. In addition, the Company has
been engaged to do advertising for U.S. Robotics' telephony division. Management
believes that its focus on long-term partnerships should provide a recurring
revenue stream not associated with single project assignments.
Maintain Superiority in Talent, Technology, and Service. Leap intends to
continue to attract, hire and retain top level strategic, creative and technical
talent and to be a leader in developing better ways of communicating with
consumers through leading-edge technology. With its flexible work team approach
and flat organizational structure, Leap is dedicated to providing faster and
more cost effective solutions to its clients' needs. Leap believes that it can
provide a competitive advantage to itself and its clients by creating leading
multimedia marketing programs that use interactive technologies and MIS tools
for optimizing the effectiveness of marketing initiatives.
Target Market Leaders as Clients. Leap intends to focus on a limited number
of marquee clients, with businesses of national or global scope, that seek to
develop long-term marketing partnerships for significant national or
international brands and are interested in using traditional and new media for
their marketing
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communications. Many of Leap's current clients are, and future targets are
expected to be, market leaders with aggressive plans for growth and multi-
faceted communications needs.
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 year ended January 31, 1997,
three clients, Nike, U.S. Robotics, and Tommy Armour Golf, accounted for 25.1%,
23.4%, and 18.9%, respectively, of consolidated revenues. In March 1997, Nike
gave the Company a notice of termination effective June 10, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which is incorporated herein by reference to the 1997 Annual
Report.
Develop Proprietary Program Material. Leap believes there is a significant
opportunity to create, develop and own proprietary program material for its
clients or itself. For example, Leap could create fictional characters, events
(a fictional sports league, for example) or locations (a fictional shopping
mall) that could be used in clients' marketing campaigns. This is similar in
concept to the early days of television when third parties, often advertising
agencies, developed entertainment programs sponsored by agency clients. Leap's
strategy, in contrast to the earlier concept, is to retain ownership of programs
it creates and to use such fictional creations primarily on the World Wide Web,
rather than television. If these fictional characters, events or locations are
developed and prove popular, the Company could license them to sponsors.
Moreover, the Company could create collateral merchandise, such as clothing,
games, and toys, based on these fictional creations. Leap's management believes
that this strategy, over time, could result in the creation of intellectual
property which, if properly utilized, could generate a recurring revenue stream
for the Company.
In March 1997, QLC announced the release of the Quantum Objects Software.
Quantum Objects, Version 1.0, was developed to become a powerful centralized
Internet database which allows editors to input new or revised text into a Web
site by posting the information to the database--and not to specific Web pages.
It will help publishers to maintain or freshen their Web sites more frequently,
easily and cost-effectively since there is no need to create a new Web page to
display the latest information. Metromix, the first commercial application of
Quantum Objects, is an online arts and entertainment guide published by The
Chicago Tribune in an effort to take a leadership position in Web-based content
products. Management believes that over time, the development of proprietary
program material, like Quantum Objects and Metromix, could result in recurring
revenue streams from licensing, advertising, and maintenance.
Pursue Acquisitions and Alliances. The Company expects to pursue
acquisitions of, or alliances with, businesses that extend or complement the
Company's business. The Company may explore acquisitions to obtain additional
top level talent, to supplement its scope of services and technology or to add
to its client roster. To assist the Company in attracting and servicing
international clients, the Company intends to seek out and establish strategic
alliances with international partners who share or expand Leap's core strengths
and services.
Consistent with this strategy, in April 1997, the Company acquired YAR.
With this acquisition, Leap effectively doubles its revenue base, increases its
creative talent by approximately 200, and expands its presence nationally in New
York City and San Francisco, and internationally in Moscow.
Broaden Operations Geographically to Service Clients. In keeping with the
Company's strategy of developing long-term relationships with national-to-global
clients, management intends to expand localized client account management and
support services through cost effective computerized local offices. On January
31, 1997, The Leap Partnership established a new office in Los Angeles,
California, to service local and additional clients on the West Coast. Creative
marketing, advertising and administrative support will be provided by personnel
at the Company's corporate headquarters as management believes that centralized
operations can best preserve Leap's culture, assist creativity and maximize the
operational efficiencies of Leap's structure.
Create the Marketing Multiplier. In its work for clients, Leap applies a
concept it calls the "marketing multiplier." This concept involves the mixing
of advertising, entertainment and technology to increase the opportunities for
delivering brand messages in a fresh way. Ideally, this generates publicity and
public relations opportunities, creates product recognition and makes the
selling message more memorable. Leap seeks to create the "big idea," a
marketing theme which has greater impact as it is translated across multiple
communications channels into advertising, promotions, programming, entertainment
and Internet content. For example, in 1994 Leap created a series of humorous
spots for Miller that followed fictional quarterback Elmer Bruker, a member of
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every winning Super Bowl team who never saw any playing time. Leap wrote a
Bruker biography, created Bruker trading cards and orchestrated promotions and
public relations efforts. The Bruker idea generated "free" publicity and
product recognition that went far beyond the spots themselves. At Super Bowl
1995, network sportscasters interviewed Bruker and fans displayed Bruker
banners. The Company believes that major national-to-global advertisers are
embracing the "marketing multiplier" or "big idea" marketing strategy as a
way to build brand equity on a cost effective basis and that Leap, with its
expertise in developing communications across all platforms and its
relationships with clients and members of the media and entertainment
industries, is well positioned to leverage the multiplier effectively for the
brands it promotes.
LEAP'S SERVICES
Leap focuses on providing integrated marketing and communications services
designed to build brand equity through both traditional and new media. Creative
marketing solutions are generated with the goal of increasing the client's sales
while maximizing return on investment. The Company's solutions are formulated
through an ongoing process of building brand strategy and creating and producing
traditional and new media content.
Strategic Brand Management. Leap focuses on developing a unique selling
proposition for a client or a client's product that builds brand equity and
differentiates the client or product from its competition. The Company creates
integrated marketing communications campaigns using a combination of traditional
and new media techniques designed to leverage marketing multiplier principles.
Leap has an account planning philosophy that places the consumer at the center
of the process, enhancing understanding of consumer needs, motives and
perceptions.
Creative Content Development. Leap develops creative ideas and executions
for delivery through a variety of distribution channels. Leap creates
television, print, radio and outdoor ads; develops logos, packaging, product and
collateral designs; creates promotions; generates design, programming and
content for World Wide Web sites, interactive kiosks and laptop presentations;
and develops entertainment programming.
New Media Production and Services. As part of Leap's integrated marketing
strategy, it generates and provides new media products and services including
designing and programming World Wide Web sites, interactive kiosks, CD-ROMs and
laptop presentations.
Innovative Production. Once strategy and creative content are approved by
clients, Leap produces the work in a manner designed to maintain high standards
of quality and deliver an attractive return on investment. Leap seeks to deliver
innovative solutions that can lower production costs, or provide new media or
new distribution channels for Leap's clients.
COMPETITION
The markets for the Company's services are highly competitive. Clients may
change their marketing and communications advisors with relative ease or perform
these functions themselves. Clients may also reduce or eliminate their
expenditures on advertising and marketing at any time for any reason. The
Company faces competition from a number of sources, all striving to attract new
clients or additional assignments or accounts from existing clients. These
sources include national and regional full-service and specialty advertising
agencies as well as specialized and integrated marketing communications firms.
The Company could also be viewed as competing with large
entertainment/technology/marketing companies. While management believes that
Leap has a technological head start over most traditional agencies, many
agencies have begun to internally develop or acquire new media capabilities
(e.g., corporate identity and packaging, advertising services or World Wide Web
site design), have emerged technically proficient in the new media arena and are
competing with the Company in the interactive advertising market. Many of the
Company's competitors or potential competitors have longer operating histories,
longer client relationships and significantly greater financial, management,
technology, development, sales, marketing and other resources than the Company.
The Company believes that the principal competitive factors in its markets are
the abilities to understand the client's business and develop strategically
sound interactive solutions, present unique creative concepts, demonstrate
breadth and depth of technical and new media expertise, develop strong customer
relationships and produce high quality products with speed and efficiency, and
at a competitive price. The Company believes that it
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competes favorably with respect to each of these factors, due in large part to a
structure that combines the creative talent and other skills of a traditional
advertising agency, as well as access to significant client advertising budgets,
with the technological vision required to convert client budgets into effective
digital, interactive marketing communications. However, there can be no
assurance that the Company will continue to compete successfully. To the extent
that the Company's competitors are perceived as providing superior products,
services or terms, or to the extent that the Company's clients are dissatisfied
with the Company's products, services or terms, the Company's business,
operating results and financial condition could be materially adversely
affected.
CREATIVE PARTNERS
As of January 31, 1997, Leap employed a total of 82 Creative Partners, 75 of
whom were full-time and 7 part-time. Of these, 72 were engaged in servicing
clients and 10 were involved in finance and administration. The acquisition of
YAR in April 1997, added approximately 200 additional employees to the Company.
The Company expects to hire a significant number of Creative Partners in fiscal
1998 to accommodate anticipated growth and expansion. None of the Company's
Creative Partners are represented by a labor union, and the Company believes
that its relations with its Creative Partners are good.
ITEM 2. PROPERTIES.
The Company is headquartered in Chicago and has offices in Los Angeles, New
York, San Francisco, and Moscow. The Company's headquarters are located at 22
W. Hubbard Street, Chicago, Illinois, 60610. The Company's telephone number at
that address is (312) 494-0300.
The Company owns its main office building in Chicago which is a 12,400 square
foot two-story facility. The Company also leases approximately 2,000 square
feet of additional space in Chicago to provide office space for QLC and for
administrative offices.
In March 1997, Leap Partnership entered into an agreement to purchase a 16,480
square foot, three-story commercial office building in Santa Monica, California.
The Company is currently leasing approximately 1,000 square feet of temporary
office space in Santa Monica until the building is available for occupancy.
With the acquisition of YAR in April 1997, the Company added the following
offices around the world: New York City--approximately 26,300 square feet, San
Francisco--approximately 3,100 square feet, and Moscow-- approximately 2,500
square feet.
ITEM 3. 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. The complaint alleges copyright
and persona infringement, statutory and common law unfair competition and unjust
enrichment stemming from the airing of a television commercial created by the
Company for a client. The suit has been referred to the Company's insurance
carrier and legal counsel. The complaint seeks substantial monetary damages. In
an unsolicited demand, the plaintiffs offered to compromise the case in the
amount of $5,750,000. The defendants rejected such offer to settle because of
their belief that the plaintiffs' claims have no merit. The Company continues
to vigorously defend its position. Trial proceedings are tentatively scheduled
to commence on May 6, 1997. It is difficult to ascertain the ultimate outcome
of this litigation. An adverse determination and award of damages not covered
by insurance could have a material adverse effect on the Company's results of
operations, liquidity and consolidated financial position.
The Company is not a party to any other material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Reference is made to the "Common Stock Information" on page 40 of the 1997
Annual Report (hereby incorporated by reference) for this information.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA.
Reference is made to "Financial Highlights" on page 1 and "Selected Financial
Data" on page 40 of the 1997 Annual Report (hereby incorporated by reference)
for this information. This referenced section should be read in conjunction with
the Consolidated Financial Statements and Notes thereto on pages 25 to 38
(hereby incorporated by reference) of the 1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 17 to 24 of the 1997 Annual Report
(hereby incorporated by reference) for this information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, related Notes and Report of Independent
Public Accountants appearing in the 1997 Annual Report on pages 24 to 38, are
incorporated herein by reference:
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets as of January 31, 1997 and 1996
Consolidated Statements of Operations for the Fiscal Years Ended
January 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended January 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with independent auditors on
accounting and financial disclosure.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the 1997 Proxy Statement under the headings "Election of
Directors" and "Executive Compensation and Certain Transactions--Other Executive
Officers" (hereby incorporated by reference) for this information.
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the 1997 Proxy Statement under the heading "Executive
Compensation and Certain Transactions" (hereby incorporated by reference) for
this information.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the 1997 Proxy Statement under the heading "Security
Ownership of Management and Certain Beneficial Owners" (hereby incorporated by
reference) for this information.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the 1997 Proxy Statement under the heading "Executive
Compensation and Certain Transactions" (hereby incorporated by reference) for
this information.
10
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Consolidated Financial Statements--
The following Consolidated Financial Statements and related Notes and Report
of Independent Public Accountants appearing in the 1997 Annual Report, pages
24 to 38, are incorporated herein by reference.
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets as of January 31, 1997 and 1996
Consolidated Statements of Operations for the Fiscal Years Ended
January 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended January 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules--
Are not submitted because they are not required or because the required
information is included in the Consolidated Financial Statements or related
Notes thereto.
3. Exhibits--
The following exhibits are filed with this Report or incorporated by reference
as set forth below.
Exhibit Number Exhibits
-------------- --------
*3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
*3.2 Amended and Restated Bylaws of the Registrant.
*4.1 Specimen Stock Certificate Representing Common Stock.
*10.3 Revolving Credit Agreement, dated October 7, 1996, by and
between the Company and the Union Bank of Switzerland for
a line of credit up to $24,000,000, and related
documentation.
10.4 Revolving Credit Agreement, dated February 18, 1997, by
and between the Company and Manufacturers Bank, for a
line of credit up to $8,000,000, and related
documentation.
