<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-20835
THE LEAP GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4079500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22 West Hubbard Street, Chicago, Illinois 60610, (312) 494-0300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
N/A
---
(Former Name, Former Address & Former Fiscal Year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Outstanding Shares at
Class September 10, 1998
------------------------------ -----------------------------
Common Stock - $0.01 par value 13,648,866
1
<PAGE>
The Leap Group, Inc.
Form 10-Q
For The Period Ended
July 31, 1998
Index
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets --
July 31, 1998 (Unaudited)
and January 31, 1998 3
Consolidated Statements of Operations --
Three Months and Six Months Ended
July 31, 1998 and 1997 (Unaudited) 5
Consolidated Statements of Cash Flows --
Six Months Ended
July 31, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, January 31,
-------- -----------
1998 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................................. $12,709,007 $ 7,214,261
Accounts receivable (net of allowance of
$779,422 and $859,611, respectively)................................ 4,776,109 6,348,071
Costs in excess of billings (net of allowance of
$10,374 and $85,374, respectively).................................. 2,156,395 951,214
Prepaid expenses...................................................... 309,190 249,203
Refundable income..................................................... 320,000 320,000
Deferred income tax asset............................................. 530,000 530,000
---------- -----------
Total current assets............................................... 20,800,701 15,612,749
---------- -----------
Property and Equipment
Land.................................................................. 158,921 158,921
Building and building improvements.................................... 522,945 504,472
Leasehold improvements................................................ 1,111,036 1,255,062
Computer equipment.................................................... 3,694,230 3,606,318
Furniture and equipment............................................... 1,234,493 1,197,926
----------- -----------
6,721,625 6,722,699
Less accumulated depreciation......................................... (1,945,067) (1,528,867)
----------- -----------
Net property and equipment......................................... 4,776,558 5,193,832
----------- -----------
Other Assets
Building held for sale................................................ - 2,321,689
Intangible assets..................................................... 14,711,376 17,596,464
Deferred income tax asset............................................. 2,351,993 2,430,061
Other assets.......................................................... 985,819 2,899,426
----------- -----------
Other assets....................................................... 18,049,188 25,247,640
----------- -----------
Total Assets............................................................ $43,626,447 $46,054,221
=========== ===========
</TABLE>
3
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, January 31,
----------- -----------
1998 1998
----------- -----------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.................................................................. $ 3,169,312 $ 4,579,435
Accrued expenses.................................................................. 693,562 1,207,237
Accrued restructuring............................................................. 105,983 630,000
Billings in excess of costs....................................................... 1,428,190 394,760
Notes payable..................................................................... 6,617,025 7,613,478
Current portion of long-term liabilities.......................................... 366,843 368,006
----------- -----------
Total current liabilities.................................................... 12,380,915 14,792,916
Long-Term Liabilities
Capital lease obligations......................................................... 235,937 420,591
----------- -----------
Total Liabilities...................................................................... 12,616,852 15,213,507
----------- -----------
Commitments and Contingencies (Note 8 and 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,
13,648,866 and 13,636,866 shares issued and outstanding as of
July 31, 1998 and January 31, 1998, respectively................................. 136,489 136,369
Additional paid in capital........................................................ 35,680,845 35,600,964
Retained earnings................................................................. (4,656,609) (4,745,489)
less cost of 50,000 shares of common stock held in treasury....................... (151,130) (151,130)
----------- -----------
Total Stockholders' Equity................................................... 31,009,595 30,840,714
----------- -----------
Total Liabilities and Stockholders' Equity............................................. $43,626,447 $46,054,221
=========== ===========
</TABLE>
The accompanying notes to the financial statements
are an integral part of these statements.
4
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 31, July 31,
-------- --------
1998 1997 1998 1997
----------- ----------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues........................... $8,990,943 $ 7,572,759 $19,366,006 $12,044,085
Operating expenses:
Direct costs and related
expenses........................ 3,920,284 2,817,582 7,614,831 5,071,026
Salaries and related expenses.... 3,992,063 4,811,052 8,457,854 7,967,916
General and administrative
expenses........................ 2,076,274 2,495,582 4,161,910 3,827,033
---------- ----------- ----------- -----------
Total operating expenses. 9,988,621 10,124,216 20,234,595 16,865,975
---------- ----------- ----------- -----------
Operating loss.................... (997,678) (2,551,457) (868,589) (4,821,890)
Gain on Sale of Building..... 1,154,588 - 1,154,588 -
Interest (expense) /
income, net................. (22,094) (27,408) (119,051) 392,724
---------- ----------- ----------- -----------
Income / (Loss) before
income taxes............. 134,816 (2,578,865) 166,948 (4,429,166)
Income tax (expense) / benefit..... (60,922) 1,022,753 (78,068) 1,722,946
---------- ----------- ----------- -----------
Net income / (loss)................ $ 73,894 $(1,556,112) $ 88,880 $(2,706,220)
========== =========== =========== ===========
Net income / (loss) per share:
Basic............................ $ 0.01 $ (0.11) $ 0.01 $ (0.20)
Diluted.......................... $ 0.01 $ (0.11) $ 0.01 $ (0.20)
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
5
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
----------------
July 31,
--------
1998 1997
------------ -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss)/income .............................................................. $ 88,880 $ (2,706,220)
Adjustments to reconcile net (loss) / income to
net cash used in operating activities:
Depreciation and amortization ............................................... 1,093,718 785,377
Deferred income taxes ....................................................... 78,068 (1,722,946)
Gain on sale of building...................................................... (1,154,588) -
Changes in operating assets and liabilities:
Accounts receivable ........................................................ 1,498,210 2,095,558
Costs in excess of billings ................................................ (1,205,181) 5,425
Prepaid expenses ........................................................... (84,286) (179,721)
Other assets ............................................................... (56,047) (91,942)
Accounts payable ........................................................... (1,678,049) 976,082
Accrued expenses ........................................................... (850,285) (1,238,832)
Billings in excess of costs.................................................. 1,033,430 -
----------- ------------
Net cash used in operating activities............................................ (1,236,130) (2,360,407)
----------- ------------
Cash flows from investing activities:
Acquisition, net of cash ....................................................... - (22,625,455)
Capital expenditures ........................................................... (67,101) (3,153,870)
Capitalized software development costs ......................................... (120,986) (404,933)
Issuance/repayment of notes receivable ......................................... 1,819,770 (2,018,379)
Proceeds from sale of building................................................... 3,476,277 -
Release of escrow monies in connection
with YAR acquisition, net of expenses.......................................... 2,725,186 -
----------- ------------
Net cash provided by/(used in) investing activities.............................. 7,833,146 (28,202,637)
----------- ------------
Cash flows from financing activities:
Net proceeds/(outlays) related to common stock issuance ........................ 79,999 (9,552)
Payments for treasury stock .................................................... - (151,130)
Net borrowings/(repayments) on:
Notes payable and lines of credit .......................................... (1,655,478) 27,968,279
Mortgage payable .......................................................... 659,025 -
Repayment of capital lease financing ...................................... (185,816) (32,587)
----------- ------------
Net cash (used in)/provided by financing activities.............................. (1,102,270) 27,775,010
----------- ------------
Net (decrease) / increase in cash and cash equivalents .......................... 5,494,746 (2,788,034)
Cash and cash equivalents, at beginning of period ............................... 7,214,261 32,312,749
----------- ------------
Cash and cash equivalents, at end of period ..................................... $12,709,007 $ 29,524,715
=========== ============
Supplementary disclosure of cash paid during the period:
Interest paid .................................................................. $ 279,789 $ 369,356
=========== ============
Taxes paid....................................................................... $ 271,400 $ -
=========== ============
Schedule of noncash investing and financing activities:
Equipment purchased under capital lease
obligations ................................................................... $ - $ 842,021
=========== ============
</TABLE>
- -----------
The accompanying notes to the financial statements are an integral part of these
statements.
