<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 31, 1998, or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Identification No.)
incorporation or organization)
22 W. Hubbard Street, Chicago, IL 60610
(Address of principal executive office, including zip code)
(312) 494-0300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
- ------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $.01 Per Share)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in a definitive proxy statement or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_]
The aggregate market value of Common Stock, $.01 par value, held by non-
affiliates of the Registrant, as of April 3, 1998 was $6,690,474 (based upon the
closing sale price of the Common Stock on the Nasdaq National Market on April 3,
1998, and, for the purpose of this calculation only, assuming that all of the
Registrant's directors and officers are affiliates.) There were 13,586,866
shares of Registrant's Common Stock, $.01 par value, outstanding as of April 3,
1998.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended January 31, 1998 ("the 1998 Annual Report") (Parts II and IV).
(2) Portions of the Registrant's Notice of Annual Meeting and Proxy Statement
issued in connection with the Annual Meeting of Stockholders to be held on
June 9, 1998 (the "1998 Proxy Statement") (Part III).
<PAGE>
THE LEAP GROUP, INC.
FORM 10-K
For The Fiscal Year Ended
January 31, 1998
<TABLE>
<CAPTION>
INDEX
PART I
Item Page
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<S> <C>
1. Business.............................................................. 3
2. Properties............................................................ 6
3. Legal Proceedings..................................................... 6
4. Submission of Matters to a Vote of Security Holders................... 7
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters. 7
6. Selected Financial and Operating Data................................. 8
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 8
8. Financial Statements and Supplementary Data........................... 16
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 35
PART III
10. Directors and Executive Officers of the Registrant.................... 36
11. Executive Compensation................................................ 36
12. Security Ownership of Certain Beneficial Owners and Management........ 36
13. Certain Relationships and Related Transactions........................ 36
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 36
Signatures................................................................. 39
</TABLE>
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PART I
Item 1. Business.
The Company
The Leap Group, Inc. ("Leap" or "the Company") is a creatively focused
advertising holding company providing innovative consumer marketing,
advertising and Internet related services and products to
market-leading companies. The Company's marketing and communications services
include comprehensive strategic brand marketing, award-winning creative,
digital strategy and design and global strategy. Leap's mission is to
offer clients diversified services in traditional advertising, new media and
technology and global brand development.
Leap is a Delaware corporation that was incorporated in March 1996 to act as the
parent company for The Leap Partnership, Inc. ("Leap Partnership"), an Illinois
corporation established in September, 1993. The Leap Partnership is a new
generation advertising agency designed to deliver intelligent brand strategies,
high-end creative, innovative business building ideas and nimble, proactive
service. The Leap Partnership includes among its clients Anheuser-Busch,
Rockwell Semiconductor Systems, Daewoo Motor America, One-On-One Sports,
Ameritech, Armour Golf, Leiner Health Products and The University of Notre Dame.
In December 1996, the Company formed a new wholly-owned subsidiary--Quantum Leap
Communications, Inc. ("QLC"), a Delaware corporation. QLC is focused on
developing distribution systems and producing content that will help advertisers
communicate more effectively with targeted consumers in non-traditional ways
primarily using new media over the Internet. Quantum Leap Communications' client
list includes American Airlines, MSNBC, R.R. Donnelley, FTD and Coolsville
Records.
In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR Communications, Inc. ("YAR"). YAR employs more than 175 multicultural
specialists under one roof allowing clients the ability to communicate brand
messages with one voice across more than 80 languages and 100 countries. YAR is
the largest U.S.-based, full-service advertising agency that targets Western and
Eastern European and Middle Eastern consumers. YAR's top clients include AT&T,
L.L. Bean, EDS, CNN, General Electric, and Johnson & Johnson.
In November 1997, the Company, through its wholly owned subsidiary One World
Communications, Inc. ("OWC"), acquired certain property and equipment and the
ongoing business of Kang & Lee Advertising, Inc. and K&L West Advertising, Inc.
(jointly referred to as "Kang & Lee"). Kang & Lee is the largest U.S.-based
full-service advertising agency specializing in marketing to Asian consumer
target groups including Chinese, Korean, Japanese, Vietnamese, Filipino and
Asian-Indian. Kang & Lee's clients include AT&T, Sears Roebuck and Co., Bank of
America, Oxford Health Plans, Seagrams, Shiseido Cosmetics America, Ltd., and
Hong Kong Bank.
Leap is headquartered in Chicago with offices in New York, Los Angeles and San
Francisco. Its executive offices are located at 22 W. Hubbard Street, Chicago,
Illinois, 60610. The Company's telephone number at that address is (312) 494-
0300. The Company's Internet address is: http://www.leapgroup.com. Information
contained on the Company's Internet site shall not be deemed part of this
Report.
The Company's common stock is traded on the NASDAQ National Market under the
symbol LEAP.
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Leap's Core Strengths
Leap's central mission is to build brand equity for its clients by designing and
implementing creatively-focused, strategic brand marketing plans and
comprehensive advertising campaigns through traditional media and via the
Internet. Management believes that certain core strengths have been and will
continue to be integral to Leap's success in achieving this goal.
Multiple Revenue Streams. During fiscal 1998, the Company diversified its
services both by establishing a new media subsidiary and through acquisition. In
addition to the strategic and creative services provided by The Leap
Partnership, the Company started Quantum Leap Communications, a new media and
technology subsidiary, and launched One World Communications by acquiring two
leading agencies in the multicultural advertising sector--YAR and Kang & Lee.
Management believes that expanding the services offered clients greatly enhances
the company's ability to attract, service and retain clients.
Roster of Marquee Clients. Leap Group companies continue to successfully compete
for and service major accounts. The Leap Partnership includes among its clients
Anheuser-Busch, Rockwell Semiconductor Systems, Daewoo Motor America, One-On-One
Sports, Ameritech, Armour Golf, Leiner Health Products and The University of
Notre Dame. Quantum Leap Communications' client list includes American Airlines,
MSNBC, R.R. Donnelley, FTD and Coolsville Records. YAR and Kang & Lee are
working with numerous Fortune 500 clients including AT&T, Sears Roebuck and Co.,
L.L. Bean, Bank of America, Johnson & Johnson, EDS, Westin Hotels, Western
Union, Turner Broadcasting and General Electric. The Company attributes its
success in attracting such clients to the reputations of the companies and their
senior management, as well as its other core strengths, and believes that these
factors, coupled with the client roster itself, will enhance the Company's
ability to attract additional clients of national and international scope.
Strategic Orientation. The Company specializes in the strategic positioning of
brands. Beginning with a thorough assessment of the needs, wants, impressions
and opinions of the client's customers and the position of the client's brand in
its marketplace, the Company develops a distinct identity for the brand that can
be communicated through and integrated package of marketing solutions. Fusing
the brand strategy with the client goals, objectives and information, Leap then
develops a strategic platform that serves as the grounding for all brand
messages across all media.
Talent and Creative Distinction. The Company maintains a multidisciplinary
talent strategy as one of its core principles. Recognizing that the best
strategic platform is useless without creative executions that inform, engage
and entertain consumers, the Company's management places heavy emphasis on
creativity in the selection and training of personnel. The Company believes that
its success in attracting such talented creative and strategic thinkers is in
part attributable to the reputations of Frederick Smith, George Gier, Joseph A.
Sciarrotta, Thomas R. Sharbaugh, Yuri Radzievsky, Anna Radzievsky and Eliot
Kang.
The Company's employees include experienced writers, art directors, television
and radio producers, print production specialists, strategic planners, account
managers, media planners, translators, Web designers, producers, programmers,
digital strategists, multicultural language management specialists and cultural
analysts. The Company's talent strategy targets skilled individuals who, in
addition to being creative, are adept marketers attuned to the brand strategy
and business objectives of clients.
Integrated Services Approach. The Company provides a full range of strategic,
creative, interactive, production and multicultural services for both
traditional and new media assignments. The Company's strategies are designed to
integrate the most effective and beneficial aspects of a wide array of media.
Creative executions may include television, print, outdoor, radio and Internet
advertisements, as well as promotions, direct mail, package design, logo design.
The Company also develops other digitally-based interactive solutions including
World Wide Web sites, CD-ROMs and interactive presentations.