**10.8 The Leap Group, Inc. Employee Incentive Compensation
Plan.
**10.9 The Leap Group, Inc. Non-employee Directors' Stock
Option Plan.
11
<PAGE>
**10.10 The Leap Group, Inc. Employee Stock Purchase Plan.
**10.11 The Leap Group, Inc. Amended and Restated 1996 Stock
Option Plan
*10.13 Employment Agreement dated March 12, 1996 by and between
the Company and R. Steven Lutterbach.
*10.14 Employment Agreement dated March 12, 1996 by and between
the Company and Thomas Sharbaugh.
*10.15 Employment Agreement dated March 12, 1996 by and between
the Company and Frederick Smith.
*10.16 Employment Agreement dated March 12, 1996 by and
between the Company and George Gier.
*10.17 Employment Agreement dated March 12, 1996 by and
between the Company and Joseph A. Sciarrotta.
*10.18 Form of Indemnification Agreement.
11. Statement Regarding Computation of Per Share Earnings.
13.1 Common Stock Information from the 1997 Annual Report.
13.2 Selected Financial Data from the 1997 Annual Report.
13.3 Management's Discussion and Analysis of Financial
Condition and Results of Operations.
13.4 Consolidated Financial Statement, Related Notes and
Report of Independent Public Accountants.
21. Subsidiaries of the Registrant.
23. Consent of Arthur Andersen LLP.
27. Financial Data Schedule.
* Previously filed with the Securities and Exchange Commission (the "SEC") as
an Exhibit to the Registrant's Registration Statement on Form S-1 (File No.
333-050501) as amended, and incorporated herein by reference.
** Previously filed with the SEC as an Exhibit to the Registrant's Registration
Statement on Form S-8 (File No. 333-24389), and incorporated herein by
reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1997.
12
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
By: /s/ R. STEVEN LUTTERBACH
------------------------------------
R. STEVEN LUTTERBACH
Chairman and Chief Executive Officer
(principal executive officer)
Date: May 1, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE
CAPACITIES INDICATED ON THE FIRST DAY OF MAY, 1997:
/s/ R. STEVEN LUTTERBACH /s/ PETER VEZMAR
- -------------------------------------- -------------------------------------
R. STEVEN LUTTERBACH PETER VEZMAR
Chairman and Chief Executive Officer Chief Financial Officer
(principal executive officer) (principal financial and accounting
officer)
/s/ FREDERICK R. SMITH /s/ GUY B. DAY
- -------------------------------------- -------------------------------------
FREDERICK R. SMITH GUY B. DAY
Vice Chairman and Chief Operating Director
Officer
/s/ THOMAS R. SHARBAUGH /s/ JOHN KEANE
- -------------------------------------- -------------------------------------
THOMAS R. SHARBAUGH JOHN KEANE
Director and President Director
/s/ GEORGE GIER /s/ THOMAS McELLIGOTT
- -------------------------------------- -------------------------------------
GEORGE GIER THOMAS McELLIGOTT
Director, Chief Marketing and Director
Information Officer and Executive
Vice President
13
<PAGE>
EXHIBIT 10.4
THE LEAP GROUP, INC.
REVOLVING CREDIT AGREEMENT, DATED FEBRUARY 18, 1997,
BY AND BETWEEN THE LEAP GROUP, INC. AND MANUFACTURERS BANK,
FOR A LINE OF CREDIT OF UP TO $8,000,000, AND RELATED DOCUMENTATION.
<PAGE>
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$8,000,000.00 02-18-1997 02-17-1998 30 DD
- ------------------------------------------------------------------------------------------------------------------------------------
Note: References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or item.
- ------------------------------------------------------------------------------------------------------------------------------------
Borrower: The Leap Group, Inc. (TIN: 36-4079500) Lender: Manufacturers Bank
22 West Hubbard St. 1200 North Ashland
Chicago, IL 60610 Chicago, IL 60622
====================================================================================================================================
Principal Amount: $8,000,000.00 Initial Rate: 7.562% Date of Note: February 18, 1997
</TABLE>
PROMISE TO PAY. The Leap Group, Inc. ("Borrower") promises to pay to
Manufacturers Bank ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Eight Million & 00/100 Dollars ($8,000,000.00)
or so much as may be outstanding, together with interest on the unpaid
outstanding principal balance of each advance. Interest shall be calculated from
the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding
principal plus all accrued unpaid interest on February 17, 1998. In addition,
Borrower will pay regular monthly payments of accrued unpaid interest beginning
March 18, 1997, and all subsequent interest payments are due on the same day of
each month after that. Interest on this Note is computed on a 365/360 simple
interest basis; that is, by applying the ratio of the annual interest rate over
a year of 360 days, multiplied by the outstanding principal balance, multiplied
by the actual number of days the principal balance is outstanding. Borrower
will pay Lender at Lender's address shown above or at such other place as Lender
may designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the Three Month
London Interbank Offered Rate (the "Index"). The Index is not necessarily the
lowest rate charged by Lender on its loans if the Index becomes unavailable
during the term of this loan, Lender may designate a substitute index after
notice to Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each first day of each calendar quarter. The Index currently is 5.562% per
annum. The interest rate to be applied to the unpaid principal balance of this
Note will be at a rate of 2.000 percentage points over the Index, resulting in
an initial rate of 7.562% per annum. NOTICE: Under no circumstances will the
interest rate on this Note be more than the maximum rate allowed by applicable
law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $25.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts,
including deposit accounts, with Lender. (g) Any guarantor dies or any of the
other events described in this default section occurs with respect to any
guarantor of this Note. (h) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or performance
of the Indebtedness is impaired. (i) Lender in good faith deems itself insecure.
It any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 6.000
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. This Note has been delivered to
Lender and accepted by Lender in the State of Illinois. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of the
courts of Cook County, the State of Illinois. Lender and Borrower hereby waive
the right to any jury trial in any action, proceeding, or counterclaim brought
by either Lender or Borrower against the other. This Note shall be governed by
and construed in accordance with the laws of the State of Illinois.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however, all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to
<PAGE>
02-18-1997 PROMISSORY NOTE PAGE 2
(CONTINUED)
================================================================================
the extent permitted by applicable law, to charge or setoff all sums owing on
this Note against any and all such accounts.
COLLATERAL. This Note is secured by a Security Agreement covering all Business
Assets of The Leap Group, Inc., located 22 West Hubbard Street, Chicago, IL
60610.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or by an authorized person. All
oral requests shall be confirmed in writing on the day of the request. All
communications, instructions, or directions by telephone or otherwise to Lender
are to be directed to Lender's office shown above. The following party or
parties are authorized to request advances under the line of credit until Lender
receives from Borrower at Lender's address shown above written notice of
revocation of their authority: PETER VEZMAR, CHIEF FINANCIAL OFFICER; R. STEVEN
LUTTERBACH, CHAIRMAN AND CHIEF EXECUTIVE OFFICER; FREDERICK SMITH, VICE CHAIRMAN
AND CHIEF OPERATING OFFICER; GEORGE GIER, EXECUTIVE VICE PRESIDENT; AND JOSEPH
SCIARROTTA, EXECUTIVE VICE PRESIDENT. Borrower agrees to be liable for all sums
either: (a) advanced in accordance with the instructions of an authorized person
or (b) credited to any of Borrower's accounts with Lender. The unpaid principal
balance owing on this Note at any time may be evidenced by endorsements on this
Note or by Lender's internal records, including daily computer print-outs.
Lender will have no obligation to advance funds under this Note if: (a) Borrower
or any guarantor is in default under the terms of this Note or any agreement
that Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; (d) Borrower has applied funds provided pursuant to
this Note for purposes other than those authorized by Lender: or (e) Lender in
good faith deems itself insecure under this Note or any other agreement between
Lender and Borrower.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
The Leap Group, Inc.
By: /S/ Peter Vezmar
-------------------------------------------------------
Peter Vezmar, Chief Financial Officer
By: /S/ Frederick Smith
-------------------------------------------------------
Frederick Smith, Vice Chairman and Chief Operating Officer
================================================================================
<PAGE>
RIDER TO THE LEAP GROUP, INC. NOTE (the "NOTE")
DATED AS OF FEBRUARY 18, 1997, BY AND BETWEEN
THE LEAP GROUP, INC. ("BORROWER") AND MANUFACTURERS BANK ("BANK")
IN THE PRINCIPAL AMOUNT OF $8,000,000.00
The Borrower shall pay all interest on amount outstanding under the Note as
provided herein. Interest shall be payable monthly in arrears, commencing on
February 18, 1997 and continuing on the first day of each month thereafter, with
a final payment of all outstanding amounts due under the Note, including, but
not limited to principal and interest if not sooner paid, on February 17, 1998.
The amounts outstanding from time to time shall bear interest calculated on the
actual number of days elapsed on the basis of a 360 day year, at a rate equal to
the London Interbank Offered Rate ("LIBOR") plus -2- percent (the sum of which
is named Adjusted LIBOR and is defined below).
(a) Adjusted LIBOR shall apply to the outstanding principal balance of the
borrowing under the Note identified by the Borrower to bear interest at Adjusted
LIBOR (as hereinafter defined). For purposes hereof, Adjusted LIBOR shall mean a
rate of interest equal to 2.00% per annum in excess of the per annum rate of
interest at which U.S. dollar deposits in an amount comparable to the
outstanding principal amount of the loan and for a 90 day period on the 1st
business day of January, April, June and October are offered generally by
LaSalle National Bank (rounded upward to the nearest 1/16 of 1.00%) in the
London Interbank Eurodollar market at 11:00 a.m. (London time) two (2) banking
days prior to the commencement of each Interest Period, such rate to remain
fixed until the next interest reset date (approximately one calendar quarter
later). For purposes hereof, "Interest Period" shall mean the three month period
adjusted on the 1st day of each calendar quarter.
The Bank's determination of Adjusted LIBOR as provided above shall be
conclusive, absent manifest error. Furthermore, if the Bank determines, in good
faith (which determination shall be conclusive, absent manifest error) prior to
the commencement of any Interest Period that (a) U.S. dollar deposits of
sufficient amount and maturity for funding this loan are not available to and of
the three (3) largest Chicagoland banks in the London Interbank Eurodollar
market in the ordinary course of business, or (b) by reason of circumstances
affecting the London Interbank Eurodollar market, adequate and fair means do not
exist for ascertaining the rate of interest to the applicable to this loan, the
Bank shall promptly notify the Borrower and such LIBOR loan shall automatically
convert on the last day of its then-current Interest Period to a loan bearing
interest at the Reference Rate.
If, after the date hereof, the introduction of, or any change in any
applicable law, treaty, rule, regulation or guideline or in the interpretation
or administration thereof by any governmental authority or any central bank or
other fiscal, monetary or other authority having jurisdiction over the Bank or
its lending office (a "Regulatory Change"), shall, in the opinion of counsel to
the Bank, make it unlawful for the Bank to make or maintain any LIBOR loan
evidenced hereby, then the Bank shall promptly notify the Borrower and such
LIBOR loan shall automatically convert on the last day of its then-current
interest quarter to a loan bearing interest at the Reference Rate.
If any Regulatory Change (whether or not having the force of law) shall (a)
impose, modify or deem applicable any assessment, reserve, special deposit or
similar requirement against assets held by, or deposits in or for the account of
or loans
1
<PAGE>
by or any other acquisition of funds or disbursements by, the Bank; (b) subject
the Bank or any LIBOR Loan to any tax, duty, charge, stamp tax or fee or change
the basis of taxation of payments to the Bank of principal or interest due from
the Borrower to the Bank hereunder (other than a change in the taxation of the
overall net income of the Bank); or (c)impose on the bank any other condition
regarding such LIBOR loan or the Bank's funding thereof, and the Bank shall
determine (which determination shall be conclusive, absent manifest error) that
the result of the foregoing is to increase the cost to the Bank of making or
maintaining such LIBOR loan or to reduce the amount of principal or interest
received by the Bank hereunder, then the Borrower shall pay the Bank, on demand,
such additional amounts as the Bank shall, from time to time, determine are
sufficient to compensate and indemnify the Bank for such increased cost or
reduced amount.
Interest after maturity (whether by reason of acceleration or otherwise)
shall be paid on the unpaid balance at the rate of the LIBOR Rate plus 2
percent.
DATE: FEBRUARY 18, 1997
MANUFACTURERS BANK THE LEAP GROUP, INC.
an Illinois Banking Corporation
By: /S/ Frederick Smith
--------------------------
By: /S/ Peter Vezmar
--------------------------
Attest:
/S/ Colleen Correra
---------------------
2
<PAGE>
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$8,000,000.00 02-18-1997 02-17-1998 30 DD
- -------------------------------------------------------------------------------------------------------
Note: References in the shaded area are for Lender's use only and
do not limit the applicability of this document to any particular loan or item.
Borrower: The Leap Group, Inc. (TIN: 36-4079500) Lender: Manufacturers Bank
22 West Hubbard St. 1200 North Ashland
Chicago, IL 60610 Chicago, IL 60622
=======================================================================================================
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN THE LEAP GROUP, INC.