6
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- Basis of Presentation
The accompanying unaudited consolidated financial statements and related notes
to the consolidated financial statements include the results of The Leap Group,
Inc. (the "Company") and its wholly-owned subsidiaries.
The unaudited consolidated financial statements for the three and six month
periods ended July 31, 1998 and 1997, respectively, reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on May 1, 1998.
The results of operations for the three and six month periods ended July 31,
1998 are not necessarily indicative of the results of operations to be expected
for the entire fiscal year ending January 31, 1999.
NOTE 2 -- Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. SFAS No. 128 changed the methodology of calculating
earnings per share and requires the disclosure of basic earnings per share and
diluted earnings per share. The calculation of basic earnings per share
excludes dilutive common stock equivalents and convertible securities (such as
stock options, warrants and convertible preferred stock) which are included in
the diluted earnings per share calculation under the treasury method.
The Company adopted SFAS No. 128 in fiscal 1998 and has retroactively restated
all periods presented. The weighted average number of common shares used in
determining basic and diluted income (loss) per share attributable to common
stockholders for the three and six months ended July 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
--------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common shares outstanding--Basic 13,640,866 13,581,334 13,644,866 13,595,556
Common stock equivalents 348,802 - . 348,802 - .
---------- ---------- ---------- ----------
Common shares outstanding--Diluted 13,989,668 13,581,334 13,993,668 13,595,556
</TABLE>
NOTE 3 -- Proposed Sale of Various Assets of Certain Subsidiaries
On July 23, 1998, the Company executed a letter of intent with Young & Rubicam,
Inc. ("Y&R"), whereby "Y&R" would acquire substantially all of the assets and
certain liabilities of One World Communications, Inc., a wholly-owned subsidiary
of the Company, including the Kang & Lee operations (as defined in Note 4) and
the AT&T business of YAR (as defined in Note 4) ("Net Assets"). The terms of the
sale have not yet been finalized. Y&R has informed the Company that it will not
go forward with the purchase of the Net Assets until legal matters related to
YAR, as described in Notes 8 and 9, Litigation and Subsequent Events, are
resolved.
7
<PAGE>
NOTE 4 -- Acquisitions
In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR Communications, Inc. ("YAR"). The acquisition was accounted for as a
purchase and, accordingly, the purchase price was allocated to the assets
acquired and the liabilities assumed based upon the fair values at the date of
acquisition.
The excess of the purchase price over the fair values of the net assets acquired
and net liabilities assumed was recorded as goodwill, which is being amortized
on a straight-line basis over 20 years.
The original purchase price was approximately $23.4 million, including
approximately $275,000 of acquisition related costs. Additionally, the purchase
agreement provides for contingent consideration which is payable if YAR meets
certain net income and revenue thresholds during calendar years 1997, 1998 and
1999. Specifically, contingent consideration equal to 50% of the excess of
annual net income targets is payable if and only if YAR also achieves annual
revenue targets, as defined. These thresholds are as follows:
<TABLE>
<CAPTION>
Annual Net Annual Net
Year Income Target Revenue Target
--------------------------------------
<S> <C> <C>
1997 $3,937,500 $22,500,000
1998 $4,725,000 $27,000,000
1999 $5,670,000 $32,400,000
</TABLE>
There was no contingent consideration earned for calendar 1997.
At the time of the acquisition, $3 million of the purchase price was deposited
into escrow. In April 1998, a final determination on the purchase price was
made. The Company received $3 million of escrowed funds on April 30, 1998 which
reduced the purchase price and the amount of recorded goodwill. At July 31,
1998, the amount of goodwill recorded was $14,720,556 less $1,043,268 in
accumulated amortization since the acquisition.
In November 1997, the Company acquired certain property and equipment and the
ongoing business of Kang & Lee Advertising, Inc. and K&L West Advertising, Inc.
(collectively, "Kang & Lee"). The acquisition was accounted for as a purchase.
The purchase price was approximately $1.4 million, which includes approximately
$80,000 of acquisition-related costs. Additionally, the purchase agreement
provides for contingent consideration equal to 40% of Kang & Lee's pre-tax
income for each of the next three years, as defined.
The excess of the purchase price over the fair values of the net assets acquired
and net liabilities assumed was recorded as goodwill, which is being amortized
on a straight-line basis over 20 years. At July 31, 1998, the amount of goodwill
recorded was $1,074,381 less $40,293 in accumulated amortization for the nine
months since the acquisition.
The results of YAR and Kang & Lee have been included in the consolidated
financials since April 1, 1997 and November 1, 1997, respectively. The following
unaudited pro forma results of operations data gives effect to the acquisitions
of YAR and Kang & Lee as if they had occurred on February 1, 1997:
<TABLE>
<CAPTION>
Six Months Ended
Pro Forma Summary (unaudited) July 31, 1997
----------------
<S> <C>
Revenues $ 21,389,863
Net income ($1,212,743)
Net income per share ($0.09)
Shares used in per share computation 13,595,556
</TABLE>
8
<PAGE>
The pro forma results are not necessarily indicative of what would have occurred
had the YAR and Kang & Lee acquisitions been consummated as of February 1, 1997,
nor are they necessarily indicative of future operating results.