Technological Sophistication and Expertise. Management believes that the Company
is in the forefront in the application of new marketing communications
technology. The Company develops and maintains sites on the
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Internet's World Wide Web, is engaged in database marketing, is developing
successful Internet promotions, is placing online media, and is developing
proprietary technology for the use of The Company and its clients. The Company's
new media partners include skilled programmers, Web designers, digital
strategists, Internet media planners and buyers and Web promotions specialists.
With the creation of Quantum Leap Communications, the Company has added a
strategic focus on developing proprietary content and new distribution systems
that allow clients to communicate more effectively in non-traditional ways.
During fiscal 1998, Quantum Leap developed three proprietary technologies--
Quantum Objects, a customizable Internet publishing application; The Ambassador,
a laptop multimedia presentation system; and Quantum Banners, a Java-based
banner that delivers instantaneous information. In April 1998, Quantum Leap was
awarded the prestigious Gold Pencil in the first One Show Interactive
competition for the innovative breaking news banner it developed for MSNBC.
Management believes it will realize additional opportunities for new clients, as
well as revenue, from the marketing of these and other technologies in
development.
Leap's Strategy
Growth Through Diversification. Management will continue, as it did last year,
to diversify revenue streams by acquiring and integrating companies that provide
additional complementary services to those already offered by the Company. The
Company expects to pursue acquisitions of, or alliances with businesses that
extend or complement the Company's business. The Company may explore
acquisitions to obtain additional top level talent, to supplement its scope of
services and technology or to add to its client roster. To assist the Company in
attracting and servicing international clients, the Company intends to seek out
and establish strategic alliances with international partners who share or
expand The Company's core strengths and services.
Internal Growth. To grow internally the Company will continue to employ two key
strategies--target market-leaders as clients and expand scope of business with
existing clients. In terms of attracting new clients, Leap intends to focus on a
limited number of marquee clients, with businesses of national or global scope,
that seek to develop long-term marketing partnerships. Many of the Company's
current clients are, and future targets are expected to be, market leaders with
aggressive plans for growth and multi-faceted communications needs. With a
portfolio of diversified services to offer, the Company's three subsidiaries
will be able to cross-sell services in order to expand the overall partnership
with any given client.
Competition
The markets for the Company's services are highly competitive. Clients may
change their marketing and communications advisors with relative ease or perform
these functions internally. Clients may also reduce or eliminate their
expenditures on advertising and marketing at any time for any reason. The
Company faces competition from a number of sources, all striving to attract new
clients or additional assignments or accounts from existing clients. The Leap
Partnership competes with national and regional full-service and specialty
advertising agencies as well as specialized and integrated marketing
communications firms. The Leap Partnership could also be viewed as competing
with large entertainment, technology and/or marketing companies. Quantum Leap
Communications competes with other new media specialty agencies, new media
divisions of large agency holding companies and software development companies.
One World Communications competes with ethnic specialty agencies in, for
example, the Hispanic or Asian consumer target groups, or large multi-national
agencies with offices around the world. Many of the Company's competitors or
potential competitors have longer operating histories, longer client
relationships and significantly greater financial, management, technology,
development, sales, marketing and other resources than the Company.
The Company believes that the principal competitive factors in its markets are
the abilities to understand the client's business and develop strategically
sound interactive solutions, present unique creative concepts, demonstrate
breadth and depth of technical and new media expertise, develop strong consumer
relationships and produce high quality products with speed and efficiency, and
at a competitive price. The Company believes that it competes favorably with
respect to each of these factors, however there can be no assurance that the
Company will continue
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to compete successfully. To the extent that the Company's competitors are
perceived as providing superior products, services or terms, or to the extent
that the Company's clients are dissatisfied with the Company's products,
services or terms, the Company's business, operating results and financial
condition could be materially adversely affected.
Creative Partners
As of January 31, 1998, Leap employed a total of 351 employees, 332 of whom were
full-time and 19 part-time. Of these, 284 were engaged in servicing clients and
67 were involved in finance and administration. With the two acquisitions during
the fiscal year, the Company includes 188 YAR and 81 Kang & Lee employees within
the total number. None of the Company's employees are represented by a labor
union, and the Company believes that its relations with its employees are good.
Intellectual Property Rights
Leap generally relies on a combination of trade secrets, copyright laws and
contractual rights to establish and protect its proprietary rights to
intellectual property. The Company may, where appropriate, take actions to
further protect certain proprietary rights through software or other patents.
The Company does not believe that the legal protections afforded to its
intellectual property rights are material to its business, financial condition
or results of operations.
Item 2. Properties.
The Company is headquartered in Chicago and has offices in New York, Los Angeles
and San Francisco. The Company's headquarters are located at 22 W. Hubbard
Street, Chicago, Illinois, 60610. The Company's telephone number at that address
is (312) 494-0300.
The Company owns its main office building in Chicago which is a 12,400 square
foot two-story facility. The Company also leases approximately 2,000 square feet
of additional space in Chicago to provide office space for QLC and for
administrative offices.
In May 1997, The Leap Partnership, purchased a commercial office building for $2
million to provide facilities for its Los Angeles office. A term note for $1.4
million was financed by the seller over a one year term at 9% and is
collateralized by the L.A. office building. The agreement also contains an
option to extend the note for one additional year and management intends to
exercise this extension.
With the acquisition of YAR in April 1997, the Company added the following
leased offices: New York City--approximately 26,300 square feet and San
Francisco--approximately 3,100 square feet.
In November 1997, the Company also acquired Kang & Lee which has 22,500 square
feet of leased office space in New York and 20,000 square feet of leased office
space in Los Angeles.
Item 3. Legal Proceedings.
In September, 1995, the Spin Doctors (also known as Modigliani, Inc.), a
recording and performing group, and Mow B'Jow Music, Inc., their music
publisher, filed a lawsuit against Leap, the Miller Brewing Company and
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Trivers/Myers Music (collectively "the defendants") in the United States
District Court, Central District of California. On May 21, 1997, the lawsuit was
settled within the limits of the Company's insurance policy. On May 23, 1997,
the case was formally dismissed by the court pursuant to the settlement
agreement.
On or about November 4, 1997, a former employee of the Company filed a lawsuit
against The Leap Partnership, Inc. On February 28, 1998, a settlement agreement
was signed and this case has been dismissed.
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.
There are no other significant claims or lawsuits against the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
COMMON STOCK INFORMATION
The Company's common stock is traded on the Nasdaq National Market under the
symbol LEAP. On April 22, 1998, there were 112 holders of record of the
Company's stock. The Company estimates that as of March 27, 1998 there are
approximately 1,361 beneficial owners of the company's stock. The Company's high
and low common stock prices for the last six quarters since the Company's
Initial Public Offering are:
<TABLE>
<CAPTION>
Fiscal 1998 High Low
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<S> <C> <C>
1st Quarter $8.125 $ 4.00
2nd Quarter $ 5.00 $1.125
3rd Quarter $2.875 $1.625
4th Quarter $ 2.00 $0.875
Fiscal 1997 High Low
-------------------------------------------------
3rd Quarter (from September 27) $10.50 $ 6.00
4th Quarter $ 7.63 $ 5.25
</TABLE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future, but intends
to retain future earnings, if any, for reinvestment in the future operation and
expansion of the Company's business and related development activities. Any
future determination to pay cash dividends will be at the discretion of the
Board of Directors and will be dependent upon the Company's
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financial condition, results of operations, capital requirements and such other
factors as the Board of Directors deems relevant, as well as the terms of any
financing arrangements.
Item 6. Selected Financial and Operating Data.
Reference is made to "Financial Highlights" on page 1 and "Selected Financial
Data" on page 33 of the 1998 Annual Report (hereby incorporated by reference)
for this information. This referenced section should be read in conjunction with
the Consolidated Financial Statements and Notes thereto contained herein.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's consolidated financial statements, accompanying
notes thereto and other financial information appearing elsewhere herein.
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.
OVERVIEW
The Company
The Leap Group, Inc. ("Leap" or "the Company") is a creatively-focused
advertising holding company providing innovative consumer marketing, advertising
and Internet related services and products to market-leading companies. The
Company's marketing and communications services include comprehensive strategic
brand marketing, award-winning creative, digital strategy and design and global
strategy. Leap's mission is to offer clients diversified services in traditional
advertising, new media and technology and global brand development.
