<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 April 30, 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.
<TABLE>
<CAPTION>
Outstanding Shares at
Class June 12, 1998
- ------------------------------ ---------------------
<S> <C>
Common Stock - $0.01 par value 13,598,866
</TABLE>
1
<PAGE>
The Leap Group, Inc.
Form 10-Q
for the period ended
April 30, 1998
Index
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets --
April 30, 1998 (Unaudited)
and January 31, 1998 3
Consolidated Statements of Operations --
Three Months Ended
April 30, 1998 and 1997 (Unaudited) 5
Consolidated Statements of Cash Flows --
Three Months Ended
April 30, 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 10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
--------- -----------
1998 1998
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................................. $ 9,444,516 $ 7,214,261
Accounts receivable (net of allowance of
$869,422 and $859,611, respectively)................................ 5,478,817 6,348,071
Costs in excess of billings (net of allowance of
$10,374 and $85,374, respectively).................................. 1,648,167 951,214
Note receivable (Note 6).............................................. 1,758,493 1,629,000
Prepaid expenses...................................................... 242,635 249,203
Refundable income taxes............................................... 320,000 320,000
Deferred income tax asset............................................. 530,000 530,000
----------- -----------
Total current assets............................................... 19,422,628 17,241,749
----------- -----------
Property and Equipment
Land.................................................................. 158,921 158,921
Building and building improvements.................................... 537,435 504,472
Leasehold improvements................................................ 1,065,605 1,255,062
Computer equipment.................................................... 3,592,139 3,606,318
Furniture and equipment............................................... 1,204,374 1,197,926
----------- -----------
6,558,471 6,722,699
Less accumulated depreciation......................................... (1,720,502) (1,528,867)
----------- -----------
Net property and equipment......................................... 4,837,969 5,193,832
----------- -----------
Other Assets
Building held for sale................................................ 2,321,689 2,321,689
Intangible assets..................................................... 14,873,564 17,596,464
Deferred income tax asset............................................. 2,412,915 2,430,061
Other assets.......................................................... 1,057,632 1,270,426
----------- -----------
Total other assets................................................. 20,665,800 23,618,640
----------- -----------
Total Assets............................................................ $44,926,397 $46,054,221
=========== ===========
</TABLE>
3
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
--------- -----------
1998 1998
---- ----
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable ..................................................... $ 3,645,372 $ 4,579,435
Accrued expenses ..................................................... 694,190 1,207,237
Accrued restructuring costs............................................ 175,310 630,000
Billings in excess of costs............................................ 803,105 394,760
Notes payable ........................................................ 8,019,964 7,613,478
Current portion of capital lease obligations........................... 360,528 368,006
----------- -----------
Total current liabilities ......................................... 13,698,469 14,792,916
Long-Term Liabilities
Capital lease obligations ............................................ 336,228 420,591
----------- -----------
Total Liabilities ...................................................... 14,034,697 15,213,507
----------- -----------
Commitments and Contingencies
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 as of April 30, 1998 and
January 31, 1998, respectively ..................................... 136,489 136,369
Additional paid in capital ........................................... 35,636,845 35,600,964
Retained earnings (accumulated deficit)............................... (4,730,504) (4,745,489)
less cost of 50,000 shares of common stock held in treasury .......... (151,130) (151,130)
----------- -----------
Total stockholders' equity ........................................ 30,891,700 30,840,714
----------- -----------
Total Liabilities and Stockholders' Equity ............................. $44,926,397 $46,054,221
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these balance sheets.