NOTE 5 -- Line of Credit
In June 1998, repayment of the Company's outstanding balance on a $5 million
bank line of credit was extended to September 30, 1998. At July 31, 1998,
$1,885,000 was outstanding on this line of credit. The Company's management
believes that the Company has sufficient funds to repay or refinance this
obligation when it comes due.
On June 30, 1998, the Company refinanced $4,073,000 in outstanding debt by
securing an additional $5 million bank line of credit through June 30, 2000. A
certificate of deposit in the amount of $3,779,000, earning interest of 5.3% and
maturing on June 30, 1999, serves as collateral for this line of credit. The
interest rate on the line is 6.75%. At July 31, 1998, $4,073,000 was outstanding
on this line of credit.
NOTE 6 -- Note Receivable from Strategic Partner
In February and March of 1997, the Company loaned $1.7 million to Vivid
Publishing, Inc. ("VPI"), an Internet production house, in exchange for a
convertible debenture. The debenture was convertible into 10% of the common
stock of VPI at the Company's option, and was secured by a pledge of VPI's
common stock. On May 29, 1998, VPI paid the Company approximately $1.9 million,
which represented the entire principal amount of the convertible debenture,
accrued interest and additional amounts for creative and other services.
NOTE 7 -- Sale of Building
On July 17, 1998, the Company sold the building which houses the LA office of
The Leap Partnership, Inc., a wholly-owned subsidiary of the Company. The
building was sold for $3.48 million which resulted in a $1.2 million pre-tax
gain as reported. The sale also generated $2 million in net cash after retiring
$1.4 million of mortgage debt on the building and after payment of all closing
costs.
NOTE 8 -- Litigation
In February 1998, The Leap Partnership, Inc. ("Leap"), filed an action in state
court of Illinois against The Chicago Tribune ("Tribune") seeking damages in
excess of $415,000 for failure to pay the full amount due for the development of
software. In June 1998, the Tribune filed responsive pleadings denying Leap's
claim and filed a counterclaim for $571,000, as a refund of the amount
previously paid by the Tribune to Leap. In July 1998, the parties settled the
case without payment by either party. The case was dismissed in August 1998.
In July 1998, Yuri Radzievsky and Anna Radzievsky filed a Notice of Intent to
Arbitrate (the "Arbitration") with the American Arbitration Association alleging
that the Company and Rayco Group, Inc. (now known as YAR Communications, Inc.
("YAR"), a wholly owned subsidiary of the Company), breached their employment
agreements and the April 1997 Asset Purchase Agreement, whereby YAR acquired
various assets from a company owned by Yuri Radzievsky and Anna Radzievsky. The
Claimants seek an unspecified amount of damages and seek to enjoin the proposed
transaction with Young & Rubicam ("Y&R") (See Note 3), whereby Y&R would acquire
various assets and assume certain liabilities of certain of the Company's
subsidiaries. In August 1998, the Company and YAR filed an action in the Supreme
Court of the State of New York against Yuri Radzievsky and Anna Radzievsky to
stay the Arbitration on the grounds that the matter is not arbitrable. On
September 9, 1998, Yuri Radzievsky and Anna Radzievsky sent a letter to the
American Arbitration Association seeking to withdraw the Arbitration. Management
does not believe that the Arbitration claims have any merit. The parties are
conducting settlement negotiations.
9
<PAGE>
NOTE 9 -- Subsequent Events
Litigation
- ----------
On September 8, 1998, Yuri Radzievsky, Anna Radzievsky and Yurianna, Inc. (the
"plaintiffs") filed an action in the Supreme Court of the State of New York
against the Company, YAR and Y&R seeking declaratory relief that the proposed
transaction with Y&R (see Note 3) constitutes a breach of the April 1997 Asset
Purchase Agreement and the April 1997 employment agreements with Yuri Radzievsky
and Anna Radzievsky. The plaintiffs sought to enjoin the transaction with Y&R,
unspecified compensatory damages, punitive damages, and attorney fees and costs.
On September 14, 1998, the plaintiffs filed a notice to discontinue the action,
a filed copy of which was delivered to the Company. The parties are conducting
settlement negotiations.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's consolidated financial statements, accompanying
notes thereto and other financial information appearing in the Company's Annual
Report on Form 10-K which was filed with the Securities and Exchange Commission
on May 1, 1998.
In reviewing the Company's consolidated financial statements and the discussion
of the Results of Operations that appears below, the following should be taken
into consideration.
In April 1997, the Company acquired YAR Communications, Inc. ("YAR") and in
November 1997, the Company also acquired Kang & Lee Advertising, Inc. and K&L
West Advertising, Inc. (jointly referred to as "Kang & Lee"). Both business
combinations were accounted for using the purchase accounting method. In
accordance with the purchase accounting method, YAR's and Kang & Lee's results
have been included within the Company's results since their respective
acquisition dates of April 1, 1997 and November 1, 1997. As used in the
following discussion, the term "Leap" refers to The Leap Partnership, Inc. and
Quantum Leap Communications, Inc., collectively.
Results of Operations
THREE MONTHS ENDED JULY 31, 1998 AND JULY 31, 1997
Revenues
- --------
Revenues increased to $9.0 million for the three months ended July 31, 1998,
from $7.6 million for the three months ended July 31, 1997, an increase of $1.4
million or 18.7%. The net increase of $1.4 million is primarily due to the
addition of Kang and Lee revenues of approximately $2.8 million offset by a
decrease of approximately $1.3 million in existing business at YAR (See
Dependence on Key Clients and Projects).
Direct Costs and Related Expenses
- ---------------------------------
Direct costs and related expenses generally consist of production costs which
include services such as filming, animation, editing, special effects,
photography and illustrations, artwork, computer design and various related
production services which are generally outsourced, along with contract labor,
talent and other costs related to creative executions which may include
traditional media as well as new technologies and multimedia. Direct costs and
related expenses increased to $3.9 million for the three months ended July 31,
1998 from $2.8 million for the three months ended July 31, 1997, an increase of
$1.1 million or 39.1%. The increase was primarily due to the addition of $1.6
million in Kang and Lee's direct expenses offset by a decrease of approximately
$427,000 for YAR.