(REFERRED TO BELOW AS "GRANTOR"); AND MANUFACTURERS BANK (REFERRED TO BELOW AS
"LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO LENDER A SECURITY
INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT LENDER
SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE COLLATERAL,
IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL
INTANGIBLES
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means The Leap Group, Inc., its successors and
assigns
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the word
"Indebtedness" includes all other obligations, debts and liabilities, plus
interest thereon, of Grantor, or any one or more of them, to Lender, as
well as all claims by Lender against Grantor, or any one or more of them,
whether existing now or later; whether they are voluntary or involuntary,
due or not due, direct or indirect, absolute or contingent, liquidated or
unliquidated; whether Grantor may be liable individually or jointly with
others; whether Grantor may be obligated as guarantor, surety accommodation
party or otherwise; whether recovery upon such indebtedness may be or
hereafter may become barred by any statute of limitations; and whether such
indebtedness may be or hereafter may become otherwise unenforceable.
LENDER. The word "Lender" means Manufacturers Bank, its successors and
assigns.
NOTE. The word "Note" means the note or credit agreement dated February 18,
1997, in the principal amount of $8,000,000.00 from The Leap Group, Inc. to
Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts
held jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by lender. Grantor hereby appoints lender as is irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this agreement.
Lender may at any time, and without further authorization from Grantor,
file a carbon, photographic or other reproduction of any financing
statement or of this agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed
<PAGE>
02-18-1997 COMMERCIAL SECURITY AGREEMENT PAGE 2
(CONTINUED)
================================================================================
business names of Grantor. This is a continuing Security Agreement and will
continue in effect even though all or any part of the Indebtedness is paid
in full and even though for a period of time Grantor may not be indebted to
Lender.
NO VIOLATION. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate of incorporation and bylaws do not prohibit any term or
condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes sub1ect to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract of sale, or for
services theretofore performed by Grantor with or for the account debtor,
there shall be no setoffs or counterclaims against any such account; and no
agreement under which any deductions or discounts may be claimed shall have
been made with the account debtor except those disclosed to Lender in
writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Guarantor shall keep the Collateral (or to the
extent the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled property, Grantor shall not take or permit any action which
would require application for certificates of title for the vehicles
outside the State of Illinois, without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale in
the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall not
pledge, mortgage, encumber or otherwise permit the Collateral to be subject
to any lien, security interest, encumbrance, or charge, other than the
security interest provided for in this Agreement, without the prior written
consent of Lender. This includes security interests even if junior in right
to the security interests granted under this Agreement. Unless waived by
Lender, all proceeds from any disposition of the Collateral (for whatever
reason) shall be held in trust for Lender and shall not be commingled with
any other funds; provided however, this requirement shall not constitute
consent by Lender to any sale or other disposition. Upon receipt, Grantor
shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and equipment,
Grantor shall deliver to Lender, as often as Lender shall require, such
lists, descriptions, and designations of such Collateral as Lender may
require to identify the nature, extent, and location of such Collateral.
Such information shall be submitted for Grantor and each of its
subsidiaries or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801. et
seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
et seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. The terms "hazardous waste" and
"hazardous substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement. This
obligation to indemnity shall survive the payment of the Indebtedness and
the satisfaction of this Agreement.
<PAGE>
02-18-1997 COMMERCIAL SECURITY AGREEMENT PAGE 3
(CONTINUED)
================================================================================
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
canceled or diminished without at least thirty (30) days' prior written
notice to Lender and not including any disclaimer of the insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require.
If Grantor at any time fails to obtain or maintain any insurance as
required under the Agreement, Lender may (but shall not be obligated to)
obtain such insurance as Lender deems appropriate, including if it so
chooses "single interest insurance" which will cover only Lender's interest
in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the payment
of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (C) the amount of the policy; (d) the
property insured; (e) the then-current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f) the expiration date of the policy. In addition, Grantor shall upon
request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the Indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
REINSTATEMENT OF SECURITY INTEREST. If payment is made by Grantor, whether
voluntarily or otherwise, or by guarantor or by any third party, on the
Indebtedness and thereafter Lender is forced to remit the amount of that payment
(a) to Grantor's trustee in bankruptcy or to any similar person under any
federal or state bankruptcy law or law for the relief of debtors, (b) by reason
of any judgment, decree or order of any court or administrative body having
jurisdiction over Lender or any of Lender's property, or (c) by reason of any
settlement or compromise of any claim made by Lender with any claimant
(including without limitation Grantor), the Indebtedness shall be considered
unpaid for the purpose of enforcement of this Agreement and this Agreement shall
continue to be effective or shall be reinstated, as the case may be,
notwithstanding any cancellation of this Agreement or of any note or other
instrument or agreement evidencing the Indebtedness and the Collateral will
continue to secure the amount repaid or recovered to the same extent as if that
amount never had been originally received by Lender, and Grantor shall be bound
by any judgment, decree, order, settlement or compromise relating to the
Indebtedness or to this Agreement.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on
the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
<PAGE>
02-18-1997 COMMERCIAL SECURITY AGREEMENT PAGE 4
(CONTINUED)
================================================================================
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any of Grantor's accounts,
including deposit accounts, with Lender. However, this Event of Default
shall not apply if there is a good faith dispute by Grantor as to the
validity or reasonableness of the claim which is the basis of the creditor
or forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surely bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or
(b), if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Illinois Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without
limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall become a part of the Indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note
rate from date of expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to
be sent; and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to
exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Illinois. If there is a lawsuit, Grantor agrees upon
Lender's request to submit to the jurisdiction of the courts of Cook
County, the State of Illinois. Lender and Grantor hereby waive the right to
any jury trial in any action, proceeding, or counterclaim brought by either
Lender or Grantor against the other. This Agreement shall be governed by
and construed in accordance with the laws of the State of Illinois.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's
<PAGE>
02-18-1997 COMMERCIAL SECURITY AGREEMENT PAGE 5
(CONTINUED)
================================================================================
legal expenses, incurred in connection with the enforcement of this
Agreement. Lender may pay someone else to help enforce this Agreement, and
Grantor shall pay the costs and expenses of such enforcement. Costs and
expenses include Lender's attorneys' fees and legal expenses whether or not
there is a lawsuit, including attorneys' fees and legal expenses for
bankruptcy proceedings (and including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. Grantor also shall pay all court costs and such
additional fees as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Grantor, notice to any Grantor will constitute notice to all Grantors. For
notice purposes, Grantor will keep Lender informed at all times of Grantors
current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the Indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 18,
1997.
GRANTOR:
The Leap Group, Inc.
By: /S/ PETER VEZMAR
-------------------------------------------------------
Peter Vezmar, Chief Financial Officer
By: /S/ FREDERICK SMITH
-------------------------------------------------------
Frederick Smith, Vice Chairman and Chief Operating Officer
LENDER:
Manufacturers Bank
================================================================================
<PAGE>
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$8,000,000.00 02-18-1997 02-17-1998 30 DD
- -------------------------------------------------------------------------------------------------------
Note: References in the shaded area are for Lender's use only and do not limit the applicability of
this document to any particular loan or item.
Borrower: The Leap Group, Inc. (TIN: 36-4079500) Lender: Manufacturers Bank
22 West Hubbard St. 1200 North Ashland
Chicago, IL 60610 Chicago, IL 60622
</TABLE>
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THIS BUSINESS LOAN AGREEMENT between The Leap Group, Inc. ("Borrower") and
Manufacturers Bank ("Lender") is made and executed on the following terms and
conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of February 18, 1997, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full or until February 17, 1998, whichever is later.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as this
Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
BORROWER. The word "Borrower" means The Leap Group, Inc.. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates of
Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
COLLATERAL. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether Borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such Indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such Indebtedness may be or hereafter may become otherwise
unenforceable.
LENDER. The word "Lender" means Manufacturers Bank, its successors and
assigns.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
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02-18-1997 BUSINESS LOAN AGREEMENT PAGE 2
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SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note, (b) Security
Agreements granting to Lender security interests in the Collateral, (c)
Financing Statements perfecting Lender's Security Interests; (d) evidence
of insurance as required below; and (e) any other documents required under
this Agreement or by Lender or its counsel.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Document.
REPRESENTATIONS AND WARRANTIES. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
NO EVENT OF DEFAULT. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants that:
(a) During the period of Borrower's ownership of the properties, there has
been no use, generation, manufacture, storage, treatment, disposal, release
or threatened release of any hazardous waste or substance by any person on,
under, about or from any of the properties. (b) Borrower has no knowledge
of, or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release
of any hazardous waste or substance on, under, about or from the properties
by any prior owners or occupants of any of the properties, or (ii) any
actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant, contractor,
agent or other authorized user of any of the properties shall use,
generate, manufacture, store, treat, dispose of, or release any hazardous
waste or substance on, under, about or from any of the properties; and any
such activity shall be conducted in compliance with all applicable federal,
state, and local laws, regulations, and ordinances, including without
limitation those laws, regulations and ordinances described above. Borrower
authorizes Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any
other person. The representations and warranties contained herein are based
on Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws, and
(b) agrees to indemnity and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which Lender
may directly or indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release occurring
prior to Borrower's ownership or interest in the properties, whether or not
the same was or should have been known to Borrower. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened. and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
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02-18-1997 BUSINESS LOAN AGREEMENT PAGE 3
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Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan. (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 22 West Hubbard St., Chicago, IL 60610. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
SHALL be continuing in nature and shall remain in full force and effect
until such time as Borrower's Indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be canceled or diminished without at
least thirty (30) days' prior written notice to Lender. Each insurance
policy also shall include an endorsement providing that coverage in favor
of Lender will not be impaired in any way by any act, omission or default
of Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then-current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (t) the expiration dale of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES CHARGES AND LIENS. Pay and discharge when due all of its indebtedness
and obligations, including without limitation all assessments, taxes,
governmental charges, levies and liens, of every kind and nature, imposed
upon Borrower or its properties, income, or profits, prior to the date on
which penalties would attach, and all lawful claims that, if unpaid, might
become a lien or charge upon any of Borrower's properties, income, or
profits. Provided however, Borrower will not be required to pay and
discharge any such assessment, tax, charge, levy, lien or claim so long as
(a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, lax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel: conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal Laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
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COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a Subchapter S Corporation
(as defined in the Internal Revenue Code of 1996, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
ADDITIONAL PROVISION. 1). The Leap Group, Inc., must maintain a minimum Book
Net Worth of $35,000,000.00 in order to borrower under the Line of Credit. This
covenant will be tested on a quarterly basis. 2). The Leap Group, Inc., may not
invest more than $1,000,000.00 in any other entity without the prior written
consent of the Bank which shall not be unreasonably withheld.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's accounts, including deposit accounts, with Lender.
However, this Event of Default shall not apply if there is a good faith
dispute by Borrower or Grantor, as the case may be, as to the
<PAGE>
02-18-1997 BUSINESS LOAN AGREEMENT PAGE 5
(Continued)
================================================================================
validity or reasonableness of the claim which is the basis of the creditor
or forfeiture proceeding, and if Borrower or Grantor gives Lender written
notice of the creditor or forfeiture proceeding and furnishes reserves or a
surety bond for the creditor or forfeiture proceeding satisfactory to
Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness. Lender, at its option, may, but
shall not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (12) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to take
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Illinois. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of Cook
County, the State of Illinois. Lender and Borrower hereby waive the right
to any jury trial in any action, proceeding, or counterclaim brought by
either Lender or Borrower against the other. This Agreement shall be
governed by and construed in accordance with the laws of the State of
Illinois.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of any
holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers.
For notice purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall
<PAGE>
02-18-1997 BUSINESS LOAN AGREEMENT PAGE 6
(Continued)
================================================================================
inure to the benefit of Lender, its successors and assigns. Borrower shall
not, however, have the right to assign its rights under this Agreement or
any interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
FEBRUARY 18, 1997.
BORROWER:
THE LEAP GROUP, INC.
By: /s/ Peter Vezmar
-------------------------------------
Peter Vezmar, Chief Financial Officer
By: /s/ Frederick Smith
-------------------------------------
Frederick Smith, Vice Chairman and
Chief Operating Officer
LENDER:
MANUFACTURERS BANK
================================================================================
<PAGE>
COMMERCIAL GUARANTY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
30 DD
- -------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- -------------------------------------------------------------------------------------------
</TABLE>
Borrower: The Leap Group, Inc. (TIN: 36-4079500) Lender: Manufacturers Bank
22 West Hubbard St. 1200 North Ashland
Chicago, IL 60610 Chicago, IL 60622
Guarantor:The Leap Partnership, Inc.
22 West Hubbard St.
Chicago, IL 60610
================================================================================
AMOUNT OF GUARANTY. The amount of this Guaranty Is Unlimited.
CONTINUING UNLIMITED GUARANTY. For good and valuable consideration, The Leap
Partnership, Inc. ("Guarantor") absolutely and unconditionally guarantees and
promises to pay to Manufacturers Bank ("Lender") or its order, in legal tender
of the United States of America, the Indebtedness (as that term is defined
below) of The Leap Group, Inc. ("Borrower") to Lender on the terms and
conditions set forth in this Guaranty. Under this Guaranty, the liability of
Guarantor is unlimited and the obligations of Guarantor are continuing.