Leap is a Delaware corporation that was incorporated in March 1996 to act as the
parent company for The Leap Partnership, Inc. ("Leap Partnership"), an Illinois
corporation established in September, 1993. The Leap Partnership is a new
generation advertising agency designed to deliver intelligent brand strategies,
high-end creative, innovative business building ideas and nimble, proactive
service. The Leap Partnership includes among its clients Anheuser-Busch,
Rockwell Semiconductor Systems, Daewoo Motor America, One-On-One Sports,
Ameritech, Armour Golf, Leiner Health Products and The University of Notre Dame.
In December 1996, the Company formed a new wholly owned subsidiary is focused on
Quantum Leap Communications, Inc. ("QLC"), a Delaware corporation. QLC was
developing distribution systems and producing content that will help advertisers
communicate more effectively with targeted consumers in non-traditional ways
primarily using new media over the Internet. Quantum Leap Communications' client
list includes American Airlines, MSNBC, R.R. Donnelley, FTD and Coolsville
Records.
In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR. YAR employs more than 175 multicultural specialists under one roof
allowing clients the ability to communicate brand messages with one voice across
more than 80 languages and 100 countries. YAR is the largest U.S.-based,
full-service advertising
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agency that targets Western and Eastern European and Middle Eastern consumers.
YAR's clients include AT&T, L.L. Bean, EDS, CNN, General Electric and Johnson &
Johnson.
In November 1997, the Company, through its wholly owned subsidiary One World
Communications, Inc. ("OWC"), acquired certain property and equipment and the
ongoing business of Kang & Lee. Kang & Lee is the largest U.S.-based full-
service advertising agency specializing in marketing to Asian consumer target
groups including Chinese, Korean, Japanese, Vietnamese, Filipino and Asian-
Indian. Kang & Lee's clients include AT&T, Sears Roebuck and Co., Bank of
America, Oxford Health Plans, Seagrams, Shiseido Cosmetics America, Ltd. and
Hong Kong Bank.
The Company is headquartered in Chicago with offices in New York, Los Angeles
and San Francisco. The Company's executive offices are located at 22 W. Hubbard
Street, Chicago, Illinois, 60610. The Company's telephone number at that address
is (312) 494-0300. The Company's Internet address is: http://www.leapgroup.com.
Information contained on the Company's Internet site shall not be deemed part of
this Report.
The Company's common stock is traded on the NASDAQ National Market under the
symbol LEAP.
REVENUES
The Company generates its revenues from a variety of sources: fees and retainers
for strategic marketing and creative services, which may include fees based upon
the airing or publication of Company-created material on various media;
production revenues for creative executions, including the communication of
messages through a variety of new media; and fixed fees for specific project
assignments.
Fees and retainers are established by the Company taking into consideration the
Company's resources and skills which will be applied to generate relevant
strategic solutions for the client's marketing and communication concerns, the
value of Leap's strategic thinking and Leap's ability to produce memorable,
entertaining and effective advertising. The Company structures its compensation
arrangements with clients in several ways to provide for retainers or fees that
integrate such an added-value approach, as well as fees based on a percentage of
media charges or other fixed methodologies. However, certain assignments covered
by fees and retainers have been based upon traditional methodologies which have
included either an estimate of the amount and level of professional expertise
provided by the Company and other committed resources needed to execute a
particular client's engagement or have included an estimate of the client's
advertising expenditures over certain periods.
The term of written agreements between the Company and its clients generally is
a minimum of six months. However, written agreements typically are terminable by
either the client or the Company on short notice, often 90 days, and in certain
instances less. The Company at times performs services at the client's request
prior to the execution of written agreements. Revenues, whether predominantly
retainer- or project-based, can vary materially from period to period. The
Company's strategy is to focus on providing expanding ranges and amounts of
services to a relatively limited number of nationally recognized clients. The
Company's results of operations will therefore, by design, be dependent upon the
Company's ability to maintain its relationships with its key clients or to
replace clients quickly should the Company or the client desire to reduce or
terminate a relationship. There can be no assurance that period-to-period
fluctuations in operating results will not occur.
The Company has developed proprietary software that the Company can license over
extended periods of time. The Company is currently working on developing
additional proprietary content and software that can potentially generate
recurring licensing and other revenues. The Company has not yet generated
significant revenues from this type of billing arrangement and no assurance can
be given by the Company that significant revenue streams will be generated in
the future.
The Company has experienced fluctuations in its revenues since inception, which
are to a significant degree a function of establishing or terminating client
relationships and to a lesser degree a reflection of its mix of fees and
production revenues. In addition, revenues have fluctuated due to unanticipated
changes in the spending levels of clients and uncontrollable or unforeseen
delays by clients to execute assignments and strategies. Revenue mix has also
been affected by the Company's recent acquisitions. The Company has a limited
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operating history upon which an evaluation of the Company and its prospects may
be based, and the Company has not identified any particular quarterly or
seasonal trends with respect to its historic revenues.
Revenues from fixed fee arrangements, typically in the form of monthly
retainers, are recognized over the period in which services are rendered.
Revenues from production services are recognized as the services are completed.
Outside production costs are initially recorded as costs in excess of billings
and are expensed as direct costs and related expenses at the completion of such
services. Commissions earned from fees based upon third-party media placements
are recognized as revenues when the Company-created materials appear on various
media in accordance with industry practice. Salaries and other related general
and administrative costs are expensed as incurred. Billings in excess of costs
are typically payments received in advance of work to be performed. This
deferred revenue will be recognized as income when services are provided.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, operating expenses
and certain other items which are included in the Company's statements of
operations for the fiscal years reflected below. Operating results for any
period are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
Fiscal Year Ended January 31, 1998 1997 1996
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<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Operating expenses:
Direct costs and related expenses 37.4 55.0 44.1
Salaries and related expenses 59.9 26.4 27.4
General and administrative expenses 30.8 10.0 12.0
Restructuring expenses 2.5 - -
------------------------------------------------------------------
Total operating expenses 130.6 91.4 83.5
------------------------------------------------------------------
Operating income/(loss) (30.6) 8.6 16.5
Other income and (expenses), net 0.9 2.8 (2.0)
------------------------------------------------------------------
Income/(loss) before income taxes (29.7) 11.4 14.5
Income tax (expense)/benefit 11.4 (3.3) (6.0)
------------------------------------------------------------------
Net income/(loss) (18.3%) 8.1% 8.5%
==================================================================
</TABLE>
Fiscal Year Ended January 31, 1998 Compared to Fiscal Year Ended January 31,
1997
Revenues increased to $30.7 million for fiscal 1998 from $16.1 million for
fiscal 1997, an increase of $14.6 million, or 90.7%. The increase is primarily
due to the addition of YAR revenues of approximately $16.9 million during the
ten months since the acquisition and the addition of Kang & Lee revenues of
approximately $2.6 million during the three months since the acquisition.
Revenues are offset by a $4.9 million decrease in revenues from The Leap
Partnership during the year which was primarily due to the loss of two key
clients, as described below under Dependence on Key Clients and Projects, and
decreased spending levels by certain clients when compared to the prior year.
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 $11.5 million for fiscal 1998 from $8.8 million
for fiscal 1997, an increase of $2.6 million or 29.5%. The increase was
primarily attributable to the addition of YAR direct expenses of approximately
$4.7 million since the YAR acquisition and the addition of Kang & Lee's direct
expenses of approximately $600,000 since the Kang & Lee acquisition. This was
offset by a general decrease in production activities by The
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Leap Partnership of approximately $2.7 million over the prior year. As a
percentage of revenues, total direct costs and related expenses decreased to
37.4% for the fiscal year ended January 31, 1998, due to a change in the mix of
services performed during the period, from 55% for the prior fiscal year ended
January 31, 1997.