4
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
------------------
April 30,
------------------------------
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
Revenues........................................................... $10,375,063 $ 4,471,326
Operating expenses:
Direct costs and related expenses............................ 3,694,547 2,253,444
Salaries and related expenses................................ 4,465,791 3,156,864
General and administrative expenses.......................... 2,085,635 1,331,451
----------- -----------
Total operating expenses................................. 10,245,973 6,741,759
----------- -----------
Operating income................................................... 129,090 (2,270,433)
Net interest income/(expense)................................ (96,958) 420,132
----------- -----------
Income before income taxes......................................... 32,132 (1,850,301)
Income tax (expense)/benefit................................. (17,146) 700,193
----------- -----------
Net income......................................................... $14,986 ($1,150,108)
=========== ===========
Net income per share:
Basic........................................................ $0.00 ($0.08)
Diluted...................................................... $0.00 ($0.08)
</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>
Three Months Ended
------------------
April 30,
------------------------------
1998 1997
----------- ------------
<S> <C> <C>
(Unaudited)
Cash flows from operating activities:
Net income.................................................. $ 14,986 ($1,150,108)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................... 520,845 156,335
Deferred income taxes................................... 17,146 (812,440)
Changes in operating assets and liabilities:
Accounts receivable................................... 795,502 275,247
Costs in excess of billings........................... (696,953) (20,601)
Prepaid expenses...................................... (17,731) (49,489)
Other assets.......................................... 4,095 (583,405)
Accounts payable...................................... (1,201,988) 494,690
Accrued expenses...................................... (552,151) (341,959)
Accrued restructuring costs........................... (454,690) --
Billings in excess of costs........................... 408,345 (179,730)
----------- ------------
Net cash provided by (used in) operating activities......... ($1,162,594) ($2,211,460)
----------- ------------
Cash flows from investing activities:
Acquisitions, net of cash............................. -- (19,453,499)
Release of Escrow Monies in connection with
YAR Acquisition..................................... 3,000,000 --
(Capital expenditures) disposal of property and
equipment........................................... 96,053 (325,667)
Capitalized software costs............................ (115,127) (31,857)
Note receivable....................................... 61,277 (1,629,000)
----------- ------------
Net cash provided by (used in) investing activities......... $ 3,042,203 ($21,440,023)
Cash flows from financing activities:
Net proceeds from common stock issuance............... 36,000 9,429
Net borrowings on notes payable....................... 406,487 20,000,000
Capital lease obligations............................. (91,841) (36,697)
----------- ------------
Net cash provided by financing activities................... $ 350,646 $ 19,972,732
----------- ------------
Net decrease in cash and cash equivalents.................... $ 2,230,255 ($3,678,751)
Cash and cash equivalents, at beginning of period............ 7,214,261 32,312,749
----------- ------------
Cash and cash equivalents, at end of period.................. $ 9,444,516 $ 28,633,998
=========== ============
Supplementary disclosure of cash paid during the period:
Interest paid............................................... $ 143,344 $ 15,832
Taxes paid.................................................. $ 155,400 $ --
=========== ============
</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 month periods
ended April 30, 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 month period ended April 30, 1998 are
not necessarily indicative of the results of operations to be expected for the
entire fiscal year ending January 31, 1999.
Certain amounts as previously reported have been reclassified to conform to
current year classifications.
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 quarters ended April 30, 1998 and 1997 is as follows (in
thousands):
<TABLE>
<CAPTION>
April 30, 1998 April 30, 1997
-------------- --------------
<S> <C> <C>
Common shares outstanding--Basic 13,641,000 13,610,000
Dilutive common stock equivalents 220,000 --
---------- ----------
Common shares outstanding--Diluted 13,861,000 13,610,000
</TABLE>
NOTE 3 -- 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.
7
<PAGE>
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:
Annual Net Annual Net
Year Income Target Revenue Target
-----------------------------------------------------------
1997 $3,937,500 $22,500,000
1998 $4,725,000 $27,000,000
1999 $5,670,000 $32,400,000
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 April 30,
1998, the amount of goodwill recorded was $14,686,000 less $860,000 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 April 30, 1998, the amount of
goodwill recorded was $1,074,381 less $26,861 in accumulated amortization for
the six 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, 1996:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
Pro Forma Summary (unaudited) April 30, 1998 April 30, 1997
---------------------------------------
<S> <C> <C>
Revenues $10,375,063 $8,338,380
Net income $14,986 $(1,060,000)
Net income per share $0.00 $(0.08)
Shares used in per share computation 13,861,000 13,610,000
</TABLE>
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, 1996,
nor are they necessarily indicative of future operating results.
8
<PAGE>
NOTE 4 -- Restructuring Plan
During the third quarter ended October 31, 1997, the Company implemented a plan
to restructure the operations at the Los Angeles office of the Company's wholly-
owned subsidiary, The Leap Partnership, Inc. due to continued losses at the
office. The cost of the plan was accounted for in accordance with the guidance
set forth in Emerging Issues Task Force issue 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)".