DEFINITIONS. The following words shall have the following meanings when used in
this Guaranty:
BORROWER. The word "Borrower" means The Leap Group, Inc..
GUARANTOR. The word "Guarantor" means The Leap Partnership, Inc.
GUARANTY. The word "Guaranty" means this Guaranty made by Guarantor for the
benefit of Lender dated February 18, 1997.
INDEBTEDNESS. The word "Indebtedness" is used in its most comprehensive
sense and means and includes any and all of Borrower's liabilities,
obligations, debts, and indebtedness to Lender, now existing or hereinafter
incurred or created, including, without limitation, all loans, advances,
interest, costs, debts, overdraft indebtedness, credit card indebtedness,
lease obligations, other obligations, and liabilities of Borrower, or any
of them, and any present or future judgments against Borrower, or any of
them; and whether any such Indebtedness is voluntarily or involuntarily
incurred, due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined; whether Borrower may be liable
individually or jointly with others, or primarily or secondarily, or as
guarantor or surety; whether recovery on the Indebtedness may be or may
become barred or unenforceable against Borrower for any reason whatsoever;
and whether the Indebtedness arises from transactions which may be voidable
on account of infancy, insanity, ultra vires, or otherwise.
LENDER. The word "Lender" means Manufacturers Bank, its successors and
assigns.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
NATURE OF GUARANTY. Guarantor's liability under this Guaranty shall be open and
continuous for so long as this Guaranty remains in force. Guarantor intends to
guarantee at all times the performance and prompt payment when due, whether at
maturity or earlier by reason of acceleration or otherwise, of all Indebtedness.
Accordingly, no payments made upon the indebtedness will discharge or diminish
the continuing liability of Guarantor in connection with any remaining portions
of the Indebtedness or any of the Indebtedness which subsequently arises or is
thereafter incurred or contracted.
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness incurred or
contracted before receipt by Lender of any notice of revocation shall have been
fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full. if Guarantor elects to
revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written
notice of revocation must be mailed to Lender, by certified mail, at the
address of Lender listed above or such other place as Lender may designate in
writing. Written revocation of this Guaranty will apply only to advances or new
Indebtedness created after actual receipt by Lender of Guarantor's written
revocation. For this purpose and without limitation, the term "new
Indebtedness" does not include Indebtedness which at the time of notice of
revocation is contingent, unliquidated, undetermined or not due and which later
becomes absolute, liquidated, determined or due. This Guaranty will continue to
bind Guarantor for all Indebtedness incurred by Borrower or committed by Lender
prior to receipt of Guarantor's written notice of revocation, including any
extensions, renewals, substitutions or modifications of the Indebtedness. All
renewals, extensions, substitutions, and modifications of the Indebtedness
granted after Guarantor's revocation, are contemplated under this Guaranty and,
specifically will not be considered to be new Indebtedness. This Guaranty shall
bind the estate of Guarantor as to Indebtedness created both before and after
the death or incapacity of Guarantor, regardless of Lender's actual notice of
Guarantor's death. Subject to the foregoing, Guarantor's executor or
administrator or other legal representative may terminate this Guaranty in the
same manner in which Guarantor might have terminated it and with the same
effect. Release of any other guarantor or termination of any other guaranty of
the Indebtedness shall not affect the liability of Guarantor under this
Guaranty. A revocation received by Lender from any one or more Guarantors shall
not affect the liability of any remaining Guarantors under this Guaranty, it is
anticipated that fluctuations may occur in the aggregate amount of Indebtedness
covered by this Guaranty, and it is specifically acknowledged and agreed by
Guarantor that reductions in the amount of Indebtedness, even to zero dollars
($0.00), prior to written revocation of this Guaranty by Guarantor shall not
constitute a termination of this Guaranty. This Guaranty is binding upon
Guarantor and Guarantor's heirs, successors and assigns so long as any of the
guaranteed indebtedness remains unpaid and even though the Indebtedness
guaranteed may from time to time be zero dollars ($0.00).
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before
or after any revocation hereof, without notice or demand and without lessening
Guarantor's liability under this Guaranty, from time to time: (a) prior to
revocation as set forth above, to make one or more additional secured or
unsecured loans to Borrower, to lease equipment or other goods to Borrower, or
otherwise to extend additional credit to Borrower; (b) to alter, compromise,
renew, extend, accelerate, or otherwise change one or more times the time for
payment or other terms of the Indebtedness or any part of the Indebtedness,
Including increases and decreases of the rate of interest on the Indebtedness;
extensions may be repeated and may be for longer than the original loan term;
(c) to take and hold security for the payment of this Guaranty or the
Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to
perfect, and release any such security, with or without the substitution of new
collateral; (d) to release, substitute, agree not to sue, or deal with any one
or more of Borrower's sureties, endorsers, or other guarantors on any terms or
in any manner Lender may choose; (e) to determine how, when and what application
of payments and credits shall be made on the Indebtedness; (f) to apply such
security and direct the order or manner of sale thereof, including without
limitation, any nonjudicial sale permitted by the terms of the controlling
security agreement or deed of trust, as Lender in its discretion may determine;
(g) to sell, transfer, assign, or grant participations in all or any parts of
the Indebtedness, and (h) to assign or transfer this Guaranty in whole or in
part.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
Lender that (a) no representations or agreements
<PAGE>
02-18-1997 COMMERCIAL GUARANTY PAGE 2
(Continued)
================================================================================
of any kind have been made to Guarantor which would limit or qualify in any way
the terms of this Guaranty; (b) this Guaranty is executed at Borrower's request
and not at the request of Lender; (C) Guarantor has full power, right and
authority to enter into this Guaranty; (d) the provisions of this Guaranty do
not conflict with or result in a default under any agreement or other instrument
binding upon Guarantor and do not result in a violation of any law, regulation,
court decree or order applicable to Guarantor; (e) Guarantor has not and will
not, without the prior written consent of Lender, sell, lease, assign, encumber,
hypothecate, transfer, or otherwise dispose of all or substantially all of
Guarantor's assets, or any interest therein; (f) upon Lender's request,
Guarantor will provide to Lender financial and credit information in form
acceptable to Lender, and all such financial information which currently has
been, and all future financial information which will be provided to Lender is
and will be true and correct in all material respects and fairly present the
financial condition of Guarantor as of the dates the financial information is
provided; (g) no material adverse change has occurred in Guarantor's financial
condition since the date of the most recent financial statements provided to
Lender and no event has occurred which may materially adversely affect
Guarantor's financial condition; (h) no litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid taxes)
against Guarantor is pending or threatened; (i) Lender has made no
representation to Guarantor as to the creditworthiness of Borrower; and U)
Guarantor has established adequate means of obtaining from Borrower on a
continuing basis information regarding Borrower's financial condition. Guarantor
agrees to keep adequately informed from such means of any facts, events, or
circumstances which might in any way affect Guarantor's risks under this
Guaranty, and Guarantor further agrees that, absent a request for information,
Lender shall have no obligation to disclose to Guarantor any information or
documents acquired by Lender in the course of its relationship with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue lending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of Borrower, Lender, any surety, endorser, or other guarantor in
connection with the Indebtedness or in connection with the creation of new or
additional loans or obligations; (c) to resort for payment or to proceed
directly or at once against any person, including Borrower or any other
guarantor; (d) to proceed directly against or exhaust any collateral held by
Lender from Borrower, any other guarantor, or any other person; (e) to give
notice of the terms, time, and place of any public or private sale of personal
property security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any other
remedy within Lender's power; or (g) to commit any act or omission of any kind,
or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
Guarantor also waives any and all rights or defenses arising by reason of (a)
any "one action" or "anti-deficiency" law or any other law which may prevent
Lender from bringing any action, including a claim for deficiency, against
Guarantor, before or after Lender's commencement or completion of any
foreclosure action, either judicially or by exercise of a power of sale; (b) any
election of remedies by Lender which destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower
for reimbursement, including without limitation, any loss of rights Guarantor
may suffer by reason of any law limiting, qualifying, or discharging the
Indebtedness; (c) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the cessation of Borrower's
liability from any cause whatsoever, other than payment in full in legal tender,
of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the
basis of unjustified impairment of any collateral for the Indebtedness; (e) any
statute of limitations, if at any time any action or suit brought by Lender
against Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations; or (f) any
defenses given to guarantors at law or in equity other than actual payment and
performance of the Indebtedness. If payment is made by Borrower, whether
voluntarily or otherwise, or by Guarantor or by any third party, on the
Indebtedness and thereafter Lender is forced to remit the amount of that payment
(a) to Borrower's trustee in bankruptcy or to any similar person under any
federal or state bankruptcy law or law for the relief of debtors, (b) by reason
of any judgment, decree or order of any court or administrative body having
jurisdiction over Lender or any of Lender's property, or (c) by reason of any
settlement or compromise of any claim made by Lender with any claimant
(including without limitation Borrower or Guarantor), the Indebtedness shall be
considered unpaid for the purpose of enforcement of this Guaranty and this
Guaranty shall continue to be effective or shall be reinstated, as the case may
be, notwithstanding any cancellation of this Guaranty or of any note or other
instrument or agreement evidencing the Indebtedness and Guarantor shall remain
liable for the amount repaid or recovered to the same extent as if that amount
never had been originally received by Lender, and Guarantor shall be bound by
any judgment, decree, order, settlement or compromise relating to the
Indebtedness or to this Guaranty.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of setoff,
counterclaim, counter demand, recoupment or similar right, whether such claim,
demand or right may be asserted by the Borrower, the Guarantor, or both.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees
that each of the waivers set forth above is made with Guarantor's full knowledge
of its significance and consequences and that, under the circumstances, the
waivers are reasonable and not contrary to public policy or law. If any such
waiver is determined to be contrary to any applicable law or public policy, such
waiver shall be effective only to the extent permitted by law or public policy.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Guarantor given to Lender by
law, Lender shall have, with respect to Guarantor's obligations to Lender under
this Guaranty and to the extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and Guarantor hereby
assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's
right, title and interest in and to, all deposits, moneys, securities and other
property of Guarantor now or hereafter in the possession of or on deposit with
Lender, whether held in a general or special account or deposit, whether held
jointly with someone else, or whether held for safekeeping or otherwise,
excluding however all IRA, Keogh, and trust accounts. Every such security
interest and right of setoff may be exercised without demand upon or notice to
Guarantor. No security interest or right of setoff shall be deemed to have been
waived by any act or conduct on the part of Lender or by any neglect to exercise
such right of setoff or to enforce such security interest or by any delay in so
doing. Every right of setoff and security interest shall continue in full force
and effect until such right of setoff or security interest is specifically
waived or released by an instrument in writing executed by Lender.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets of
Borrower, through bankruptcy, by an assignment for the benefit of creditors, by
voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, that such assignment shall be effective only for the purpose
of assuring to Lender full payment in legal tender of the Indebtedness. If
Lender so requests, any notes or credit agreements now or hereafter evidencing
any debts or obligations of Borrower to Guarantor shall be marked with a legend
that the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor,
from time to time to execute and file financing statements and continuation
statements and to execute
<PAGE>
02-18-1997 COMMERCIAL GUARANTY PAGE 3
(Continued)
================================================================================
such other documents and to take such other actions as Lender deems necessary or
appropriate to perfect, preserve and enforce its rights under this Guaranty.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
AMENDMENTS. This Guaranty, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Guaranty. No alteration of or amendment to this Guaranty
shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted by
Lender in the State of Illinois. If there is a lawsuit, Guarantor agrees
upon Lender's request to submit to the jurisdiction of the courts of Cook
County, State of Illinois. Lender and Guarantor hereby waive the right to
any jury trial in any action, proceeding, or counterclaim brought by either
Lender or Guarantor against the other. This Guaranty shall be governed by
and construed in accordance with the laws of the State of Illinois.
ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Guaranty.
Lender may pay someone else to help enforce this Guaranty, and Guarantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Guarantor also shall pay all court costs and such additional fees
as may be directed by the court.
NOTICES. All notices required to be given by either party to the other
under this Guaranty shall be in writing, may be sent by telefacsimile, and,
except for revocation notices by Guarantor, shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier, or when deposited in the United States mail, first class postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above or to such other addresses as either party may
designate to the other in writing. All revocation notices by Guarantor
shall be in writing and shall be effective only upon delivery to Lender as
provided above in the section titled "DURATION OF GUARANTY." If there is
more than one Guarantor, notice to any Guarantor will constitute notice to
all Guarantors. For notice purposes, Guarantor agrees to keep Lender
informed at all times of Guarantor's current address.
INTERPRETATION. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall be
deemed to have been used in the plural where the context and construction
so require; and where there is more than one Borrower named in this
Guaranty or when this Guaranty is executed by more than one Guarantor, the
words "Borrower" and "Guarantor" respectively shall mean all and any one or
more of them. The words "Guarantor," "Borrower," and "Lender" include the
heirs, successors, assigns, and transferees of each of them. Caption
headings in this Guaranty are for convenience purposes only and are not to
be used to interpret or define the provisions of this Guaranty. If a court
of competent jurisdiction finds any provision of this Guaranty to be
invalid or unenforceable as to any person or circumstance, such finding
shall not render that provision invalid or unenforceable as to any other
persons or circumstances, and all provisions of this Guaranty in all other
respects shall remain valid and enforceable. If any one or more of Borrower
or Guarantor are corporations or partnerships, it is not necessary for
Lender to inquire into the powers of Borrower or Guarantor or of the
officers, directors, partners, or agents acting or purporting to act on
their behalf, and any Indebtedness made or created in reliance upon the
professed exercise of such powers shall be guaranteed under this Guaranty.