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
$18.4 million for fiscal 1998 from $4.3 million for fiscal 1997, an increase of
$14.1 million, or 327.9%. The increase in expense reflects in part the addition
of approximately 175 new employees from YAR which represents $8.1 million of
salaries expense for the ten months since the acquisition and the addition of
approximately 75 new employees from Kang & Lee which represents $1.0 million of
salaries expense for the three months since the acquisition. The remaining
increase of $5 million in salaries expense during the year was primarily related
to the addition of new employees at The Leap Partnership and Quantum Leap
Communications to service new clients and to strengthen the Company's creative
and management team.
As further described in Note 7 to the Company's Financial Statements, the
Company announced a restructuring plan for the L.A. office of The Leap
Partnership. A restructuring charge of approximately $770,000 was recorded
during fiscal 1998 primarily for employee termination and severance costs and
other related expenses, including legal fees. Additionally, during the third and
fourth quarters, the Company reduced salaries and wages throughout the Company
by working to eliminate redundancies within the Company, by reducing executive
compensation and by decreasing Leap Partnership's staff by approximately 40%.
The Company estimates that the L.A. restructuring and the Company-wide cost
containment efforts should result in a reduction of approximately $3.1 million
in salaries and related expenses.
General and administrative expenses include space and facilities expenses,
corporate expenses, depreciation and amortization, insurance, legal and
accounting fees and management information system expenses. General and
administrative expenses increased to $9.4 million for fiscal 1998 from $1.6
million for fiscal 1997, an increase of $7.8 million or 487.5%. The increase is
primarily due to additional general and administrative expenses of $3.6 million
incurred by The Leap Partnership and QLC to support the Company's growth
activities through increased occupancy costs, depreciation, amortization and
expenses related to the Company being a public entity for the full fiscal year.
The balance of fiscal 1998's increase was attributable to the addition of YAR's
general and administrative expenses of $3.7 million for ten months since its
acquisition and the addition of Kang & Lee's general and administrative expenses
of $506,000 for three months since its acquisition.
Interest income totaled $1,313,000 and $619,000 for fiscal 1998 and fiscal 1997,
respectively. The interest income was offset by interest expense of $1,044,000
in fiscal 1998, and $163,000 in fiscal 1997, resulting in net interest income of
$269,000 and $456,000 for the respective periods. As a result of the Company's
initial public offering in late September 1996, the Company raised $35.7 million
in cash, net of related costs. The proceeds were invested in short-term U.S.
Treasury Notes and Bills, a certificate of deposit and a money market fund for
the remaining four months of the 1997 fiscal year. The increase in interest
income during fiscal 1998 was primarily the result of the offering proceeds
earning interest income for a longer period. The increase in interest expense
during fiscal 1998 was primarily due to the cost of borrowed funds related to
the acquisition of YAR in April 1997. On September 30, 1997, the Company retired
$23.3 million of notes payable to a bank related to the acquisition of YAR.
Also, interest expense increased during the fourth quarter fiscal 1998,
primarily as a result of financing the acquisition of Kang & Lee through a bank
line of credit in the amount of $1.3 million in November 1997. Interest expense
during the year resulted from financing related to real estate and other capital
expenditures and daily working capital requirements.
Overall during fiscal 1998, the Company realized an operating loss of $9.4
million, as compared to operating income of $1.4 million during fiscal 1997. In
summary, the primary reasons for the loss related to the loss of two key
clients, the establishment of an office in Los Angeles, an overall increase in
staffing levels to support anticipated new business, and other increases in the
Company's infrastructure. In response to these issues, management has endeavored
to secure new clients and new business from existing clients; has restructured
the Los Angeles operation resulting in anticipated annual savings of
approximately $3.5 million; has decreased its staffing levels to better match
the current revenue base, resulting in anticipated annual savings of
approximately $1.4 million; reduced executive compensation levels, resulting in
anticipated annual savings of approximately $1.0 million; and made focused cost-
cutting efforts in other aspects of the business.
Management plans to stay focused on cost controls and to maintain a philosophy
of matching staffing levels to the existing revenue base. Management will
continue to explore profitable business opportunities and other strategic
alternatives. In management's opinion, the decisions made and actions executed
will assist in returning the Company to profitability during fiscal 1999,
although there can be no assurances that this will occur.
The combined effective federal and state income tax rates were 38.5% and 29.1%
for fiscal 1998 and 1997, respectively. The higher effective tax in fiscal 1998
is due to higher local tax rates. During fiscal 1998 and fiscal 1997, taxes were
offset by exclusion of tax-exempt interest income from state taxable income. In
fiscal 1998, the amount of tax-exempt interest earned by the Company was
approximately $988,000 for the year. Due to the net operating loss in fiscal
1998, the Company recognized $3.5 million in net operating loss tax benefits
compared to the $536,000 income tax expense recorded in fiscal 1997. Since the
Company's inception on September 20, 1993,
11
<PAGE>
through January 31, 1995, the Company had generated net operating losses of
approximately $1.6 million which subsequently offset taxable income in fiscal
years 1996 and 1997. As of January 31, 1997, the Company's balance of net
operating losses was approximately $112,000.
As of January 31, 1998, the Company's balance of net operating losses is
approximately $6.6 million for federal purposes and $8.7 million for state
purposes, which can be utilized over 15 years. At January 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.
The Company's estimates of future taxable income are based on projections which
include a number of assumptions related to revenues and expenses. These
projections anticipate an overall return to profitability during fiscal 1999,
based primarily on anticipated taxable income from YAR and Kang & Lee and the
impact of significant cost reductions implemented at The Leap Partnership. The
projections beyond fiscal 1999 assume increased revenues from new business, of
which there can be no assurances that such new business will be generated. If
the assumed revenue increases do not occur, management intends to make any
additional cost-cutting efforts as deemed necessary to maintain overall Company-
wide profitability. Management will continue to evaluate the realizability of
the deferred tax asset and, if adverse changes occur in the Company's business,
it is possible that a valuation reserve could be provided against some or all of
the deferred tax asset in a future period. Such a reserve would result in a
charge to the Company's income tax provision which could be material to the
operating results of that period.
Fiscal Year Ended January 31, 1997 Compared to Fiscal Year Ended January 31,
1996
Revenues increased to $16.1 million for fiscal 1997 from $8.2 million for fiscal
1996, an increase of $7.9 million, or 96.0%. The increase is primarily
attributable to a significant increase in fees earned from new and existing
clients during fiscal 1997, despite the Company's resignation from the Miller
Brewing Company account during fiscal 1996. Miller represented approximately
66.4% of the Company's total revenues for fiscal 1996. Excluding Miller,
revenues increased from $2.8 million in fiscal 1996 to $16.1 million in fiscal
1997, an increase of $13.3 million or 475%.
Direct costs and related expenses increased to $8.8 million for fiscal 1997 from
$3.6 million for fiscal 1996, an increase of $5.2 million or 144.3%. This
increase was attributable to increased production activities. Revenues specific
to production activities, however, increased 91.6% as compared to the increase
in total revenues of 96.0% during fiscal 1997. As a percentage of production
revenues, direct costs and related expenses decreased by approximately 1.2%, as
a result of increased efficiencies and improved margins.
Salaries and related expenses increased to $4.3 million for fiscal 1997 from
$2.2 million for fiscal 1996, an increase of just over $2 million, or 89.2%.
Salaries and related expenses, however, declined as a percentage of revenues
from 27.4% to 26.4%. The increased expenses reflected the addition, in fiscal
1997, of 44 new employees.
General and administrative expenses increased to $1.6 million for fiscal 1997
from $985,000 for fiscal 1996, an increase of $618,000. The increase is
primarily due to additional expenses associated with increased occupancy costs,
depreciation expense and increased staffing in administrative functions. As a
percentage of revenues, general and administrative expenses declined from 12.0%
in fiscal 1996 to 10.0% in fiscal 1997.
Other income included interest income of $619,000 for the year ended January 31,
1997. The interest income was offset in part by interest expense of $163,000,
resulting in net interest income of $456,000. For the year ended January 31,
1996, there was no significant interest income; interest expense totaled
$161,000. The difference in other income and expense for the two periods
resulted from the Company's retirement of debt and investment of the net
proceeds from the Offering in September 1996, offset in part by increased
borrowings prior to receipt of the proceeds.