Salaries and Related Expenses
- -----------------------------
Salaries and related expenses consist primarily of salaries and wages for
employees, related payroll tax expenses, group medical and dental insurance
coverages and recruiting expenses. Salaries and related expenses decreased to
$4.0 million for the three months ended July 31,1998 from $4.8 million for the
three months ended July 31, 1997, a decrease of $819,000 or 17%. The decrease in
expense reflects in part a reduction of approximately $1.7 million in salaries
and related expenses due to cost cutting measures at Leap and YAR, offset by the
addition of Kang and Lee's 79 employees which represents $894,000 in salaries
and related expenses for the three months ended July 31, 1998.
General and Administrative Expenses
- -----------------------------------
11
<PAGE>
General and administrative expenses include space and facilities expenses,
corporate expenses, depreciation, insurance, legal and accounting fees and
management information system expenses. General and administrative expenses
decreased to $2.1 million for the three months ended July 31, 1998 from $2.5
million for the three months ended July 31, 1997, a decrease of approximately
$419,000 or 16.8%. The decrease is primarily due to reductions in expenses of
YAR and Leap of $823,000 as compared to the prior year quarter, offset by the
addition of Kang and Lee's general and administrative expenses of approximately
$404,000 for the three months ended July 31, 1998.
Other Income and Expense
- ---------------------------
Other income totaled $1.3 million and $437,000 for the three months ended July
31, 1998 and 1997, respectively. The other income was offset in part by interest
expense of $147,000 and $464,000, resulting in net other income of $1.1 million
and expense of $27,000, respectively. The Company incurred interest expense on
debt that totaled approximately $7.2 million as of July 31, 1998, and $28.9
million as of July 31, 1997. Interest income in both periods was generated from
short-term U.S. Treasury Notes, certificates of deposit, and a money market
account.
Income Taxes
- ------------
The combined federal and state effective income tax rates were 45.2% and 39.7%
for the three months ended July 31, 1998 and 1997, respectively. The increase in
the effective tax rate is primarily due to higher state and local tax rates
applied to a higher level of taxable income in those tax jurisdictions. As of
July 31, 1998, the Company has a deferred tax asset of approximately $2,881,993.
At July 31, 1998, no valuation reserve has been provided against deferred tax
assets since, in management's opinion, it is more likely than not that those tax
assets will be realized based on available tax operating loss carrybacks,
expected reversals of taxable temporary differences, and estimates of future
taxable income.
SIX MONTHS ENDED JULY 31, 1998 AND JULY 31, 1997
Revenues
- --------
Revenues increased to $19.4 million for the six months ended July 31, 1998 from
$12.0 million for the six months ended July 31, 1997, an increase of $7.3
million or 60.8%. The net increase of $7.3 million is primarily attributable to
the addition of $5.0 million of Kang and Lee revenues as well as the addition of
$3.2 million of YAR revenues for two additional months in the current fiscal
period and a $1.4 million decrease in revenue at YAR (see Dependence on Key
Clients and Projects) offset by a $500,000 increase in revenues at Leap.
Direct Costs and Related Expenses
- ---------------------------------
Direct costs and related expenses increased to $7.6 million for the six months
ended July 31, 1998 from $5.1 million for the six months ended July 31, 1997, an
increase of $2.5 million or 50%. The increase was primarily attributable to the
addition of $5.0 million of Kang and Lee's direct production expenses as well as
an increase of approximately $1.2 million for the two additional months of YAR
direct expenses in the current period offset by a decrease of $345,000 in YAR
direct expenses and $313,000 of Leap direct epxenses.
12
<PAGE>
Salaries and Related Expenses
- -----------------------------
Salaries and related expenses increased to $8.5 million for the six months ended
July 31, 1998, from $8.0 million for the six months ended July 31, 1997, an
increase of $490,000 or 6.1%. The increase in expense reflects in part the
addition of 79 new employees from Kang and Lee which represents $2.0 million in
salaries and related expenses for the six months ended July 31, 1998 and $1.3
million which represents two additional months of YAR salaries and related
expenses in the current period. The increase due to the addition of the acquired
companies is offset by $2.4 million and $405,000 of cost reductions at Leap and
YAR, respectively, since the prior year.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased to $4.2 million for the six months
ended July 31, 1998 from $3.8 million for the six months ended July 31, 1997, an
increase of $335,000 or 8.8%. The increase is primarily due to the addition of
Kang and Lee's general and administrative expenses of $867,000 and two
additional months of YAR's general and administrative expenses of $602,000
during the six months ended July 31, 1998. The increase due to the addition of
the acquired companies is offset by $841,000 and $294,000 of cost reductions at
Leap and YAR, respectively, during the current year.
Other Income and Expense
- ------------------------
Other income totaled $1.4 million and $872,000 for the six months ended July
31, 1998 and 1997, respectively. The other income was offset in part by
interest expense of $347,000 and $479,000, respectively, resulting in net
other income of $1.0 million and $393,000. The Company incurred interest
expense on debt that totaled approximately $7.2 million and $28.9 million as of
July 31, 1998 and 1997, respectively. Interest income in both periods was
generated from short-term U.S. Treasury Notes, certificates of deposit, and a
money market account.
Income Taxes
- ------------
The combined federal and state effective income tax rates were 46.8% and 38.9%
for the six months ended July 31, 1998 and 1997, respectively. The increase in
the effective tax rate is primarily due to higher state and local tax rates
applied to a higher level of taxable income in those tax jurisdictions. As of
July 31, 1998, the Company has a deferred tax asset of approximately $2,881,993.
At July 31, 1998, no valuation reserve has been provided against deferred tax
assets since, in management's opinion, it is more likely than not that those tax
assets will be realized based on available tax operating loss carrybacks,
expected reversals of taxable temporary differences, and estimates of future
taxable income.
Liquidity and Capital Resources
- -------------------------------
Since its inception, the Company has primarily financed its operations and
investments in property and equipment through cash generated from bank
borrowings, proceeds from the Company's initial public offering, loans from a
Company officer and equipment leases.