WAIVER. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Guaranty shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Guaranty. No prior waiver by Lender, nor any
course of dealing between Lender and Guarantor, shall constitute a waiver
of any of Lender's rights or of any of Guarantor's obligations as to any
future transactions. Whenever the consent of Lender is required under this
Guaranty, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY
IS DATED FEBRUARY l8, 1997.
GUARANTOR:
THE LEAP PARTNERSHIP, INC.
By: /s/ Peter Vezmar
-------------------------------------------------------------
Peter Vezmar, Chief Financial Officer
By: /s/ Frederick Smith
-------------------------------------------------------------
Frederick Smith, Vice Chairman and Chief Operating Officer
<PAGE>
EXHIBIT 11
THE LEAP GROUP, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Twelve Months Ended January 31, Three Months Ended January 31,
------------------------------- ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average of common
shares outstanding 9,600,000 9,600,000 9,600,000 9,600,000
Effect of options granted
within one year prior to the
Offering, based on the treasury
stock method 192,829 508,680 172,800 508,680
Weighted average of common shares
issued in the Offering 1,333,333 - 4,000,000 -
----------- ----------- ---------- ----------
Total 11,126,162 10,108,680 13,772,800 10,108,680
Net income $ 1,305,931 $ 700,460 $613,454 $1,546
Net income per common share $0.12 $0.07 $0.05 $0.00
</TABLE>
<PAGE>
Exhibit 13.1
The Leap Group, Inc.
Common Stock Information
The Company's common stock is traded on the Nasdaq National Market under the
symbol LEAP. On April 15, 1997, there were 58 holders of record of the Company's
stock. The Company's high and low common stock prices for the last two quarters
since the Company's Initial Public Offering are:
<TABLE>
<CAPTION>
Fiscal 1997 High Low
- -----------------------------------------------
<S> <C> <C>
3rd Quarter (from September 27) $10.50 $6.00
4th Quarter $ 7.63 $5.25
</TABLE>
<PAGE>
Exhibit 13.2
The Leap Group, Inc.
Selected Financial Data
<TABLE>
<CAPTION>
Fiscal Year ended January 31,
------------------------------------------
1997 1996 1995 1994*
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues (000's) $16,088 $8,210 $4,679 $ 373
Net Income/(Loss) (000's) $ 1,306 $ 700 ($1,065) ($ 76)
Earnings (Loss) Per Share $ 0.12 $ 0.07 ($ 0.11) ($0.01)
As of January 31,
------------------------------------------
1997 1996 1995 1994*
- ---------------------------------------------------------------------------
Total Assets (000's) $39,860 $2,053 $2,538 $355
Long-Term Obligations (000's) $ 366 $ 448 $ 420 $ 0
Working Capital (000's) $34,694 ($ 973) $1,515) ($145)
</TABLE>
* For the short period from business inception, September 20, 1993, through
January 31, 1994.
<PAGE>
Exhibit 13.3
The Leap Group, Inc.
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 elsewhere herein.
OVERVIEW
The Leap Group, Inc. ("Leap") is a strategic and creative communication services
company that develops and implements integrated brand marketing campaigns
primarily for market leading clients using traditional and new media.
Traditional marketing services provided by Leap include television, print, radio
and outdoor advertising, promotions, direct mail and package and logo design;
its new media services include digital interactive applications such as World
Wide Web sites, CD-ROMs and interactive presentations. With a wide array of
innovative services and premier marketing, advertising and technical talent and
expertise, Leap is well prepared to continually pursue its central mission to
build brand equity for its clients.
During the fiscal year ended January 31, 1997, and in the few months since then,
The Leap Group, Inc. and its subsidiaries have achieved a number of strategic
milestones:
. Looking back over the three and one-half years of the Company's existence, the
Company has grown to become profitable in its second full year of business
with $8.2 million in revenues and $700,460 in net income during fiscal 1996.
For fiscal 1997, the Company reported record revenues of $16.1 million and
record earnings of $1.3 million.
. The Company grew from four founding partners in September 1993, to 82
employees as of January 31, 1997. Leap's strategy is to recruit the very best
talent available. Despite intense competition for talent, the Company believes
that it has been successful in attracting and retaining superior creative and
strategic thinkers as well as highly skilled programmers and interactive media
developers. Despite the short history of the Company, Leap and its Creative
Partners have achieved international recognition for creative advertising and
have received numerous other accolades and awards.
. In September 1996, Leap raised $40 million in its Initial Public Offering (the
"Offering") of common stock. A portion of the proceeds from the Offering was
used to retire certain obligations of the Company and the balance will provide
added capital to the Company so that it may continue to pursue talent,
products, technologies and potential acquisitions that are complementary to
the Company's business.
. In December 1996, Leap formed a new subsidiary, Quantum Leap Communications,
Inc. ("QLC"). QLC was created to help advertisers communicate more effectively
with targeted consumers in non-traditional ways primarily using new media over
the Internet.
. On January 31, 1997, The Leap Partnership, Inc. opened up a Los Angeles
office. In keeping with the Company's strategy of developing long-term
relationships with national-to-global clients, management broadened the
Company's operations geographically. The office is under the guidance and
direction of an exceptionally talented creative team headed by Creative
Director, Steve Raboski, and Managing Director, Carisa Bianchi.
. In March 1997, QLC announced the release of the Quantum Objects Software.
Quantum Objects, Version 1.0, was developed to become a powerful centralized
Internet database which allows editors to input new or revised text into a Web
site by posting the information to the database - and not to specific Web
pages. It will help
<PAGE>
publishers to maintain or freshen their Web sites more frequently, easily and
cost-effectively since there is no need to create a new Web page to display
the latest information. Management believes that over time, the development of
proprietary program material, like Quantum Objects, could result in a
recurring revenue stream for the Company.
. In April 1997, Leap acquired YAR Communications, Inc. ("YAR"). YAR brings
culturally relevant marketing and advertising expertise in over 40 different
nationalities and for many U.S. ethnic and global markets. For the year ended
December 31, 1996, YAR reported revenues of $18.5 million and pre-tax income
of $2.75 million. In addition, YAR has added approximately 200 Creative
Partners to Leap's pool of talent.
REVENUES
The Company generates its revenues from a variety of sources: fees and retainers
for strategic marketing and creative services, which may include fees based upon
the airing or publication of Company-created material on various media;
production revenues for creative executions, including the communication of
messages through a variety of new media; fixed fees for specific project
assignments; and licensing fees related to licensing of the Company's
proprietary software.
Fees and retainers are established by the Company taking into consideration the
Company's resources and skills which will be applied to generate relevant
strategic solutions for the client's marketing and communication concerns, the
value of Leap's strategic thinking and Leap's ability to produce memorable,
entertaining and effective advertising. The Company structures its compensation
arrangements with clients in several ways to provide for retainers or fees that
integrate such an added-value approach, as well as fees based on a percentage of
media charges or other fixed methodologies. However, certain assignments covered
by fees and retainers have been based upon traditional methodologies which have
included either an estimate of the amount and level of professional expertise
provided by the Company and other committed resources needed to execute a
particular client's engagement or based upon an estimate of the client's
advertising expenditures over certain periods.
The term of written agreements between the Company and its clients generally is
a minimum of six months. However, written agreements typically are terminable by
either the client or the Company on short notice, often 90 days, and in certain
instances less. The Company at times performs services prior to the execution of
written agreements. Revenues, even if predominantly retainer- or project-based,
can vary materially from period to period. The Company's strategy is to focus on
providing expanding ranges and amounts of services to a relatively limited
number of nationally recognized clients. The Company's results of operations
will therefore, by design, be dependent upon the Company's ability to maintain
its relationships with its key clients or to replace clients quickly should the
Company or the client desire to reduce or terminate a relationship. There can be
no assurance that period-to-period fluctuations in operating results will not
occur.
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.
The Company has experienced fluctuations in its revenues since inception, which
are to a significant degree a function of establishing or terminating client
relationships and to a lesser degree a reflection of its mix of fees and
production revenues. The Company has a limited operating history upon which an
evaluation of the Company and its prospects may be based, and the Company has
not identified any particular trends with respect to its historic revenues.
Revenues from fixed fee arrangements, typically in the form of monthly
retainers, are recognized over the period in which services are rendered.
Revenues from production services are recognized as the services are completed.
<PAGE>
Leap's production projects are usually commenced and completed in a short time
period, often less than 60 days. Outside production costs are initially recorded
as costs in excess of billings and are expensed as direct costs and related
expenses at the completion of such services. Revenues earned from fees based
upon third-party media placements are recognized when the Company-created
materials appear on various media in accordance with industry practice. Salaries
and other related general and administrative costs are expensed as incurred.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, operating expenses
and certain other items which are included in the Company's statements of
operations for the fiscal years reflected below. Operating results for any
period are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Operating expenses:
Direct costs and related expenses 55.0 44.1 80.1
Salaries and related expenses 26.4 27.4 34.2
General and administrative expenses 10.0 12.0 15.4
- ------------------------------------------------------------------
Total operating expenses 91.4 83.5 129.7
- ------------------------------------------------------------------
Operating income/(loss) 8.6 16.5 (29.7)
Other income and (expenses), net 2.8 (2.0) (2.2)
- ------------------------------------------------------------------
Income/(loss) before income taxes 11.4 14.5 (31.9)
Income tax (expense)/benefit (3.3) (6.0) 9.1
- ------------------------------------------------------------------
Net income/(loss) 8.1% 8.5% (22.8)%
===================================================================
</TABLE>
Fiscal Year Ended January 31, 1997 Compared to Fiscal Year Ended January 31,
1996
Revenues increased to $16.1 million for fiscal 1997 from $8.2 million for fiscal
1996, an increase of $7.9 million, or 96.0%. The increase is primarily
attributable to a significant increase in fees earned from new and existing
clients during fiscal 1997, despite the Company's resignation from the Miller
Brewing Company account during fiscal 1996. Miller represented approximately
66.4% of the Company's total revenues for fiscal 1996. Excluding Miller,
revenues increased from $2.8 million in fiscal 1996 to $16.1 million in fiscal
1997, an increase of $13.3 million or 475%.
Direct costs and related expenses increased to $8.8 million for fiscal 1997 from
$3.6 million for fiscal 1996, an increase of $5.2 million or 144.3%. This
increase was attributable to increased production activities. Revenues specific
to production activities, however, increased only 91.6% as compared to the
increase in total revenues of 96.0% during fiscal 1997. As a percentage of
production revenues, direct costs and related expenses decreased by
approximately 1.2%, as a result of increased efficiencies and improved margins.
Salaries and related expenses increased to $4.3 million for fiscal 1997 from
$2.2 million for fiscal 1996, an increase of just over $2 million, or 89.2%.
Salaries and related expenses, however, declined as a percentage of revenues
from 27.4% to 26.4%. The increased expenses reflected the addition, in fiscal
1997, of 44 new Creative Partners.
General and administrative expenses increased to $1.6 million for fiscal 1997
from $985,000 for fiscal 1996, an increase of $618,000. The increase is
primarily due to additional expenses associated with increased occupancy costs,
depreciation expense and increased staffing in administrative functions. As a
percentage of revenues, general and administrative expenses declined from 12.0%
in fiscal 1996 to 10.0% in fiscal 1997.
Other income included interest income of $619,000 for the year ended January 31,
1997. The interest income was offset in part by interest expense of $163,000,
resulting in net interest income of $456,000. For the year ended
<PAGE>
January 31, 1996, there was no significant interest income; interest expense
totaled $161,000. The difference in other income and expense for the two periods
resulted from the Company's retirement of debt and investment of the net
proceeds from the Offering in September 1996, offset in part by increased
borrowings prior to receipt of the proceeds.
The combined effective federal and state income tax rates were 29.1% and 41.4%
for fiscal 1997 and 1996, respectively. Income tax expense of $536,000 and
$494,000 is reflected for fiscal 1997 and 1996, respectively, as a result of the
Company generating taxable income during those years. During fiscal 1997, the
Company realized tax benefits from the exclusion of tax-exempt investment income
from state taxable income. Also, the Company generated a net operating loss from
its inception, September 20, 1993, through January 31, 1995 of approximately
$1.6 million. The net operating loss subsequently offset taxable income in both
fiscal 1996 and 1997. The balance of the net operating loss as of January 31,
1996, of approximately $260,000, had been fully reserved, primarily due to the
Company's history of operating losses. As a result of the Company's continued
growth of revenue, earnings and capital resources during fiscal 1997, the
Company reversed the tax valuation allowance. As of January 31, 1997, the
Company's balance of net operating losses is approximately $112,000, which
pursuant to the tax law can be utilized ratably over the next five years.