A pretax charge of $767,323 was recorded during fiscal 1998 representing
employee termination, severance costs and other related costs that are
anticipated to be incurred as a direct result of the plan. As of April 30, 1998,
approximately $190,000 had been paid out in restructuring related expenses and
approximately $400,000 was reversed into income as all costs related to the
restructuring have been settled. The remaining unpaid costs are expected to be
paid out within the current fiscal year.
NOTE 5 -- Line of Credit
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.
NOTE 6 -- Subsequent Events
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.
Litigation
- ----------
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.
Leap intends to vigorously pursue its claim and defend the counterclaim. The
parties have had settlement discussions. Management does not believe that the
claim by the Tribune has 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.
Line of Credit
- --------------
In June 1998, repayment of the Company's outstanding balance on the $5 million
line of credit was extended to September 30, 1998. At April 30, 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.
9
<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.
Results of Operations
Revenues
- --------
Revenues increased to $10.4 million for the three months ended April 30, 1998
from $4.5 million for the three months ended April 30, 1997, an increase of $5.9
million or 132%. The net increase of $5.9 million is primarily due to the
addition of YAR revenues of approximately $4.8 million for three months as
compared to $1.7 million for the one month of April 1997, the addition of Kang &
Lee revenues of approximately $2.4 million this year, and an increase of
approximately $500,000 in other new and existing business.
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 $3.7 million for the three months ended April 30,
1998 from $2.3 million for the three months ended April 30, 1997, an increase of
$1.4 million or 64%. The increase was primarily due to the addition of $1.7
million in YAR's direct expenses and $502,000 in Kang & Lee direct expenses. As
a percentage of revenues, direct costs and related expenses actually decreased
to 35.6% for the three months ended April 30, 1998, due to a change in the mix
of services performed during the period, from 50.4% for the three months ended
April 30, 1997.
Salaries and Related Expenses
- -----------------------------
Salaries and related expenses consist primarily of salaries and wages for
employees, related payroll tax expenses, group medical and dental insurance
coverages and recruiting expenses. Salaries and related expenses increased to
$4.5 million for the three months ended April 30, 1998 from $3.2 million for the
three months ended April 30, 1997, an increase of $1.3 million or 41.5%. The
increase in expense reflects in part the addition of approximately 175 employees
from YAR Communications, Inc. and 75 new employees from Kang & Lee which
represents $2.0 million and $1.1 million, respectively, in salaries and related
expenses for the three months ended April 30, 1998.
General and Administrative Expenses
- -----------------------------------
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
increased to $2.1 million for the three months ended April 30, 1998 from $1.3
million for the three months ended April 30, 1997, an increase of $754,000 or
57%. The increase is primarily
10
<PAGE>
due to the addition of YAR's and Kang & Lee's general and administrative
expenses of $859,000 and $464,000, respectively, offset by a decrease in other
expenses of $400,000.
Interest Income and Expense
- ---------------------------
Interest income totaled $103,200 and $434,452 for the three months ended April
30, 1998 and 1997, respectively. The interest income was offset by interest
expense of $200,157 and $14,320, resulting in net interest expense of $96,957
and $420,132, respectively. The Company incurred interest expense on debt that
totaled approximately $8 million as of April 30, 1998 and $7.6 million as of
April 30, 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 53.4% and 37.8%
for the three months ended April 30, 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.
Additionally, in the prior year, the effective tax rate was lower due to the
exclusion of tax-exempt interest income from state taxable income. As of April
30, 1998, the Company has a deferred tax asset of approximately $2,412,915.
At April 30, 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 April 30, 1998, the Company had $5.7 million of working capital, inclusive of
$9.4 million in cash and cash equivalents, compared to working capital of $14.6
million at April 30, 1997. Cash and cash equivalents increased $2.2 million
during the first quarter of fiscal 1999 and decreased $3.7 million during the
first quarter of fiscal 1998. In the current period, cash provided from
investing activities was approximately $3.0 million. In April 1998, a final
escrow settlement was made in connection with the YAR acquisition and the
Company received $3 million in cash. (See Note 3). Cash decreased approximately
$1.2 million due to cash used in operating activities which was offset in part
by approximately $406,000 of bank borrowings. The remaining $200,000 decrease in
cash was due to payments for capital leases and for capital software development
costs.