The combined effective federal and state income tax rates were 29.1% and 41.4%
for fiscal 1997 and 1996, respectively. Income tax expense of $536,000 and
$494,000 is reflected for fiscal 1997 and 1996, respectively, as a result of the
Company generating taxable income during those years. During fiscal 1997, the
Company realized tax benefits from the exclusion of tax-exempt investment income
from state taxable income. Also, the Company generated a net operating loss from
its inception, September 20, 1993, through January 31, 1995 of approximately
$1.6 million. The net operating loss subsequently offset taxable income in both
fiscal 1996 and 1997. The balance of the net operating loss as of January 31,
1996, of approximately $260,000, had been fully reserved, primarily due to the
Company's history of operating losses. As a result of the Company's continued
growth of revenue, earnings and capital resources during fiscal 1997, the
Company reversed the tax valuation allowance. As of January 31, 1997, the
Company's balance of net operating losses is approximately $112,000, which
pursuant to the tax law can be utilized ratably over the next five years.
12
<PAGE>
Fiscal Year Ended January 31, 1996 Compared to Fiscal Year Ended January 31,
1995
Revenues increased to $8.2 million for fiscal 1996 from $4.7 million for fiscal
1995, an increase of $3.5 million, or 74.5%. The increase is primarily
attributable to a significant increase in fees earned from Miller during fiscal
1996, and the remainder is attributable to services provided to new clients and
increased demand for services by existing clients. Miller represented
approximately 66.4% and 63.7% of the Company's total revenues for fiscal 1996
and 1995, respectively. Excluding Miller, revenues increased from $1.7 million
in fiscal 1995 to $2.8 million in fiscal 1996, an increase of $1.1 million or
64.7%.
Direct costs and related expenses decreased to $3.6 million for fiscal 1996 from
$3.7 million for fiscal 1995, a decrease of $100,000 or 2.7%. Approximately
$375,000, or 10.0%, of the direct costs in fiscal 1995 were incurred in
connection with business development activities for which no corresponding
revenues were generated by the Company. Exclusive of these costs, direct costs
increased by approximately $250,000, or 7.4%, from fiscal 1995 to fiscal 1996.
This increase was attributable to an increase in production activities. Revenues
specific to production activities increased approximately 24% in fiscal 1996. As
a percentage of production revenues, direct costs decreased by approximately
11%, as a result of increased efficiencies and improved margins.
Salaries and related expenses increased to $2.2 million for fiscal 1996 from
$1.6 million for fiscal 1995, an increase of $600,000, but declined as a
percentage of revenues from 34.2% to 27.4%. The increased expenses reflected the
addition, in fiscal 1996, of 11 new employees.
General and administrative expenses increased to $985,000 for fiscal 1996 from
$722,000 for fiscal 1995, an increase of $263,000. The increase is primarily due
to additional expenses associated with increased occupancy costs and increased
staffing in administrative functions. As a percentage of revenues, general and
administrative expenses declined from 15.4% in fiscal 1995 to 12.0% in fiscal
1996.
Interest expense increased to $161,000 for fiscal 1996 from $103,000 for fiscal
1995, an increase of $58,000 or 56.3%. The increase is primarily attributable to
increased borrowings from available bank lines of credit in order to fund the
Company's growth and operations. Interest rates remained relatively constant for
both fiscal 1996 and 1995.
Combined effective federal and state income tax rates were 41.4% and 28.6% for
fiscal 1996 and 1995, respectively. Income tax expense of $494,000 is reflected
for fiscal 1996, as a result of the Company's taxable income during the year. An
income tax benefit of $427,000 is reflected for fiscal 1995, as a result of the
Company's net operating loss during the period. The Company generated a net
operating loss from its inception, September 20, 1993, through January 31, 1995
of approximately $1.6 million. The net operating loss offsets the taxable income
generated in fiscal 1996. The balance of the net operating loss of approximately
$260,000 was fully reserved at January 31, 1996, primarily due to the Company's
history of operating losses.
LIQUIDITY & 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 January 31, 1998 the Company had $820,000 of working capital, inclusive of
$7.2 million in cash and cash equivalents, compared to working capital of $34.7
million at January 31, 1997. Cash and cash equivalents decreased $25.1 million
during fiscal 1998 and increased $32.3 million during fiscal 1997. The decrease
in cash during fiscal 1998 was primarily attributable to: (1) $24.1 million for
the acquisitions of YAR in April 1997 and Kang & Lee in November 1997; (2) $1.9
million in capital expenditures for
13
<PAGE>
property additions; (3) $2.2 million net cash used in operating activities as a
result of the Company's net operating loss during the year; (4) $1.8 million
loaned to strategic partner; and offset by a (5) $5.6 million increase in cash
borrowed. During fiscal 1997, the increase in cash and cash equivalents is
primarily due to the $34.4 million received in net proceeds from the Offering
after repayment of substantially all of the Company's debt.
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 January 31, 1998,
the outstanding balance on this line of credit was $4,173,000.
In May 1997, the Company borrowed $543,000 against a 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.
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. The interest rate on
the line is equal to the prime rate. At January 31, 1998, $1,475,000 was
outstanding on this line of credit, of which $1.3 million was used for the
acquisition of Kang & Lee.
On April 30, 1998, in connection with the YAR acquisition, the Company received
$3 million in cash due to the release of the escrowed funds. The funds will
reduce the purchase price of the acquisition and the amount of recorded
goodwill.
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 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
14
<PAGE>
been, and is expected to continue to be, concentrated among a relatively limited
number of nationally recognized clients. For the year ended January 31, 1998,
one client accounted for 36.3% of consolidated revenues. Three clients accounted
for 25.1%, 23.4%, and 18.9%, respectively, of consolidated revenues during
fiscal 1997, and one client accounted for 66.4% of consolidated revenues during
fiscal 1996 (refer to Note 3 to the Company's Financial Statements).
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, alter 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.
In December 1995, the Company voluntarily resigned a client which accounted for
66.4% of the Company's revenues for the year ended January 31, 1996. In the
second half of fiscal 1996, this client began to reduce its advertising
expenditures on campaigns in which the Company was involved, which resulted in a
significant decline in Leap's revenues during such period. The Company's
management viewed an expansion of the client's advertising budget for such
campaigns as unlikely and determined that Leap's resources could be better used
pursuing other opportunities. The Company therefore resigned the account in
December 1995 in order to pursue other assignments.
During fiscal 1997, the Company fully offset the loss of this client's revenues
and grew by 96%. Excluding revenue attributable to this client, revenue from
other existing clients and new business increased $13.3 million or 475% during
fiscal 1997 as compared to fiscal 1996.
In March 1997, the Company received notice from a client that it was reassigning
its account to another agency. The account had accounted for 3.1% and 25.1% of
consolidated revenues for the years ending January 31, 1998 and 1997,
respectively.
In October 1997, the Company received notice from a client that it was
consolidating its advertising accounts and reassigning its account to another
agency. This client accounted for 5.5% and 23.4% of consolidated revenues for
the years ending January 31, 1998 and 1997, respectively.
Another 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. This
client accounted for 36.3% of the Company's consolidated revenues for the year
ending January 31, 1998.
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 manage the
acquisitions successfully or generate additional revenues in the near term, and
any inability to do so may have a materially adverse effect on the Company's
business, financial condition and operating results.
NOTE REGARDING FORWARD LOOKING STATEMENTS
This report contains forward-looking statements (within the meaning of the
Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties. When used in this report, the words "anticipate," "believe,"
"estimate," "expect" and similar expressions as they relate to the Company or
its Management are intended to identify such forward-looking
15
<PAGE>
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.
Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants 17
Consolidated Balance Sheets as of January 31, 1998 and 1997 18
Consolidated Statements of Operations for the Fiscal Years Ended
January 31, 1998, 1997, and 1996 20
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended January 31, 1998, 1997, and 1996 21
Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 31, 1998, 1997 and 1996 22
Notes to Consolidated Financial Statements 23
</TABLE>
16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of The Leap Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Leap Group,
Inc. (a Delaware corporation) and subsidiaries as of January 31, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Leap Group, Inc.
and subsidiaries as of January 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 5, 1998
(except with respect to the
second paragraph of Note 15,
as to which the date is
April 30, 1998.)