Fiscal Year Ended January 31, 1996 Compared to Fiscal Year Ended January 31,
1995
Revenues increased to $8.2 million for fiscal 1996 from $4.7 million for fiscal
1995, an increase of $3.5 million, or 74.5%. The increase is primarily
attributable to a significant increase in fees earned from Miller during fiscal
1996, and the remainder is attributable to services provided to new clients and
increased demand for services by existing clients. Miller represented
approximately 66.4% and 63.7% of the Company's total revenues for fiscal 1996
and 1995, respectively. Excluding Miller, revenues increased from $1.7 million
in fiscal 1995 to $2.8 million in fiscal 1996, an increase of $1.1 million or
64.7%.
Direct costs and related expenses decreased to $3.6 million for fiscal 1996 from
$3.7 million for fiscal 1995, a decrease of $100,000 or 2.7%. Approximately
$375,000, or 10.0%, of the direct costs in fiscal 1995 were incurred in
connection with business development activities for which no corresponding
revenues were generated by the Company. Exclusive of these costs, direct costs
increased by approximately $250,000, or 7.4%, from fiscal 1995 to fiscal 1996.
This increase was attributable to an increase in production activities. Revenues
specific to production activities increased approximately 24% in fiscal 1996. As
a percentage of production revenues, direct costs decreased by approximately
11%, as a result of increased efficiencies and improved margins.
Salaries and related expenses increased to $2.2 million for fiscal 1996 from
$1.6 million for fiscal 1995, an increase of $600,000, but declined as a
percentage of revenues from 34.2% to 27.4%. The increased expenses reflected the
addition, in fiscal 1996, of 11 new Creative Partners.
General and administrative expenses increased to $985,000 for fiscal 1996 from
$722,000 for fiscal 1995, an increase of $263,000. The increase is primarily due
to additional expenses associated with increased occupancy costs and increased
staffing in administrative functions. As a percentage of revenues, general and
administrative expenses declined from 15.4% in fiscal 1995 to 12.0% in fiscal
1996.
Interest expense increased to $161,000 for fiscal 1996 from $103,000 for fiscal
1995, an increase of $58,000 or 56.3%. The increase is primarily attributable to
increased borrowings from available bank lines of credit in order to fund the
Company's growth and operations. Interest rates remained relatively constant for
both fiscal 1996 and 1995.
Combined effective federal and state income tax rates were 41.4% and 28.6% for
fiscal 1996 and 1995, respectively. Income tax expense of $494,000 is reflected
for fiscal 1996, as a result of the Company's taxable income during the year. An
income tax benefit of $427,000 is reflected for fiscal 1995, as a result of the
Company's net operating loss during the period. The Company generated a net
operating loss from
<PAGE>
its inception, September 20, 1993, through January 31, 1995 of approximately
$1.6 million. The net operating loss offsets the taxable income generated in
fiscal 1996. The balance of the net operating loss of approximately $260,000 was
fully reserved at January 31, 1996, primarily due to the Company's history of
operating losses.
Fiscal Year Ended January 31, 1995 Compared to Fiscal Year Ended January 31,
1994
The Company's inception was September 20, 1993, and operations commenced during
November 1993. Since less than three months of operations are included in fiscal
1994, comparisons to fiscal 1995 are not meaningful.
During fiscal 1994, the Company's revenues were $373,000 and operating expenses
were $496,000, resulting in a net loss of $123,000. The loss was primarily
attributable to start-up costs incurred in connection with commencing
operations.
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 Offering in late September 1996, the Company raised $35.7 million in cash,
net of underwriting commissions and other Offering costs, of which approximately
$1.3 million was used to repay company debt. 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.
The Company's net working capital increased to $34.7 million at January 31, 1997
from a working capital deficit of $1 million at January 31, 1996. The Company's
cash and cash equivalents increased $32.3 million and $41,000 for the fiscal
years ended January 31, 1997 and 1996, respectively. The increase during fiscal
1997 is primarily due to the $34.4 million received from the net proceeds of the
Initial Public Offering after repayment of substantially all of the Company's
debt. This cash from financing activities is offset by cash used in operations
and in investing activities during fiscal 1997. The $825,000 decrease in cash
from operating activities is primarily attributable to a $4.4 million increase
in accounts receivable which is offset by current year net income of $1.3
million, increases in accounts payable and other liabilities totaling $1.7
million, and a decrease in costs in excess of billings of $400,000. The cash
used in investing activities includes capital expenditures totalling $524,000
and $825,000 in proprietary software development costs. The operating and
investing cash flows reflect the growth in the Company's business operations and
investment activities.
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%. As of January 31, 1997, there was no
outstanding balance. In April 1997, the Company borrowed $20 million under this
facility for the purchase of YAR.
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 the accounts
receivable, equipment and general intangibles 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%.
In March 1997, Leap loaned $1.0 million to Vivid Publishing, Inc., an Internet
production house ("Vivid"), in exchange for a convertible debenture. The
debenture is convertible into 10% of the common stock of Vivid at Leap's option,
and is secured by a pledge of Vivid's common stock. Under the debenture, Leap
may at its option invest up to an additional $1.0 million on substantially the
same terms. As of April 1, 1997, Leap had advanced $318,000 pursuant to this
option. The loans to Vivid bear interest at the prime rate plus 2% per annum.
Also in March 1997, Leap Partnership entered into an agreement to purchase a
commercial office building to provide facilities for its new Los Angeles office.
The estimated purchase price is $2 million, of which $1.4 million will be
<PAGE>
seller financed over a one-year term at 9% with an option to renew the note for
one additional year. The balance of the purchase price will be paid by the
Company.
In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR Communications, Inc. for $20 million. The sellers may also receive
contingent payments if certain revenue and performance goals are achieved for
each of the next three years. In addition, to provide performance incentives,
options to purchase one million shares of Leap's common stock were granted to
YAR's management and employees.
The Company believes that the net proceeds of the Offering, together with
existing credit facilities and any 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, and/or
additional equity or debt offerings. There can be no assurance that the Company
will be able to raise any additional required capital on favorable terms, or at
all.
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.
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 year ended January 31, 1997,
three clients accounted for 25.1%, 23.4%, and 18.9%, respectively, of
consolidated revenues. One client accounted for 66.4% of consolidated revenues
during fiscal 1996, and two clients accounted for 63.7% and 28.4% of
consolidated revenues during fiscal 1995.
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. In December 1995, the Company voluntarily resigned the
Miller Brewing Company account which accounted for 66.4% of the Company's
revenues for the year ended January 31, 1996. In the second half of fiscal 1996,
Miller began to reduce its advertising expenditures on campaigns in which the
Company was involved, which resulted in a significant decline in Leap's revenues
during such period. The Company's management viewed an expansion of Miller's
advertising budget for such campaigns as unlikely and determined that Leap's
resources could be better utilized on other opportunities. The Company therefore
resigned the Miller account in December 1995 in order to pursue other
assignments. During fiscal 1997, the Company fully offset the loss of this
client's revenues and grew revenue by 96%. Excluding revenue attributable to
Miller, revenue from
<PAGE>
other existing clients and new business increased $13.3 million or 475% during
fiscal 1997 as compared to fiscal 1996.
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 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 25.1% of the
Company's revenues for the year ended January 31, 1997, gave the Company a 90-
day notice of termination. Management believes that the loss of the client and
varying effects of seasonality, as described above, will have an impact on the
Company's operations, particularly in the short term. Given the Company's
existing plans to grow the business through the completion of the YAR
acquisition, new business development and its 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. There can be, however, no assurance
that the Company will be able to manage the acquisition successfully or generate
additional revenues in the near term, and any inability to do so may have a
materially adverse effect on the Company's business, financial condition and
operating results.
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," "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, material changes in
economic conditions in the markets served by the Company's clients; competition
in the Company's industry; uncertainties relating to the developing market for
new media; changing technologies; seasonality; costs and uncertainties relating
to establishing new offices and bringing them to profitability; costs and
uncertainties relating to YAR and other acquisitions, including Leap's ability
to successfully manage and integrate the acquired companies; and the Company's
dependence on key clients and projects (as discussed above under "Dependence on
Key Clients and Projects") and key personnel.
<PAGE>
Exhibit 13.4
The Leap Group, Inc.
Consolidated Financial Statements, and Related Notes and
Report of Independent Public Accountants
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of The Leap Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Leap Group,
Inc. (a Delaware corporation) and subsidiaries as of January 31, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31, 1997.
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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Leap Group, Inc.
and subsidiaries as of January 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
March 18, 1997
<PAGE>
The Leap Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 31,
------------------------
1997 1996
----------- ----------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $32,312,749 $ 47,981
Accounts receivable (net of allowance of $30,000
and $0, respectively) 4,793,937 362,388
Costs in excess of billings (net of allowance of
$40,000 and $0, respectively) 218,721 619,660
Deferred income tax asset 64,622
Prepaid expenses 215,174 42,201
----------- ----------
Total current assets 37,605,203 1,072,230
PROPERTY AND EQUIPMENT
Land 158,921 158,921
Building and building improvements 491,900 442,923
Computer equipment 804,534 385,462
Furniture and equipment 259,074 164,521
----------- ----------
1,714,429 1,151,827
Less accumulated depreciation (525,068) (254,454)
----------- ----------
Net property and equipment 1,189,361 897,373
OTHER ASSETS 1,065,048 83,190
----------- ----------
TOTAL ASSETS $39,859,612 $2,052,793
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,834,331 $ 898,133
Accrued expenses 809,939 230,952
Billings in excess of costs 214,264 -
Notes payable to bank - 459,378
Current portion of long-term liabilities 52,066 56,295
Notes payable to officer - 400,000
----------- ----------
Total current liabilities 2,910,600 2,044,758
LONG-TERM LIABILITIES
Deferred income tax liability 294,326 -
Mortgage payable - 381,097
Capital lease obligations 71,999 66,526
----------- ----------
Total long-term liabilities 366,325 447,623
TOTAL LIABILITIES $ 3,276,925 $2,492,381
----------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
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, 13,600,000 and 9,600,000 shares
issued and outstanding as of January 31, 1997
and 1996, respectively 136,000 96,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Additional paid in capital 35,581,344 (95,000)
Retained earnings (accumulated deficit) 865,343 (440,588)
----------- ----------
Total stockholders' equity (deficit) 36,582,687 (439,588)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $39,859,612 $2,052,793
=========== ==========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
<TABLE>
<CAPTION>
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Operations
FISCAL YEAR ENDED JANUARY 31,
-----------------------------------------
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Revenues $16,087,986 $ 8,209,622 $ 4,679,248
Operating expenses:
Direct costs and related expenses 8,847,323 3,622,016 3,749,019
Salaries and related expenses 4,252,019 2,246,963 1,598,047
General and administrative expenses 1,602,644 984,966 722,092
----------- ----------- ------------
Total operating expenses 14,701,986 6,853,945 6,069,158
Operating income/(loss) 1,386,000 1,355,677 (1,389,910)
Other income and (expense), net 456,293 (161,194) (102,699)
----------- ----------- ------------
Income/(loss) before income taxes 1,842,293 1,194,483 (1,492,609)
Income tax (expense)/benefit (536,362) (494,023) 427,300
----------- ----------- ------------
Net income/(loss) $ 1,305,931 $ 700,460 ($ 1,065,309)
=========== =========== ============
Per share data:
Net income/(loss) per share $ 0.12 $ 0.07 $ (0.11)
Shares used in per share computation 11,126,162 10,108,680 10,108,680
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings/ Total
--------------------- Paid In (Accumulated Stockholders'
Shares Amounts Capital Deficit) (Deficit) Equity
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as of February 1, 1994 9,600,000 $ 96,000 ($95,000) ($75,739) ($74,739)
Net loss - - - (1,065,309) (1,065,309)
- ----------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1995 9,600,000 96,000 (95,000) (1,141,048) (1,140,048)
Net income - - - 700,460 700,460
- ----------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1996 9,600,000 96,000 (95,000) (440,588) (439,588)
Issuance of additional shares
for the initial public offering 4,000,000 40,000 35,676,344 - 35,716,344
Net income - - - 1,305,931 1,305,931
- ----------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1997 13,600,000 $136,000 $35,581,344 $ 865,343 $36,582,687
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
---------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income/(loss) $ 1,305,931 $ 700,460 ($1,065,309)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 322,531 169,598 106,930
Deferred income taxes 229,704 477,793 (427,300)
Changes in operating assets and liabilities:
Accounts receivable (4,431,549) 286,369 (555,257)
Costs in excess of billings 400,939 (28,397) (591,263)
Prepaid expenses (172,973) (23,916) 4,103
Other assets (208,775) (27,795) (69,716)
Accounts payable 936,198 (1,102,426) 1,809,400
Accrued expenses 578,987 (34,958) 224,254
Billings in excess of costs 214,264 - -
Income tax payable - (16,230) -
- -------------------------------------------------------------------------------------------------------------
Net Cash (Used in)/Provided by Operating Activities (824,743) 400,498 (564,158)
Cash Flows from Investing Activities:
Capital expenditures (524,241) (241,947) (281,571)
Capitalized software development costs (825,000) - -
- -------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,349,241) (241,947) (281,571)
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 35,716,344 - -
Net borrowings/(repayments) on:
Line of credit (218,356) (722,517) 760,653
Term note (241,022) 241,022 -
Mortgage payable (418,214) (35,790) (25,996)
Note payable to officer (400,000) 400,000 -
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by/(Used in) Financing Activities 34,438,752 (117,285) 734,657
Net Increase/(Decrease) in cash and cash equivalents 32,264,768 41,266 (111,072)
Cash and cash equivalents, at beginning of period 47,981 6,715 117,787
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of period $ 32,312,749 $ 47,981 $ 6,715
Supplementary disclosure of cash paid during the period:
Interest paid $ 163,109 $ 166,898 $ 88,091
Income taxes paid $ 400,056 - -
Supplementary disclosure of noncash investing and financing activities:
Property purchased under mortgage payable - - $ 480,000
Equipment purchased under capital lease obligations $ 38,360 $ 85,704 -
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
The Leap Group, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS
The Leap Group, Inc. and its subsidiaries ("the Company") are strategic and
creative communication services companies that develop and implement integrated
brand marketing campaigns primarily for market leading clients using traditional
and new media.