At July 31, 1998 the Company had approximately $8.4 million of working capital,
inclusive of $12,709,007 in cash and cash equivalents, compared to working
capital of approximately $820,000 at January 31, 1998. Cash and cash equivalents
increased $5.5 million during the six months ended July 31, 1998, and decreased
$2.8 million during the six months ended July 31, 1997. The increase in cash in
fiscal 1999 is primarily attributable to: (1) the sale of the LA building which
generated $2 million in net cash after the retirement of $1.4 million in
mortgage debt and after payment of all closing costs; and (2) in April 1998, a
final escrow settlement was made in connection with the YAR acquisition and the
Company received $3 million in cash. During the six months ended July 31, 1997,
the decrease in cash and cash equivalents was primarily attributable to (1) an
increase in cash used in operating activities of approximately $2.4 million, (2)
an increase in cash used in investing activities of $28.2 million which is
attributable to the acquisition of YAR, the financing of a strategic partner,
Vivid Publishing, Inc. and expenditures for property, equipment and software
development costs, and (3) an increase in cash provided from financing
activities of $27.8 million secured to fund the acquisition, the opening of a
new
13
<PAGE>
office, the creation of a new subsidiary at that time, Quantum Leap
Communications, Inc., the loan to a strategic partner, and other working capital
requirements.
Effective June 30, 1998, the Company refinanced $4,073,000 in outstanding debt
by securing a $5 million line of credit through June 30, 2000. A certificate of
deposit in the amount of $3,779,000, earning interest of 5.3% and maturing on
June 30, 1999, serves as collateral for this line of credit. The interest rate
on the line is 6.75%. At July 31, 1998, $4,073,000 was outstanding on this line
of credit.
In November 1997, one of the Company's wholly owned subsidiaries obtained an
additional line of credit from a bank to provide working capital financing and
funds for other general corporate purposes of the subsidiary. The line of credit
is secured by substantially all the assets of the subsidiary, and provides for
borrowing up to a maximum principal amount of $5 million through September 30,
1998, at which time the outstanding balance on the line must be paid. The
interest rate on the line is equal to the prime rate. At July 31, 1998,
$1,885,000 was outstanding on this line of credit of which $1.3 million was used
for the acquisition of Kang & Lee.
On February 2, 1998, the Company received proceeds from a loan for $665,000 from
a bank. The three-year balloon note bears interest at the rate of 9%, payable in
monthly principal and interest installments of $5,992 through December 2, 2001,
with a balloon payment of approximately $184,000 in January 2002. The loan is
secured by a mortgage on the building in which the Company's current principal
offices are located and is personally guaranteed by an officer of the Company.
As of July 31, 1998, $659,025 was outstanding on this note.
On April 30,1998, in connection with the YAR acquisition, the Company received
$3 million in cash due to the release of escrowed funds. The funds reduced the
purchase price of the acquisition and the amount of recorded goodwill.
On May 29, 1998, VPI repaid the Company $1.9 million in repayment of amounts
owed to the Company under a convertible debenture, accrued interest, and for
additional creative and other services.
On July 17, 1998, the Company sold the building which houses the LA office of
The Leap Partnership, Inc. The building was sold for $3.48 million and generated
$2 million in cash after retiring $1.4 million of mortgage debt on the building
and after payment of all closing costs.
The Company believes that the existing and future credit facilities, funds from
capital markets, funds from operations, and the cash received as discussed above
will be sufficient to meet the Company's cash requirements for at least the next
twelve months. The Company's 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 seller
financing, institutional financing, issuance of common stock of the Company
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 reasonably
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
14
<PAGE>
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 a strategy, a large portion of the Company's revenues has
been, and is expected to continue to be, concentrated among a relatively limited
number of nationally recognized clients. For the quarter ended July 31, 1998,
one client accounted for 29.6% of consolidated revenues. For the quarter ended
July 31, 1997, the same client accounted for 29.6% of consolidated revenues.
Due to the nature of the advertising business, any of the Company's clients
could at any time in the future, and for any reason, reduce its marketing
budget, after the timing of projects, engage another entity or take in-house all
or part of the business performed by the Company. Even though the Company has
taken steps to add new accounts, diversify its client base, negotiate a greater
percentage of retainer and fixed fee 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.
AT&T Corporation, a major client of both YAR and One World Communications, Inc.
("One World") has recently made across the board reductions in its marketing
programs for calendar 1998 to reduce costs and has indicated that cost control
pressures are likely to continue in the future. The Company is currently
negotiating a definitive agreement to sell various assets of One World and the
AT&T business of YAR to Young & Rubicam (See Note 3). The execution of such
agreement and the consummation of such sale will depend upon the satisfaction of
a number of conditions, including without limitation the resolution of
litigation between the Company and the former owners of YAR (See Item 1). There
can be no assurance that such sale will occur and if such sale does not occur
and AT&T transfers its business to another agency, the business, results of
operations and financial condition of the Company would be materially adversely
affected.
Management believes that the loss of other key clients and varying effects of
seasonality, as described above, could also have an adverse impact on the
Company's business, results of operations and financial condition, particularly
in the short term.
Note Regarding Forward-Looking Statements
This report contains forward-looking statements (within the meaning of the
Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties. When used in this report, the words "anticipate," "believe,"
"estimate," "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 1999 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 Kang & Lee acquisitions and other
acquisitions, including Leap's ability to successfully manage and integrate the
acquired companies; costs and uncertainties relating to the Young & Rubicam
transaction (see Notes 3, 8 and 9 to the Company's financial statements) and the
Company's dependence on key clients and projects (as discussed above under
"Dependence on Key Clients and Projects") and key personnel.
15
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
In February 1998, Venture Direct Worldwide, Inc. filed a lawsuit in
the Supreme Court of New York against an employee of Quantum Leap
Communications (QLC), the Company and QLC. The complaint alleges that
the employee's e-mail response to an e-mail communication from the
plaintiff caused damage to the plaintiff. The Company has received
from the plaintiff a settlement proposal that does not involve a
monetary payment. The Company intends to vigorously defend the suit
and believes that the employee's actions were outside the scope of
employment. The complaint alleges six causes of action, each seeking
ten million dollars plus punitive damages. Management does not believe
that the claims have any merit or that the ultimate outcome of this
matter will have a material adverse impact on the company's financial
position or results of operations.
In February 1998, The Leap Partnership, Inc. ("Leap"), a wholly-owned
subsidiary of the Company, filed an action in state court of Illinois
against The Chicago Tribune ("Tribune") seeking damages in excess of
$415,000 for failure to pay the full amount due for the development of
software. In June 1998, the Tribune filed responsive pleadings denying
Leap's claim and filed a counterclaim for $571,000, as a refund of the
amount previously paid by the Tribune to Leap. In July 1998, the
parties settled the case without payment by either party. The case was
dismissed in August 1998.