17
<PAGE>
The Leap Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 31,
--------------
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,214,261 $32,312,749
Accounts receivable (net of allowance of $859,611
and $30,000, respectively) 6,348,071 4,793,937
Costs in excess of billings (net of allowance of
$85,374 and $40,000, respectively) 951,214 218,721
Prepaid expenses 249,203 215,174
Refundable income taxes 320,000 -
Deferred income tax asset 530,000 -
----------- -----------
Total current assets 15,612,749 37,540,581
PROPERTY AND EQUIPMENT
Land 158,921 158,921
Building and building improvements 504,472 471,291
Leasehold improvements 1,255,062 20,609
Computer equipment 3,606,318 804,534
Furniture and equipment 1,197,926 259,074
----------- -----------
6,722,699 1,714,429
Less accumulated depreciation (1,528,867) (525,068)
----------- -----------
Net property and equipment 5,193,832 1,189,361
OTHER ASSETS
Building held for sale 2,321,689 -
Intangible assets 17,596,464 -
Deferred income tax asset 2,430,061 64,622
Other assets 2,899,426 1,065,048
----------- -----------
Total other assets 25,247,640 1,129,670
TOTAL ASSETS $46,054,221 $39,859,612
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these balance sheets.
18
<PAGE>
<TABLE>
<CAPTION>
January 31,
---------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 4,579,435 $ 1,834,331
Accrued expenses 1,207,237 809,939
Accrued restructuring costs 630,000 -
Billings in excess of costs 394,760 214,264
Notes payable 7,613,478 -
Current portion of capital lease obligations 368,006 52,066
----------- -----------
Total current liabilities 14,792,916 2,910,600
LONG-TERM LIABILITIES
Deferred income tax liability - 294,326
Capital lease obligations 420,591 71,999
----------- -----------
Total long-term liabilities 420,591 366,325
TOTAL LIABILITIES $15,213,507 $ 3,276,925
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
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, 13,636,866 and 13,600,000 shares
issued and outstanding as of January 31, 1998
and 1997, respectively 136,369 136,000
Additional paid in capital 35,600,964 35,581,344
Retained earnings (accumulated deficit) (4,745,489) 865,343
Less cost of common stock held in treasury (50,000 shares
of January 31, 1998) (151,130) -
----------- -----------
Total stockholders' equity 30,840,714 36,582,687
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $46,054,221 $39,859,612
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these balance sheets.
19
<PAGE>
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
----------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Revenues $30,660,039 $16,087,986 $8,209,622
Operating expenses:
Direct costs and related expenses 11,451,736 8,847,323 3,622,016
Salaries and related expenses 18,390,286 4,252,019 2,246,963
General and administrative expenses 9,440,915 1,602,644 984,966
Restructuring expenses 767,323 - -
----------- ----------- ----------
Total operating expenses 40,050,260 14,701,986 6,853,945
Operating income/(loss) (9,390,221) 1,386,000 1,355,677
Other income and (expense), net 269,024 456,293 (161,194)
----------- ----------- ----------
Income/(loss) before income taxes (9,121,197) 1,842,293 1,194,483
Income tax (expense)/benefit 3,510,365 (536,362) (494,023)
----------- ----------- ----------
Net income/(loss) $(5,610,832) $ 1,305,931 $ 700,460
=========== =========== ==========
Net income/(loss) per share
Basic $ (0.41) $ 0.12 $ 0.07
Diluted $ (0.41) $ 0.12 $ 0.07
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
20
<PAGE>
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Retained Earnings/ Total
--------------------- Paid In Accumulated Treasury Shareholders'
Shares Amounts Capital Deficit) Shares (Deficit)/Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 31, 1995 9,600,000 $ 96,000 ($95,000) ($1,141,048) - ($1,140,048)
Net income - - - 700,460 - 700,460
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1996 9,600,000 96,000 (95,000) (440,588) - (439,588)
Issuance of additional shares
for the initial public offering 4,000,000 40,000 35,676,344 - - 35,716,344
Net income - - - 1,305,931 - 1,305,931
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1997 13,600,000 136,000 35,581,344 865,343 - 36,582,687
Direct offering expenses - - (45,545) - - (45,545)
Issuance of additional shares for:
Stock option exercises 14,667 147 43,854 - - 44,001
Stock purchase plan purchase 22,199 222 21,311 - - 21,533
Repurchase of shares - - - - (151,130) (151,130)
Net loss - - - (5,610,832) - (5,610,832)
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1998 13,636,866 $136,369 $35,600,964 (4,745,489) ($151,130) $ 30,840,714
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
21
<PAGE>
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
------------------------------------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income/(loss) ($ 5,610,832) $ 1,305,931 $ 700,460
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,173,733 322,531 169,598
Deferred income taxes (3,189,765) 229,704 477,793
Changes in operating assets and liabilities:
Accounts receivable 1,895,750 (4,431,549) 286,369
Costs in excess of billings 181,158 400,939 (28,397)
Prepaid expenses (40,367) (172,973) (23,916)
Refundable income taxes (320,000) - -
Other assets 93,092 (208,775) (27,795)
Accounts payable 2,592,916 936,198 (1,102,426)
Accrued expenses (502,702) 578,987 (34,958)
Accrued restructuring expenses 630,000 - -
Billings in excess of costs (129,504) 214,264 -
Income tax payable - - (16,230)
- -------------------------------------------------------------------------- ----------- -----------
Net Cash (Used in)/Provided by Operating
Activities (2,226,521) (824,743) 400,498
Cash Flows from Investing Activities:
Acquisitions, net of cash (24,057,470) - -
Capital expenditures (1,891,636) (488,566) (241,947)
Capitalized software development costs (531,569) (825,000) -
Issuance of notes receivable (1,819,770) - -
- -------------------------------------------------------------------------- ----------- -----------
Net Cash Used in Investing Activities (28,300,445) (1,313,566) (241,947)
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 19,989 35,716,344 -
Payments for treasury stock (151,130) - -
Net borrowings/(repayments) on:
Line of credit - (218,356) (722,517)
Notes payable 5,648,000 (241,022) 241,022
Mortgage payable - (418,214) (35,790)
Note payable to officer - (400,000) 400,000
Capital lease obligations (88,381) (35,675) -
- -------------------------------------------------------------------------- ----------- -----------
Net Cash Provided by/(Used in) Financing
Activities 5,428,478 34,403,077 (117,285)
Net Increase/(Decrease) in cash and cash equivalents (25,098,488) 32,264,768 41,266
Cash and cash equivalents, at beginning of period 32,312,749 47,981 6,715
- -------------------------------------------------------------------------- ----------- -----------
Cash and cash equivalents, at end of period $ 7,214,261 $32,312,749 $ 47,981
Supplementary disclosure of cash paid during the period:
Interest paid $ 999,316 $ 163,109 $ 166,898
Income taxes paid $ 15,063 $ 400,056 -
Supplementary disclosure of noncash investing and
financing activities:
Property purchased and financed with notes payable $ 1,965,478 - -
Equipment purchased under capital lease obligations - $ 74,035 $ 85,704
The accompanying notes to the consolidated financial statements are an integral part of these statements.
</TABLE>
22
<PAGE>
The Leap Group, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS
The Leap Group, Inc. ("the Company") is a creatively-focused advertising holding
company providing innovative consumer marketing, advertising and Internet
related services and products to market-leading companies.
The Leap Group, Inc. is a Delaware corporation which was incorporated in March
1996 to act as the parent company for The Leap Partnership, Inc. ("Leap
Partnership"), an Illinois corporation established in September 1993.
In October 1996, the Company completed its Initial Public Offering (the
"Offering") and issued 4,000,000 shares of its common stock at $10.00 per share.
The Company received proceeds of approximately $35.7 million in cash, net of
underwriting commissions and other Offering costs.
In December 1996, the Company formed a new wholly owned subsidiary, Quantum Leap
Communications, Inc. ("QLC"), a Delaware corporation. QLC was formed to develop
distribution systems and to produce content that will help advertisers to
communicate more effectively with targeted consumers in non-traditional ways
primarily using new media over the Internet.
In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR Communications, Inc. ("YAR"). YAR employs more than 175 multicultural
specialists under one roof allowing clients the ability to communicate brand
messages with one voice across more than 80 languages in 100 countries. YAR
provides culturally relevant marketing and advertising for global clients and
for all major U.S. ethnic and global markets.