The Leap Group, Inc. is a Delaware corporation which was incorporated in March
1996 to act as the parent company for three wholly owned subsidiaries - The Leap
Partnership, Inc. ("Leap Partnershi"), an Illinois corporation established in
September 1993; Lilypad Services, Inc. ("Lilypad"), an Illinois corporation
established in September 1995; and Tadpole Productions, Inc. ("Tadpole"), an
Illinois corporation established in September 1995.
The Company is primarily headquartered in Chicago, Illinois. On January 31,
1997, The Leap Partnership, Inc. established a second office in Los Angeles,
California.
In December 1996, the Company formed a new wholly owned subsidiary, Quantum Leap
Communications, Inc. ("QLC"), a Delaware corporation. QLC was formed to develop
distribution systems and to produce content that will help advertisers to
communicate more effectively with targeted consumers in non-traditional ways
primarily using new media over the Internet.
In October 1996, the Company completed its Initial Public Offering (the
"Offering") and issued 4,000,000 shares of its common stock at $10.00 per share.
The Company received proceeds of approximately $35.7 million in cash, net of
underwriting commissions and other Offering costs.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The accompanying Consolidated Financial Statements have been prepared on the
basis that the entities which now comprise the Company were combined at their
inception for financial reporting purposes. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents generally consist of cash, certificates of deposit,
U.S. Treasury Notes and Bills, and other money market instruments with short-
term maturities. These investments are stated at cost, which approximates fair
value, and are also considered cash equivalents for the purposes of reporting
cash flows.
Disclosures About Fair Value of Financial Instruments
- -----------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument held by the Company:
Cash and cash equivalents, trade receivables and trade payables: the carrying
amounts approximate fair value because of the short maturity of these items.
Notes payable to a bank and mortgage payable: due to the floating interest rate
on these obligations, the carrying amounts approximate fair value.
<PAGE>
Property and Equipment
- ----------------------
Property and equipment are stated at cost less accumulated depreciation. Company
policy provides for capitalization of all major expenditures for renewal and
improvements and for current charges to income for repairs and maintenance. The
provision for depreciation has been calculated using straight-line and
accelerated methods over the estimated economic lives of the related assets as
follows:
Building and building improvements 39 years
Computer equipment 3 years
Furniture and equipment 5-7 years
Leasehold improvements are amortized over the lesser of their useful lives or
the remaining term of the related lease.
Purchased Software Costs
- ------------------------
Software that is purchased for use by the Company and has an expected life
greater than one year is capitalized and classified within Other Assets. The
Company has adopted a policy to depreciate these costs over a two-year period
using the straight-line method.
Research and Development Costs
- ------------------------------
Research and development costs are charged to expense as incurred. However, the
costs incurred for the development of computer software that will be sold,
leased or otherwise marketed are capitalized once technological feasibility has
been established. These capitalized costs are subject to an ongoing assessment
of recoverability based upon anticipated future revenues and changes in hardware
and software technologies. Costs that are capitalized include contracted outside
labor, direct labor and related overhead.
Amortization of capitalized software development costs begins when the product
is available for general release. Amortization is provided on a product-by-
product basis using the straight-line method over periods not exceeding three
years. Unamortized capitalized software development costs determined to be in
excess of net realizable value of the product are expensed immediately.
Revenue Recognition
- -------------------
Retainers from fixed fee arrangements, typically in the form of monthly
retainers, are recognized over the period in which services are rendered.
Revenues from production services are recognized as the services are completed.
The Company's production projects are usually commenced and completed in a short
time period, often less than 60 days. Outside production costs are initially
recorded as costs in excess of billings and are expensed as direct costs and
related expenses at completion of such services. Revenue earned from fees based
upon third-party media placements are recognized when the Company-created
materials appear on various media in accordance with industry practice. Salaries
and other related general and administrative costs are expensed as incurred.
Billings in excess of costs are billings received in advance of work performed.
This deferred revenue will be recognized in income as services are provided.
Concentration of Credit and Other Risk
- --------------------------------------
SFAS No. 105, Disclosure of Information about Financial Instruments with Off-
Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk,
requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet items. The
Company attempts to limit its concentration of credit risk by securing clients
which are well-established and credit-worthy advertisers of consumer and
industrial goods and services.
While the Company typically enters into written agreements with its clients, at
times it performs services prior to the execution of such agreements, and
written contracts are typically terminable by either party on short notice,
often 90 days and in certain instances less. Management considers the
relationships with existing clients to be good; however, the loss of any one or
more of the Company's significant clients
<PAGE>
could have a materially adverse effect on the Company's business, financial
condition and results of operations.
<PAGE>
For the year ended January 31, 1997, three clients accounted for 25.1%, 23.4%,
and 18.9%, respectively, of consolidated revenues (refer to Note 13). One client
accounted for approximately 66.4% of consolidated revenues during fiscal 1996,
and two clients accounted for approximately 63.7% and 28.4%, respectively of
consolidated revenues during fiscal 1995.
Income Taxes
- ------------
The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes, which requires recognition of deferred tax assets and liabilities for the
expected future effects of all deductible temporary differences, loss
carryforwards, and tax credit carryforwards. If deemed necessary, deferred tax
assests are reduced by a valuation allowance for the amount of any tax benefits
which are not expected to be realized.
Per Share Data
- --------------
Net income (loss) per common share is computed using the weighted average number
of shares outstanding of common stock and dilutive common equivalent shares from
stock options using the treasury stock method. In accordance with certain
Securities and Exchange Commission (SEC) Staff Accounting Bulletins, such
computations include all common and common equivalent shares issued within 12
months of the Company's Offering date as if they were outstanding for all prior
periods presented using the treasury stock method and the Offering price.
Management's Use of 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 period. Actual results
could differ from those estimates.
Recently Issued Accounting Standards
- ------------------------------------
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123 establishes financial
accounting and reporting standards for stock-based compensation. The Statement
defines a fair value-based method of accounting for an employee stock option or
similar equity instrument. However, it also allows a company to continue to
measure compensation cost for those plans using the intrinsic-value based method
of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Companies electing to continue the accounting in Opinion No. 25 must
make pro forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in the Statement had been applied.
Management of the Company has elected to make the pro forma disclosure as
allowed by SFAS No. 123. Note 7 to the consolidated financial statements
presents the pro forma net income and earnings per share disclosures.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, which the Company adopted in fiscal 1996. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles to be held and used
by the Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. To date, no such events or circumstances have occurred. However,
the Company intends to continue to perform a periodic review of assets for
impairment.
<PAGE>
NOTE 3 - OTHER ASSETS
During fiscal year 1997, the Company recorded approximately $825,000 of
capitalized software development costs as Other Assets in the accompanying
consolidated balance sheet. These costs are being amortized over a three-year
period commencing when the product was available for general release.
Amortization expense related to capitalized software development costs totaled
$22,000 for fiscal 1997.
As of January 31, 1997 and 1996, the Company also recorded $214,000 and
$104,000, respectively, of purchased software costs. It is the Company's policy
to amortize purchased software costs over a two-year period. Amortization
expense related to the purchased software was approximately $58,000 and $28,000
for fiscal years 1997 and 1996, respectively.
NOTE 4 - NOTES PAYABLE TO BANKS
Lines of Credit
- ---------------
On November 1, 1994, the Company entered into a revolving credit agreement with
a bank for a line of credit of up to $1 million. The interest rate on January
31, 1995 (1.5% above the bank's prime lending rate) was 10.5%. The line was
collateralized by all business assets, including a second mortgage on the
Company's commercial real estate, and was guaranteed by certain stockholders of
the Company. On October 26, 1995, all outstanding debt under the line was paid
in full, the agreement was terminated and the mortgage was discharged.
On October 4, 1995, the Company obtained a line of credit with a bank for up to
$1,500,000. On July 5, 1996, the agreement expired and was subsequently extended
through October 31, 1996. The line was collateralized by substantially all of
the Company's general business assets and by the guarantees of certain
stockholders of the Company. At January 31, 1996, $218,000 was outstanding under
such line and was classified as current with interest at 9.5% per annum. In
October 1996, the outstanding balance on this line of credit was repaid with
proceeds from the Offering.
In October 1996, the Company obtained a new line of credit from a bank secured
by collateral cash balances, money market and other cash equivalent instruments
of the Company. The line provides for borrowings up to the lesser of (i) $24
million or (ii) 90-95% of the Company's available cash and cash equivalent
balances, to fund working capital requirements and for other general corporate
purposes of the Company. The interest rate on the loan is LIBOR plus .5%. As of
January 31, 1997, there was no outstanding balance on this line of credit.
Revolving Line and Term Note
- ----------------------------
On October 4, 1995, the Company obtained an additional line of credit for up to
$500,000 to purchase computer and office equipment. The note was secured by all
the computer equipment of the Company and was guaranteed by certain stockholders
of the Company. At January 31, 1996, the outstanding balance was approximately
$241,000 which was classified as current. In October 1996, the debt was retired
with proceeds from the Offering.
Mortgage
- --------
On March 9, 1994, the Company secured a loan for $480,000 to purchase the
building in which the Company's current principal offices are located.
The three-year balloon note bore interest at the rate of 8.5%, payable in
monthly principal and interest installments of $5,995 through March 9, 1997, and
was collateralized by a mortgage on the Company's offices. This loan was
refinanced on May 30, 1996.
<PAGE>
The new loan, which was in the amount of $596,000, bore an interest rate of
prime plus 1%, and was payable in monthly principal and interest installments of
$7,794 through May 2001, with a balloon payment of approximately $360,000 in
June 2001. The loan was secured by a mortgage on the building in which the
Company's current principal offices are located. In October 1996, this loan was
repaid with proceeds from the Offering.
<PAGE>
NOTE 5 - RELATED PARTY TRANSACTIONS
Guarantees of Notes Payable to Banks
- ------------------------------------
As discussed in Note 4, prior to October 7, 1996, substantially all of the
Company's debt had been guaranteed by certain shareholders of the Company. The
Company's existing lines of credit are no longer guaranteed by shareholders, but
are collateralized by the assets of the Company.
Note Payable to Officer
- -----------------------
In February 1995, the Company secured financing from an officer of the Company
to fund additional working capital needs of the Company. The $450,000
installment note bore interest at prime plus 1.5% through October 31, 1996 and
was collateralized by a second mortgage on the Company's principal office
building. In October 1996, this note was repaid with proceeds from the Offering.
NOTE 6 - CAPITAL STOCK
Incorporation
- -------------
On September 20, 1993, The Leap Partnership, Inc. was incorporated in Illinois.
Subsequently, on March 11, 1996, the Company was formed and became the parent to
the wholly owned subsidiaries, Leap Partnership, Lilypad, and Tadpole. In
connection with the formation of the Company, each of the four founding
shareholders of Leap Partnership exchanged their 25 shares of Leap Partnership
common stock for 2,400,000 shares of the Company's common stock. Common stock
and per share amounts have been retroactively restated in the accompanying
financial statements to reflect the effect of the reorganization. The combined
entities have been under common control since inception and have been included
in the consolidated financial statements at historical cost since their
respective dates of inception in a manner similar to a pooling of interests.
The initial certificate of incorporation of the Company authorized 40,000,000
shares of common stock with $.01 par value and 10,000,000 shares of preferred
stock with $.01 par value. On May 29, 1996, the Board of Directors and
Stockholders of the Company approved an amendment to the certificate of
incorporation which increased the total number of authorized shares of common
stock to 100,000,000 and preferred stock to 20,000,000.
NOTE 7 - STOCK COMPENSATION PLANS
1996 Stock Option Plan
- ----------------------
On January 3, 1996, the Board of Directors and Shareholders of The Leap
Partnership, Inc. adopted the 1996 Stock Option Plan (the "1996 Stock Option
Plan''), which was subsequently amended and restated on March 12, 1996, by the
Board of Directors and Stockholders of the Company, whereby certain eligible
employees may be granted options. The 1996 Stock Option Plan allows issuance of
incentive stock options and nonqualified options. The 1996 Stock Option Plan is
administered by the Stock Option Committee of the Board of Directors. The
exercise price of incentive stock options shall not be less than the stock's
intrinsic fair market value on the date of grant. No more shares are available
for grant under this plan as of January 31, 1997.