In July 1998, Yuri Radzievsky and Anna Radzievsky filed a Notice of
Intent to Arbitrate (the "Arbitration") with the American Arbitration
Association alleging that the Company and Rayco Group, Inc. (now known
as YAR Communication, Inc. ("YAR"), a wholly owned subsidiary of the
Company), breached their employment agreements and the April 1997
Asset Purchase Agreement, whereby YAR acquired various assets from the
company owned by Yuri Radzievsky and Anna Radzievsky. The Claimants
seek an unspecified amount of damages and seek to enjoin the
transaction with Young & Rubicam ("Y&R") (see Note 3), whereby Y&R
would acquire various assets and assume certain liabilities of certain
of the Company's subsidiaries. In August 1998, the Company and YAR
filed an action in the Supreme Court of the State of New York against
Yuri Radzievsky and Anna Radzievsky to stay the Arbitration on the
grounds that the matter is not arbitrable. On September 9, 1998, Yuri
Radzievsky and Anna Radzievsky sent a letter to the American
Arbitration Association seeking to withdraw the Arbitration.
Management does not believe that the Arbitration claims have any
merit. The parties are conducting settlement negotiations.
On September 8, 1998, Yuri Radzievsky, Anna Radzievsky and Yurianna,
Inc. filed an action in the Supreme Court of the State of New York
against the Company, YAR and Young & Rubicam, Inc. ("Y&R") seeking
declaratory relief that the transaction with Y&R, whereby Y&R would
acquire various assets and assume certain liabilities of certain of
the Company's subsidiaries, constitutes a breach of the April 1997
Asset Purchase Agreement and the April 1997 employment agreements with
Yuri Radzievsky and Anna Radzievsky. The plaintiffs sought to enjoin
the transaction with Y&R, unspecified compensatory damages, punitive
damages, and attorney fees and costs. On September 14, 1998, the
plaintiffs filed a notice to discontinue the action, a filed copy of
which was delivered to the Company. The parties are conducting
settlement negotiations.
16
<PAGE>
There are no other significant claims or lawsuits against the Company.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Line of Credit Agreement, dated June 30, 1998, between
Manufacturer's Bank and The Leap Group, Inc.
11. Statement Regarding Computation of Per-Share Earnings
27. Financial Data Schedule
b. Reports on Form 8-K
None
Items 2, 3, 4 And 5 Are Not Applicable And Have Been Omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEAP GROUP, INC.
--------------------
(Registrant)
Date: September 14, 1998 By: /s/ FREDERICK A. SMITH
-----------------------------------
Frederick A. Smith, Chairman and Chief
Executive Officer (principal executive,
financial and accounting officer)
17
<PAGE>
THE LEAP GROUP, INC.
EXHIBIT INDEX
Exhibit
Number Exhibits
------ --------
10.1 Line of Credit Agreement, dated June 30, 1998, between
Manufacturer's Bank and The Leap Group, Inc.
11. Statement Regarding Computation of Per-Share Earnings
27. Financial Data Schedules
<PAGE>
EXHIBIT 10.1
The Leap Group, Inc.
LINE OF CREDIT AGREEMENT,
DATED JUNE 30, 1998,
BETWEEN MANUFACTURER'S BANK
AND THE LEAP GROUP, INC.
<PAGE>
PROMISSORY NOTE
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$5,000,000.00 06-30-1998 06-30-2000 80 DDG
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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)
22 West Hubbard Street
Chicago, Illinois 60610-4606
Lender: Manufacturers Bank
Ashland Banking Facility
1200 North Ashland Avenue
Chicago, Illinois 60622-2298
<TABLE>
===============================================================================================================
<S> <C> <C> <C>
Principal Amount: $5,000,000.00 Interest Rate: 6.750% Date of Note: June 30, 1998
</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 Five Million & 00/100 Dollars ($5,000,000.00)
or so much as may be outstanding, together with interest at the rate of 6.750%
per annum 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 June 30, 2000. In addition, Borrower will
pay regular monthly payments of accrued unpaid interest beginning July 30, 1998,
and all subsequent interest payments are due on the same day of each month after
that. The annual interest rate for this Note is computed on a 365/360 basis;
that is, by applying the ratio of the annual interest at the 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.
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
to 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) 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. (d) 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.
(e) 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. (f) Any guarantor
dies or any of the other events described in this default section occurs with
respect to any guarantor of this Note. (g) A material adverse change occurs in
Borrower's financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired. (h) Lender in good faith deems
itself insecure.
If 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 interest rate on this Note 5.000 percentage points.
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 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 in the State of Illinois.
CONFESSION OF JUDGMENT. Borrower hereby irrevocably authorizes and empowers any
attorney-at-law to appear in any court of record and to confess judgment against
Borrower for the unpaid amount of this Note as evidenced by an affidavit signed
by an officer of Lender setting forth the amount then due, plus attorneys' fees
as provided in the Note, plus costs of suit, and to release all errors, and
waive all rights of appeal. If a copy of this Note, verified by an affidavit,
shall have been filed in the proceeding, it will not be necessary to file the
original as a warrant of attorney. Borrower waives the right to any stay of
execution and the benefit of all exemption laws now or hereafter in effect. No
single exercise of the foregoing warrant and power of confess judgment will be
deemed to exhaust the power, whether or not any such exercise shall be held by
any court to be invalid, voidable, or void; but the power will continue
undiminished and may be exercised from time to time as Lender may elect until
all amount owing on this Note have been paid in full.
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 this Note against any and
all such accounts.
COLLATERAL. This Note is secured by a Manufacturers Bank Certificate of Deposit
Number 5250008917, in possession of the Bank and all renewals, extensions,
substitutions and proceeds thereof.
LINE OF CREDIT. This Note evidence 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: Frederick A. Smith, Chief Executive Officer;
Thomas R. Sharbaugh, Director & President; and Robert C. Bramlette, Secretary.
Borrower agrees to be liable for all
2
<PAGE>
06-30-1998 PROMISSORY NOTE Page 2
(Continued)
================================================================================
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.
INSURANCE. Unless Borrower provides Lender with evidence of the insurance
coverage required by Borrower's agreement with Lender, Lender may purchase
insurance at Borrower's expense to protect Lender's interests in the collateral.