In November 1997, the Company created a wholly owned subsidiary, One World
Communications, Inc. ("OWC"). This new subsidiary in turn acquired certain
property and equipment and the ongoing business of Kang & Lee Advertising, Inc.
and K&L West Advertising, Inc. (jointly referred to as "Kang & Lee"). Kang & Lee
is a U.S. based, full-service advertising agency specializing in marketing to
Asian consumer target groups including the Chinese, Korean, Japanese, Filipino
and Asian-Indian nationalities and cultures.
In launching OWC, the Company brings YAR and Kang & Lee, the two leading
agencies specializing in multicultural marketing and advertising, together.
NOTE 2 - MANAGEMENT'S PLANS
During fiscal 1998, the Company experienced an operating loss of approximately
$9.4 million, as compared to operating income of $1.4 million during fiscal
1997. The loss is attributable to a number of matters:
1) The loss of two clients which had accounted for $2.7 million in fee revenue
and $5.1 million in production revenue during fiscal 1997. During fiscal
1998, these two clients accounted for $1.4 million in fee revenue and $1.1
million in production revenue.
2) The establishment of an office in Los Angeles in anticipation of new
business opportunities. This office incurred an operating loss of $4.3
million during fiscal 1998 and was restructured as discussed in Note 7.
3) Continued investment in new media business development, resulting in an
operating loss for Quantum Leap of $2.1 million for fiscal 1998.
4) An overall increase in staffing levels and infrastructure in order to
support anticipated new business.
23
<PAGE>
In response to the loss incurred during fiscal 1998, management's plans include
the following:
1) Continued pursuit of profitable new client relationships and additional
business from existing clients.
2) The restructured Los Angeles office is expected to realize savings of at
least $3.5 million during fiscal 1999, absent any revenues generated by the
office, which would serve to further improve overall operating results.
3) With an increased revenue base and certain infrastructure reductions,
the Company has seen Quantum Leap become a break-even business unit by the
fourth quarter of fiscal 1998. Management will continue to identify new
revenue opportunities while maintaining its expense structure.
4) As a general response to the lost clients and significant operating losses
in the fall of fiscal 1998, management reduced its expense structure. This
resulted in anticipated annual savings of approximately $1.4 million in
salary and related expenses. Further, certain executives voluntarily agreed
to reduce their salaries, resulting in anticipated savings of approximately
$1.0 million during fiscal 1999.
5) Management will focus on maintaining the profitability of each operating
unit and will continue to examine the cost structure to enhance operating
efficiencies.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying Consolidated Financial Statements present all the entities
which now comprise the Company as if they were combined at their inception or at
the time of acquisition pursuant to the purchase method of accounting. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, certificates of deposit,
U.S. Treasury Notes and Bills, and other money market instruments with short-
term maturities. These investments are stated at cost, which approximates fair
value, and are also considered cash equivalents for the purposes of reporting
cash flows.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument held by the Company:
--Cash and cash equivalents, trade receivables and trade payables: the
carrying amounts approximate fair value because of the short maturity of
these items.
--Notes payable to banks and mortgage payable: due to the floating interest
rate on these obligations, the carrying amounts approximate fair value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Company
policy provides for capitalization of all major expenditures for renewal and
improvements and for current charges to income for repairs and maintenance. The
provision for depreciation has been calculated using straight-line and
accelerated methods over the estimated economic lives of the related assets as
follows:
Building and building improvements 39 years
Computer equipment 3 - 7 years
Furniture and equipment 5 - 7 years
24
<PAGE>
Leasehold improvements are amortized over the lesser of their useful lives or
the remaining term of the related lease.
Building Held for Sale
During the year, the Company purchased a building to house its Los Angeles
operation. As a result of the restructuring discussed in Note 7, the building is
not currently fully utilized. As such, the Company intends to sell the building.
It is classified as "Building Held for Sale" on the accompanying Balance Sheet.
Purchased Software Costs
Software that is purchased for use by the Company and has an expected life
greater than one year is capitalized and classified within Other Assets. The
Company has adopted a policy to depreciate these costs over a two-year period
using the straight-line method.
Research and Development Costs
Research and development costs are charged to expense as incurred. However, the
costs incurred for the development of computer software that will be licensed,
sold, leased or otherwise marketed are capitalized once technological
feasibility has been established. These capitalized costs are subject to an
ongoing assessment of recoverability based upon anticipated future revenues and
changes in hardware and software technologies. Costs that are capitalized
include contracted outside labor, direct labor and related overhead.
Amortization of capitalized software development costs begins when the product
is available for general release. Amortization is provided on a product-by-
product basis using the straight-line method over periods not exceeding three
years. Unamortized capitalized software development costs determined to be in
excess of net realizable value of the product are expensed immediately.
Revenue Recognition
Retainers from fixed fee arrangements, typically in the form of monthly
retainers, are recognized over the period in which services are rendered.
Revenues from production services are recognized as the services are completed.
Outside production costs are initially recorded as costs in excess of billings
and are expensed as direct costs and related expenses at completion of such
services. Commissions earned from fees based upon third-party media placements
are recognized as revenues when the Company-created materials appear on various
media in accordance with industry practice. Salaries and other related general
and administrative costs are expensed as incurred. Billings in excess of costs
are typically payments received in advance of work to be performed. This
deferred revenue will be recognized as income when services are provided.
Concentration of Credit and Other Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with Off-
Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk,
requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet items. The
Company attempts to limit its concentration of credit risk by securing clients
which are well-established and credit-worthy advertisers of consumer and
industrial goods and services.
While the Company typically enters into written agreements with its clients, at
times it performs services prior to the execution of such agreements, and
written contracts are typically terminable by either party on short notice,
often 90 days and in certain instances less. Management considers the
relationships with existing clients to be good; however, the loss of any one or
more of the Company's significant clients could have a materially adverse effect
on the Company's business, financial condition and results of operations.
For the year ended January 31, 1998, one client accounted for 36.3% of
consolidated revenues. Three clients accounted for 25.1%, 23.4% and 18.9%,
respectively, of consolidated revenues during fiscal 1997 and one client
accounted for 66.4% of consolidated revenues during fiscal 1996.
25
<PAGE>
Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes, which requires recognition of deferred tax assets and liabilities for the
expected future effects of all deductible temporary differences, loss
carryforwards, and tax credit carryforwards. If deemed necessary, deferred tax
assets are reduced by a valuation allowance for the amount of any tax benefits
which are not expected to be realized.
Per Share Data
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 years ended January 31, 1998, 1997 and 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
For the years ended January 31, 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Common shares outstanding (basic) 13,615 10,933 9,600
Common stock equivalents -- 193 --
------ ------ -----
Diluted 13,615 11,126 9,600
</TABLE>
Management's Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which established standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. SFAS No. 130
is effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
Because of the recent issuance of this standard, management has been unable to
fully evaluate the impact, if any, the standard may have on future financial
statement disclosures. Results of operations and financial position, however,
will be unaffected by implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes standards for the way that public companies report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997 and requires comparative information
for earlier years to be restated. Because of the recent issuance of this
standard, management has been unable to fully evaluate the impact it may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.
Reclassifications
Certain amounts as previously reported have been reclassified to conform to
current year classifications.
26
<PAGE>
NOTE 4 - ACQUISITIONS
In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR. The acquisition was accounted for as a purchase and the results of YAR's
operations since April 1, 1997, are included in the Company's Statement of
Operations for fiscal year 1998.
The total 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.
The purchase price was allocated to the net assets acquired, as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of tangible net assets $ 6,230,000
Goodwill $17,212,000
-----------
$23,442,000
</TABLE>
The goodwill is being amortized on a straight-line basis over twenty years. The
purchase price allocation is still considered preliminary and will be finalized
during fiscal 1999. Upon final determination of the purchase price allocation,
any subsequent adjustments will affect goodwill. (See Note 15)
In November 1997, the Company acquired certain property and equipment and the
ongoing business of Kang & Lee. The acquisition was accounted for as a purchase
and the results of Kang & Lee's operations since November 1, 1997 are included
in the Company's Statement of Operations for fiscal 1998.