Employee Incentive Compensation Plan
- ------------------------------------
Effective May 29, 1996, the Company adopted the Employee Incentive Compensation
Plan (the "Incentive Plan''), which permits grants of incentive stock options,
nonqualified stock options, stock appreciation rights, performance shares,
restricted stock, deferred stock and other stock-based awards. The Incentive
<PAGE>
Plan authorizes the issuance of up to 2,000,000 shares of Common Stock in
connection with such awards. Directors, officers, employees and consultants of
the Company are eligible to receive grants under the Incentive Plan.
<PAGE>
Employee Stock Purchase Plan
- ----------------------------
Effective May 29, 1996, the Company's Board of Directors adopted the Employee
Stock Purchase Plan (the "Stock Purchase Plan"), which provides for the
issuance of a maximum of 500,000 shares of Common Stock. Under Section 423 of
the Internal Revenue Code (the "Code"), eligible employees can have earnings
withheld to be used to purchase shares of the Common Stock on specified dates
determined by the Board of Directors up to a maximum of $25,000 per year. The
price of the Common Stock purchased under the Stock Purchase Plan will be equal
to 85% of the lower of the fair market value of the Common Stock on the
commencement date of each offering period or the specified purchase date (in
each case, averaged over the prior ten trading days).
Non-Employee Directors' Stock Option Plan
- -----------------------------------------
On May 29, 1996, the Board of Directors adopted the 1996 Non-Employee Directors'
Stock Option Plan (the "Directors' Plan"). The Directors' Plan provides for the
issuance of up to 200,000 nonstatutory stock options to non-employee directors
of the Company. On the effective date of the Offering, each of the three non-
employee directors were granted immediately exercisable options to purchase
20,000 shares of Common Stock at an exercise price equal to the Initial Public
Offering price. Each person who becomes a non-employee director of the Company
after the date of the Offering will automatically be granted nonstatutory
options to purchase 5,000 shares of Common Stock on the date of such directors'
initial election or appointment to the Board of Directors and on each
anniversary of the initial grant date. Such options shall become exercisable
one year after the date of grant at an exercise price equal to the intrinsic
fair market value of the Common Stock on the date of grant. All options granted
under the Directors' Plan will have a five-year term.
Pro Forma Stock-Based Compensation Disclosures
- ----------------------------------------------
Under various plans, the Company may grant stock options and other awards to key
executives, management and creative personnel. Transactions under the various
stock option plans for the periods indicated were as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
----------------------------
Weighted Average
Outstanding at: Shares Exercise Price
- -------------------------------------------------------------------------
<S> <C> <C>
January 31, 1995 -- --
- -------------------------------------------------------------------------
Granted 504,000 $3.00
Exercised -- --
Canceled -- --
- -------------------------------------------------------------------------
January 31, 1996 504,000 $3.00
- -------------------------------------------------------------------------
Granted 2,086,000 $7.40
Exercised -- --
Canceled -- --
- -------------------------------------------------------------------------
January 31, 1997 2,590,000 $5.96
- -------------------------------------------------------------------------
</TABLE>
<PAGE>
The following table summarizes information about stock options outstanding at
January 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
-------------------------------------- -------------------------
Weighted Average Remaining Average
Exercise Price Shares Exercise Price Term Shares Price
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.00 504,000 $3.00 8.92 181,333 $3.00
$7.00-$10.00 2,086,000 $7.40 9.06 1,507,000 $7.40
- ---------------------------------------------------------------------------------------
2,590,000 $5.96 8.55 1,688,333 $6.93
</TABLE>
The Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its plans.
If the compensation expense for the Company's stock-based compensation plans had
been determined based on the fair value at the grant date consistent with the
requirements of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, then the Company's pro forma net income (loss) and
pro forma net income (loss) per share would have been as indicated below:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss)
As reported $ 1,305,931 $700,460
Pro forma $(4,511,769) $450,995
- -------------------------------------------------------------------------------
Net income (loss) per share
As reported $0.12 $0.07
Pro forma $(0.41) $0.04
- -------------------------------------------------------------------------------
</TABLE>
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Risk-free interest rate 6.78% 6.78%
Expected life 5-10 years 10 years
Expected volatility 75% 75%
Expected dividend yield 0% 0%
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 8 - EMPLOYEE RETIREMENT PLANS
Effective January 1, 1997, the Company adopted a defined contribution plan
established pursuant to Section 401(k) of the Internal Revenue Code. Employees
contribute a percentage of their salaries to the plan, subject to the maximum
IRS prescribed deferral percentage and dollar limitation. The terms of the plan
call for discretionary profit sharing contributions by the Company as determined
annually by the Board of Directors. There were no Company contributions made to
the plan through January 31, 1997. The Company has no other obligations for
post-retirement benefits.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
- -----------------
The Company leases office space, telephones, copiers and other equipment under
operating leases and computer equipment under capital leases. Minimum future
lease payments under these leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Fiscal Year ending January 31, leases leases Totals
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $132,516 $ 65,174 $184,582
1999 28,596 59,733 81,686
2000 26,596 20,086 45,505
2001 3,796 -- 3,796
- -----------------------------------------------------------------------------------------------------
Total future minimum lease payments $191,504 $144,993 $315,569
Less amount representing interest (20,928)
--------
Obligations under capital leases $124,065
Less current portion of capital lease obligation (52,066)
--------
Non-current portion of capital lease obligation $ 71,999
========
</TABLE>
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, (collectively "the Plantiffs") 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. The
complaint alleges copyright and persona infringement, statutory and common law
unfair competition and unjust enrichment stemming from the airing of a
television commercial created by the Company for a client. The suit has been
referred to the Company's insurance carrier and legal counsel. The complaint
seeks substantial monetary damages. In an unsolicited demand, the Plaintiffs
offered to settle the case in the amount of $5,750,000. The Defendants rejected
such offer to settle because of their belief that the Plaintiffs' claims have no
merit. The Company continues to vigorously defend its position. Trial
proceedings are tentatively scheduled to commence on May 6, 1997. It is
difficult to ascertain the ultimate outcome of this litigation. An adverse
determination and award of damages not covered by insurance could have a
material adverse effect on the Company's results of operations, liquidity and
consolidated financial position.
Employment Agreements
- ---------------------
The Company has entered into employment agreements with certain executive
officers of the Company. The agreements expire in March 1999. Three of the
agreements provide for annual base salaries of $200,000 and the other two
agreements provide for annual base salaries of $300,000.
<PAGE>
NOTE 10 - OTHER INCOME AND EXPENSE
Included in Other Income and Expense for the years ended January 31, 1997, 1996
and 1995, is interest income of $619,000, $0 and $0, and interest expense of
$163,000, $161,000, and $103,000, respectively.
NOTE 11 - INCOME TAXES
Income tax expense is calculated according to the provisions of Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes, which
requires the liability method as described in Note 2.
The income tax provisions (benefits) charged to net income are summarized as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
--------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $292,229 $ 16,230 --
Deferred 188,475 406,125 (363,205)
- --------------------------------------------------------------------------------------------------
$480,704 $422,355 $(363,205)
- --------------------------------------------------------------------------------------------------
State:
Current $ 14,429 -- --
Deferred 41,229 71,668 (64,095)
- --------------------------------------------------------------------------------------------------
$ 55,658 $ 71,668 $ (64,095)
- --------------------------------------------------------------------------------------------------
Total Tax Provision (Benefit) $536,362 $494,023 $(427,300)
</TABLE>
The statutory federal income tax rate is reconciled to the Company's effective
income tax rate below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
--------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% (34.0)%
State, net of Federal tax benefit 1.4 4.9 (4.9)
Interest income, exempt from State income taxes (2.2) -- --
Change in valuation allowance (3.2) 1.3 11.4
Other (.9) 1.2 (1.1)
- --------------------------------------------------------------------------------------------------
Effective rate 29.1% 41.4% (28.6)%
</TABLE>
<PAGE>
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
The components of the net current deferred income tax asset are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net operating loss carryforward $ 8,698 $ 103,600 $582,296
Alternative minimum tax credit - 16,230 -
Compensation accruals 16,536 55,598 57,868
Bad debt reserves 27,300 - -
Other reserves 12,088 3,173 -
Less-Valuation allowance - (178,601) (162,371)
- -------------------------------------------------------------------------------
Net current deferred income tax asset $ 64,622 $ - $477,793
</TABLE>
Management recorded a valuation allowance to fully reserve for its net deferred
tax asset at January 31, 1996. This valuation allowance was reversed in fiscal
1997 as a result of expected utilization of the tax asset in future years.
At January 31, 1997 and 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $112,000, to be utilized
ratably over the next five years, and $260,000, respectively.
The components of the net long-term deferred income tax liability are as
follows:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net operating loss carryforward $ 34,792 - -
Deferred depreciation and amortization costs (329,118) - -
- ------------------------------------------------------------------------------
Net long-term deferred income tax liability $(294,326) - -
</TABLE>
Deferred depreciation and amortization includes $363,000 of deferred tax
liabilities related to capitalized software costs.
<PAGE>
NOTE 12 - RESIGNATION FROM SIGNIFICANT CLIENT
In prior years, revenues from one major client represented approximately 66.4%
and 63.7% of the Company's total revenues in fiscal 1996 and 1995, respectively.
In December 1995, the Company resigned the account of this client in order to
pursue other assignments.
NOTE 13 - SUBSEQUENT EVENTS
Line of Credit
- --------------
In February 1997, the Company obtained a new 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 certain assets of the Company,
including accounts receivable, equipment and general intangibles, and provides
for borrowings up to a maximum principal amount of $8 million. The interest rate
on the line is equal to the London Interbank Offered Rate ("LIBOR") plus 2%.
Loan to a Strategic Partner
- ---------------------------
In March 1997, Leap loaned $1.0 million to Vivid Publishing, Inc., an Internet
production house ("Vivid"), in exchange for a convertible debenture. The
debenture is convertible into 10% of the common stock of Vivid at Leap's option,
and is secured by a pledge of Vivid's common stock. Under the debenture, Leap
may at its option invest up to an additional $1.0 million on substantially the
same terms. As of April 1, 1997, Leap had advanced $318,000 pursuant to this
option. The loans to Vivid bear interest at the prime rate plus 2% per annum.
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.
Purchase of Real Estate
- -----------------------
In March 1997, Leap Partnership entered into an agreement to purchase a
commercial office building to provide facilities for its new office in Los
Angeles. $1.4 million of the $2 million purchase price will be seller financed
over a one-year term at 9% with an option to renew the note for one additional
year. The balance of the purchase price will be paid by the Company.
Acquisition
- -----------
In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR Communications, Inc. for $20 million. The sellers may also receive
contingent payments if certain revenue and Performance goals are achieved for
each of the next three years. In addition, to provide performance incentives,
options to purchase one million shares of Leap's common stock were granted to
YAR's management and employees. 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 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.
<PAGE>
EXHIBIT 21
THE LEAP GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
THE LEAP PARTNERSHIP, INC., AN ILLINOIS CORPORATION AND A WHOLLY-OWNED
SUBSIDIARY OF THE REGISTRANT.
LILYPAD SERVICES, INC., AN ILLINOIS CORPORATION AND A WHOLLY-OWNED SUBSIDIARY OF
THE REGISTRANT.
TADPOLE PRODUCTIONS, INC., AN ILLINOIS CORPORATION AND A WHOLLY-OWNED SUBSIDIARY
OF THE REGISTRANT.
QUANTUM LEAP COMMUNICATIONS, INC., A DELAWARE CORPORATION AND A WHOLLY-OWNED
SUBSIDIARY OF THE REGISTRANT.
BAR TV, INC., A DELAWARE CORPORATION AND A WHOLLY-OWNED SUBSIDIARY OF THE
REGISTRANT.
YAR COMMUNICATIONS, INC., A DELAWARE CORPORATION AND A WHOLLY-OWNED SUBSIDIARY
OF THE REGISTRANT.
<PAGE>
EXHIBIT 23
THE LEAP GROUP, INC.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
AS INDEPENDENT PUBLIC ACCOUNTANTS, WE HEREBY CONSENT TO THE INCORPORATION OF OUR
REPORTS INCORPORATED BY REFERENCE IN THIS FORM 10-K, INTO THE COMPANY'S
PREVIOUSLY FILED REGISTRATION STATEMENT ON FORM S-8 (FILE NO. 333-24839)
ARTHUR ANDERSEN LLP
CHICAGO, ILLINOIS
APRIL 30, 1997
<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 1996, the Consolidated
Statements of Operations for each of the three years ended January 31, 1997,
1996 and 1995, and the Consolidated Statements of Cash Flows for each of the
three years ended January 31, 1997, 1996 and 1995 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 32,313
<SECURITIES> 0
<RECEIVABLES> 4,824
<ALLOWANCES> 30
<INVENTORY> 0
<CURRENT-ASSETS> 37,605
<PP&E> 1,714
<DEPRECIATION> (525)
<TOTAL-ASSETS> 39,860
<CURRENT-LIABILITIES> 2,911
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 36,447
<TOTAL-LIABILITY-AND-EQUITY> 39,860
<SALES> 0
<TOTAL-REVENUES> 16,088
<CGS> 0
<TOTAL-COSTS> 8,847
<OTHER-EXPENSES> 5,855
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (456)
<INCOME-PRETAX> 1,842
<INCOME-TAX> 536
<INCOME-CONTINUING> 1,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,306
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