This insurance may, but need not, protect Borrower's interests. The coverage
that Lender purchases may not pay any claim that Borrower makes or any claim
that is made against Borrower in connection with the collateral. Borrower may
later cancel any insurance purchased by Lender, but only after providing Lender
with evidence that Borrower has obtained insurance as required by their
agreement. If Lender purchases insurance for the collateral, Borrower will be
responsible for the costs of that insurance, including interest and any other
charges Lender may impose in connection with the placement of the insurance,
until the effective date of the cancellation or expiration of the insurance. The
costs of the insurance may be added to Borrower's total outstanding balance or
obligation. The costs of the insurance may be more than the cost of insurance
Borrower may be able to obtain on Borrower's own.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE. 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/ FREDERICK A. SMITH
-------------------------------------------
Frederick A. Smith, Chief Executive Officer
================================================================================
Fixed Rate. Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver.
3.24a(c) 1998 CFI ProServices, Inc. All rights reserved [IL-D20 E3.24
LEAPGRO.LN C14.OVL]
3
<PAGE>
ASSIGNMENT OF DEPOSIT ACCOUNT
- --------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral
$5,000,000.00 06-30-1998 06-30-2000 80
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Account Officer Initials
DDG
- --------------------------------------------------------------------------------
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)
22 West Hubbard Street
Chicago, Illinois 60610-4606
Lender: Manufacturers Bank
Ashland Banking Facility
1200 North Ashland Avenue
Chicago, Illinois 60622-2298
================================================================================
THIS ASSIGNMENT OF DEPOSIT ACCOUNT is entered into between The Leap Group, Inc.
(referred to below as "Grantor"); and Manufacturers Bank (referred to below as
"Lender").
ASSIGNMENT. For valuable consideration, Grantor assigns and grants to Lender a
security interest in the Collateral, including without limitation the deposit
accounts described below, 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.
Account. The word "Account" means the deposit account described below in
the definition for "Collateral."
Agreement. The word "Agreement" means this Agreement of Deposit Account, as
this Assignment of Deposit Account may be amended or modified from time to
time, together with all exhibits and schedules attached to this Assignment
of Deposit Account from time to time.
Collateral. The word "Collateral" means the following described deposit
account:
Manufacturers Bank Certificate of Deposit Number 5250008917, in
possession of the Bank and all renewals, extensions, substitutions and
proceeds thereof issued by Lender in an amount not less than
$5,000,000.00
together with (a) all interest, whether now accrued or hereafter accruing;
(b) all additional deposits hereafter made to the Account; (c) any and all
proceeds from the Account; and (d) all renewals, replacements and
substitutions for any of the foregoing.
In addition, the word "Collateral" includes all property of Grantor
(however owned if owned by more than one person), in the possession of
Lender (or in the possession of a third party subject to the control of
Lender), whether existing now or later and whether tangible or intangible
in character, including without limitation each and all of the following:
(a) All property to which Lender acquires title or documents of title.
(b) All property assigned to Lender.
(c) All promissory notes, bills of exchange, stock certificates,
bonds, savings passbooks, time certificates of deposit, insurance
policies, and all other instruments and evidences of an obligation.
(d) All records relating to any of the property described in this
Collateral section, whether in the form of writing, microfilm,
microfiche, or 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 June 30,
1998, in the principal amount of $5,000,000.00 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.
GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With
respect to the Collateral, Grantor represents and warrants to Lender that:
Ownership. Grantor is the lawful owner of the Collateral free and clear of
all loans, liens, encumbrances, and claims except as disclosed to and
accepted by Lender in writing.
Right to Grant Security Interest. Grantor has the full right, power, and
authority to enter into this Agreement and to assign the Collateral to
Lender.
No Further Transfer. Grantor will not sell, assign, encumber, or otherwise
dispose of any of Grantor's rights in the Collateral except as provided in
this Agreement.
No Defaults. There are no defaults relating to the Collateral, and there
are no offsets or counterclaims to the same. Grantor will strictly and
promptly do everything required of Grantor under the terms, conditions,
promises, and agreements contained in or relating to the Collateral.
<PAGE>
06-30-1998 ASSIGNMENT OF DEPOSIT ACCOUNT Page 2
(Continued)
================================================================================
Proceeds. Any and all replacement or renewal certificates, instruments, or
other benefits or proceeds related to the Collateral that are received by
Grantor shall be held by Grantor in trust for Lender and immediately shall
be delivered by Grantor to Lender to be held as part of the Collateral.
LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL. While this
Agreement is in effect, Lender may retain the rights to possession of the
Collateral, together with any and all evidence of the Collateral, such as
certificates or passbooks. This Agreement will remain in effect until (a) there
no longer is any Indebtedness owing to Lender; (b) all other obligations secured
by this Agreement have been fulfilled; and (c) Grantor, in writing, has
requested from Lender a release of this Agreement.
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.
LIMITATIONS ON OBLIGATIONS OF LENDER. Lender shall use ordinary reasonable care
in the physical preservation and custody of any certificate or passbook for the
Collateral but shall have no other obligation to protect the Collateral or its
value. In particular, but without limitation, Lender shall have no
responsibility (a) for the collection or protection of any income on the
Collateral, (b) for the preservation of rights against issuers of the Collateral
or against third persons; (c) for ascertaining any maturities, conversions,
exchanges, offers, tenders, or similar matters relating to the Collateral; nor
(d) for informing the Grantor about any of the above, whether or not Lender has
or is deemed to have knowledge of such matters.
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.
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
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 of
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 of 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
surety 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.
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. Upon the occurrence of an Event of Default, or
at any time thereafter, Lender may exercise any one or more of the following
rights and remedies, in addition to any rights or remedies that may be available
at law, in equity, or otherwise:
Accelerate Indebtedness. Lender may declare all Indebtedness of Grantor to
Lender immediately due and payable, without notice of any kind to Grantor.
Application of Account Proceeds. Lender may obtain all funds in the Account
from the issuer of the Account and apply them to the Indebtedness in the
same manner as if the Account had been issued by Lender. If the Account is
subject to an early withdrawal penalty, that penalty shall be deducted from
the Account before its application to the Indebtedness, whether the Account
is with Lender or some other institution. Any excess funds remaining after
application of the Account proceeds to the Indebtedness will be paid to
Grantor as the interests of Grantor may appear. Grantor agrees, to the
extent permitted by law, to pay any deficiency after application of the
proceeds of the Account to the Indebtedness. Lender also shall have all the
rights of a secured party under the Illinois Uniform Commercial Code, even
if the Account is not otherwise subject to such Code concerning security
interests, and the parties to this Agreement agree that the provisions of
the Code giving rights to a secured party shall nonetheless be a part of
this Agreement.