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%. On January 30, 1998, the line of credit
agreement was modified and the outstanding balance was converted into a fixed
note due, along with any accrued interest, on June 30, 1998. The loan
modification also requires that the Company pledge 100% of the stock in One
World Communications and provide the bank with a junior mortgage on the office
building that the Company owns. Additionally, the Company must maintain a
minimum net worth (as defined) of $30.5 million at the end of each quarter
commencing on January 31, 1998 through June 30, 1998. As of April 30, 1998, the
outstanding balance on this line of credit was $4,173,000.
In May 1997, the Company borrowed $543,000 against the line of credit to finance
the purchase of the Los Angeles office building. At January 31, 1998, $565,000
was outstanding including accrued interest. This amount was subsequently paid in
full and the obligation was retired on March 18, 1998.
11
<PAGE>
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 April 30, 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 $5992 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.
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.
The Company believes that the existing and future credit facilities, funds from
capital markets, funds from operations, and the cash received in connection with
the escrow release and the repayment of the convertible debenture by VPI
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
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 April 30, 1998,
one client accounted for 37.8% of consolidated revenues. For the quarter ended
April 30, 1997, four clients accounted for 26.7%, 15.9%, 12.1% and 10.8%,
respectively, of consolidated revenues.
12
<PAGE>
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.
One client is currently undergoing marketing plan adjustments which could impact
future operations of the Company. A major client of both YAR Communications
and Kang & Lee, has recently made across the board reductions in its marketing
programs for calendar 1998 to reduce costs, and it has indicated that such cost
control pressures are likely to continue in the future. For the quarter ended
April 30, 1998, this client accounted for 37.8% of consolidated revenues.
Management believes that the loss of any key client and varying effects of
seasonality, as described above, could have an impact on the Company's
operations, particularly in the short term. The Company intends to mitigate
such losses through new business development and other strategic initiatives.
There can be, however, no assurances that the Company will be able to
successfully mitigate such losses, 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 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 Communications and Kang & Lee acquisitions 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.
13
<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. Leap
intends to vigorously pursue its claim and defend the counterclaim.
The parties have had settlement discussions. Management does not
believe that the claim by the Tribune has 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.
There are no other significant claims or lawsuits against the Company.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
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: June 12, 1998 By: /s/ FREDERICK A. SMITH
---------------------------------------------------------
Frederick A. Smith, Chairman and Chief Executive Officer
(principal executive, financial and accounting officer)
14
<PAGE>
The Leap Group, Inc.
EXHIBIT INDEX
Exhibit
Number Exhibits
------- --------
11. Statement Regarding Computation of Per-Share
Earnings
27. Financial Data Schedules
15
<PAGE>
EXHIBIT 11
The Leap Group, Inc.
STATEMENT REGARDING COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Net income/(loss) $ 14,986 $(1,150,108)
Weighted average number of common
shares outstanding during period 13,641,000 13,610,000
Net shares issuable upon exercise of
dilutive outstanding stock options 220,000 --
----------- ----------
Shares used in Diluted per share
calculation 13,861,000 13,610,000
Basic earnings per common share $0.00 $(0.08)
Diluted earnings per common share $0.00 $(0.08)
</TABLE>
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of April 30, 1998 and January 31, 1998, the
Consolidated Statements of Operations for the Three Months ended April 30, 1998
and 1997, and the Consolidated Statements of Cash Flows for the Three Months
ended April 30, 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> APR-30-1998
<CASH> 9,445
<SECURITIES> 0
<RECEIVABLES> 6,348
<ALLOWANCES> (869)
<INVENTORY> 0
<CURRENT-ASSETS> 19,423
<PP&E> 6,558
<DEPRECIATION> (1,721)
<TOTAL-ASSETS> 44,926
<CURRENT-LIABILITIES> 13,698
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 30,756
<TOTAL-LIABILITY-AND-EQUITY> 44,926
<SALES> 0
<TOTAL-REVENUES> 10,375
<CGS> 0
<TOTAL-COSTS> 3,695
<OTHER-EXPENSES> 6,551
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 32
<INCOME-TAX> 17
<INCOME-CONTINUING> 15
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