<PAGE>
06-30-1998 ASSIGNMENT OF DEPOSIT ACCOUNT Page 3
(Continued)
================================================================================
Collect the Collateral. Lender may collect any of the Collateral and, at
Lender's option and to the extent permitted by applicable law, may retain
possession of the Collateral while suing on the Indebtedness.
Sell the Collateral. Lender may sell the Collateral, at Lender's
discretion, as a unit or in parcels, at one or more public or private
sales. Unless the Collateral is perishable or threatens to decline speedily
in value, Lender shall give or mail to Grantor, or any of them, notice at
least ten (10) days in advance of the time and place of public sale, or of
the date after which private sale may be made. Grantor agrees that any
requirement of reasonable notice is satisfied if Lender mails notice by
ordinary mail addressed to Grantor, or any of them, at the last address
Grantor has given Lender in writing. If public sale is held, there shall be
sufficient compliance with all requirements of notice to the public by a
single publication in any newspaper of general circulation in the county
where the Collateral is located, setting forth the time and place of sale
and a brief description of the property to be sold. Lender may be a
purchaser at any public sale.
Register Securities. Lender may register any securities included in the
Collateral in Lender's name and exercise any rights normally incident to
the ownership of securities.
Sell Securities. Lender may sell any securities included in the Collateral
in a manner consistent with applicable federal and state securities laws,
notwithstanding any other provision of this or any other agreement. If,
because of restrictions under such laws, Lender is or believes it is unable
to sell the securities in an open market transaction, Grantor agrees that
(a) Lender shall have no obligation to delay sale until the securities can
be registered, (b) Lender may make a private sale to a single person or
restricted group of persons, even though such sale may result in a price
that is less favorable than might be obtained in an open market
transaction, and (c) such a sale shall be considered commercially
reasonable. If any securities held as Collateral are "restricted
securities" as defined in the Rules of the Securities and Exchange
Commission (such as Regulation D or Rule 144) or state securities
departments under state "Blue Sky" laws, or if Grantor, or any of them (if
more than one), is an affiliate of the issuer of the securities, Grantor
agrees that Grantor will neither sell nor dispose of any securities of such
issuer without obtaining Lender's prior written consent.
Transfer Title. Lender may effect transfer of title upon sale of all or
part of the Collateral. For this purpose, Grantor irrevocably appoints
Lender as its attorney-in-fact to execute endorsements, assignments and
instruments in the name of Grantor and each of them (if more than one) as
shall be necessary or reasonable.
Application of Proceeds. Lender may apply any cash which is part of the
Collateral, or which is received from the collection or sale of the
Collateral, to (a) reimbursement of any expenses, including any costs of
any securities registration, commissions incurred in connection with a
sale, attorney fees as provided below and court costs, whether or not there
is a lawsuit and including any fees on appeal, incurred by Lender in
connection with the collection and sale of such Collateral, and (b) to the
payment of the Indebtedness of Grantor to Lender, with any excess funds to
be paid to Grantor as the interests of Grantor may appear.
Other Rights and Remedies. Lender shall have and may exercise any or all of
the rights and remedies of a secured creditor under the provisions of the
Illinois Uniform Commercial Code, at law, in equity, or otherwise.
Deficiency Judgment. If permitted by applicable law, Lender may obtain a
judgment for any deficiency remaining in the Indebtedness due to Lender
after application of all amounts received from the exercise of the rights
provided in this section.
Cumulative Remedies. All of Lender's rights and remedies, whether evidenced
by this Agreement 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, 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 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.
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 (unless otherwise required
by law), 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 Grantor's 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.
<PAGE>
06-30-1998 ASSIGNMENT OF DEPOSIT ACCOUNT Page 4
(Continued)
================================================================================
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 ASSIGNMENT OF
DEPOSIT ACCOUNT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 30, 1998.
GRANTOR:
The Leap Group, Inc.
By: /s/ Frederick A. Smith
-------------------------------------------
Frederick A. Smith, Chief Executive Officer
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.24a(c) 1998 CFI ProServices, Inc.
All rights reserved. (IL-E90 E3.24 F3.24 LEAPGRO.LN C14.OVL)
<PAGE>
EXHIBIT 11
THE LEAP GROUP, INC.
STATEMENT REGARDING COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
-------------------------------- ---------------------------------
1998 1997 1998 1997
------------ -------------- ----------------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 73,894 $(1,556,112) $ 88,880 $(2,706,220)
Weighted average number of common
shares outstanding during period 13,640,866 13,614,667 13,644,866 13,612,223
Net shares issuable upon exercise
of dilutive outstanding stock options 348,802 - 348,802 -
----------- ----------- ----------- -----------
Shares used in Diluted per share
calculation 13,989,668 13,614,667 13,993,668 13,612,223
Basic earnings per common share $ 0.01 $ (0.11) $ 0.01 ($0.20)
Diluted earnings per common share $ 0.01 $ (0.11) $ 0.01 ($0.20)
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheets as of July 31, 1998 and January 31, 1998, the
Consolidated Statements of Operations for the Six Months ended July 31, 1998 and
1997, and the Consolidated Statements of Cash Flows for the Six Months ended
July 31, 1998 and 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 12,709
<SECURITIES> 0
<RECEIVABLES> 5,556
<ALLOWANCES> (779)
<INVENTORY> 0
<CURRENT-ASSETS> 20,801
<PP&E> 6,722
<DEPRECIATION> (1,945)
<TOTAL-ASSETS> 43,626
<CURRENT-LIABILITIES> 12,381
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 30,873
<TOTAL-LIABILITY-AND-EQUITY> 43,626
<SALES> 0
<TOTAL-REVENUES> 8,991
<CGS> 0
<TOTAL-COSTS> 3,920
<OTHER-EXPENSES> 6,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147
<INCOME-PRETAX> 135
<INCOME-TAX> 61
<INCOME-CONTINUING> 74
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74
<EPS-PRIMARY> $0.01
<EPS-DILUTED> $0.01
</TABLE>