The purchase price was approximately $1.4 million, including approximately
$80,000 of acquisition-related costs. Additionally, the purchase agreement
provides for contingent considerations equal to 40% of Kang & Lee's pre-tax
income for each of the next three years, as defined.
The purchase price was allocated to the net assets acquired, as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of tangible net assets $ 315,000
Goodwill $1,074,000
----------
$1,389,000
</TABLE>
The goodwill is being amortized on a straight-line basis over twenty years.
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>
Fiscal year
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Revenues $ 45,902,442 $47,290,932
Net Income/(Loss) $ (1,994,905) $ 3,037,952
Net Income/(Loss) per share -- Basic $ (.15) $ .28
Net Income/(Loss) per share -- Diluted $ (.15) $ .27
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that 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.
27
<PAGE>
NOTE 5 - OTHER ASSETS
As of January 31, 1998 and 1997, Other Assets includes approximately $1,315,000
and $825,000, respectively, of capitalized software development costs. These
costs are being amortized over a three-year period commencing when the product
was available for general release. Amortization expense related to capitalized
software development costs totaled $370,000 and $22,000 for fiscal years 1998
and 1997, respectively.
As of January 31, 1998 and 1997, Other Assets also includes approximately
$255,000 and $214,000, respectively, of purchased software costs. It is the
Company's policy to amortize purchased software costs over a two-year period.
Amortization expense related to the purchased software was approximately $80,000
and $58,000 for fiscal years 1998 and 1997, respectively.
In February 1997, the Company loaned $1 million to Vivid Publishing, Inc.
("VPI"), an Internet production house in exchange for a note receivable. The
note is convertible into 10% of the common stock of VPI and is secured by a
pledge of VPI's common stock. Under the note, the Company may at its option loan
up to an additional $1.0 million on substantially the same terms. In March 1997,
the Company exercised this option and has loaned an additional $714,000 to VPI.
The loans to VPI bear interest at the prime rate plus 2% per annum, with
interest paid semiannually. The $1.7 million note receivable and $105,770 of
accrued interest on the loans is included in Other Assets and $164,065 of
Interest Income has been recognized through January 31, 1998.
In connection with the acquisition of YAR in April 1997 and Kang & Lee in
November 1997, the Company recorded goodwill of approximately $17,212,000 and
$1,074,000 respectively. The Company is amortizing these costs over twenty years
commencing on the respective acquisition dates. Goodwill amortization related to
YAR and Kang & Lee totaled approximately $690,000 for fiscal year 1998.
NOTE 6 - NOTES PAYABLE
On March 9, 1994, the Company secured a loan for $480,000 to purchase the
building in which the Company's current principal offices are located. The
three-year balloon note bore interest at the rate of 8.5%, payable in monthly
principal and interest installments of $5,995 through March 9, 1997, and was
collateralized by a mortgage on the Company's offices. This loan was refinanced
on May 30, 1996. The new loan, which was in the amount of $596,000, bore an
interest rate of prime plus 1%, and was payable in monthly principal and
interest installments of $7,794 through May 2001, with a balloon payment of
approximately $360,000 due in June 2001. The loan was also secured by a mortgage
on the building in which the Company's current principal offices are located. In
October 1996, this loan was repaid with proceeds from the Offering.
On October 4, 1995, the Company obtained an additional line of credit for up to
$500,000 to purchase computer and office equipment. The note was secured by all
the computer equipment of the Company and was guaranteed by certain stockholders
of the Company. In October 1996, the debt was retired with proceeds from the
Offering.
On October 4, 1995, the Company obtained a line of credit with a bank for up to
$1,500,000 with interest at 9.5% per annum. On July 5, 1996, the agreement
expired and was subsequently extended through October 31, 1996. The line was
collateralized by substantially all of the Company's general business assets and
by the guarantees of certain stockholders of the Company. In October 1996, the
outstanding balance on this line of credit was repaid with proceeds from the
Offering.
In October 1996, the Company obtained a new line of credit from a bank secured
by collateral cash balances, money market and other cash equivalent instruments
of the Company. The line provides for borrowings up to the lesser of
28
<PAGE>
(i) $24 million or (ii) 90 to 95% of the Company's available cash and cash
equivalent balances, to fund working capital requirements and for other general
corporate purposes of the Company. The interest rate on the loan was at LIBOR
plus 0.5%. In April 1997 and July 1997, the Company borrowed an aggregate of
$22.7 million to fund the acquisition of YAR. On September 30, 1997, the entire
balance and accrued interest was repaid with the proceeds from maturing U.S.
Treasury Securities and this line of credit was retired.
In February 1997, the Company obtained a new line of credit from a bank to
provide working capital financing and funds for other general corporate purposes
of the Company. The line of credit is secured by certain assets of the Company,
including accounts receivable, equipment and general intangibles, and provides
for borrowings up to a maximum principal amount of $8 million. The interest 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 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
January 31, 1998, the outstanding balance on this line of credit was $4,173,000.
In May 1997, the Company purchased a commercial office building for $2 million
to provide facilities for its Los Angeles office. A term note for $1.4 million
was financed by the seller over a one-year term at 9% and is collateralized by
the L.A. office building. The agreement also contains an option to extend the
note for one additional year and management intends to exercise this extension.
In May 1997, the Company also obtained a new line of credit from a bank to fund
the purchase of the new office building. The line originally provided for
borrowings of $543,000 and bore interest at 6.5%, and was secured by cash funds
of the Company held by the bank. On November 12, 1997, the agreement expired,
was subsequently extended for an additional month and was increased to $562,000,
bearing interest at 6.19%. In December 1997, the agreement was again extended to
March 18, 1998, and increased to $565,000 with interest at 6.4%. At January 31,
1998, $565,000 was outstanding on this line of credit. On March 18, 1998, this
outstanding balance was repaid with the proceeds from maturing U.S. Treasury
Securities and this obligation was retired.
On July 9, 1997, the Company borrowed $2.7 million from a bank in connection
with the acquisition of YAR. On September 30, 1997, the balance was repaid with
the proceeds from maturing U.S. Treasury Securities and this obligation was
retired.
In November 1997, one of the Company's wholly-owned subsidiaries obtained a new
line of credit from a bank to provide working capital financing and funds for
other general corporate purposes. The line of credit is secured by substantially
by all the assets of the subsidiary, including accounts receivable, equipment
and general intangibles, and provides for borrowings up to a maximum principal
amount of $5 million. The interest rate on the line is equal to the prime rate.
At January 31, 1998, $1,475,000 was outstanding on this line of credit, of which
$1.3 million was used for the acquisition of Kang & Lee.
NOTE 7 - 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)".
29
<PAGE>
A pretax charge of approximately $767,323 was recorded during the fiscal year
representing employee termination, severance costs and other related costs that
are anticipated to be incurred as a direct result of the plan. As of January 31,
1998, approximately $137,000 had been paid and all remaining costs are expected
to be paid out within a year of the plan's inception.
NOTE 8 - CAPITAL STOCK
Incorporation
On September 20, 1993, The Leap Partnership, Inc. was incorporated in Illinois.
Subsequently, on March 11, 1996, the Company was formed and became the parent to
the wholly owned subsidiaries, Leap Partnership, Lilypad, and Tadpole. In
connection with the formation of the Company, each of the four founding
stockholders of Leap Partnership exchanged their 25 shares of Leap Partnership
common stock for 2,400,000 shares of the Company's common stock. Common stock
and per share amounts have been retroactively restated in the accompanying
financial statements to reflect the effect of the reorganization. The combined
entities have been under common control since inception and have been included
in the consolidated financial statements at historical cost since their
respective dates of inception in a manner similar to a pooling of interests.
The initial certificate of incorporation of the Company authorized 40,000,000
shares of common stock with $.01 par value and 10,000,000 shares of preferred
stock with $.01 par value. On May 29, 1996, the Board of Directors and
Stockholders of the Company approved an amendment to the certificate of
incorporation which increased the total number of authorized shares of common
stock to 100,000,000 and preferred stock to 20,000,000.
Stock Repurchase Program
On June 2, 1997, the Company's Board of Directors approved a Stock Repurchase
Program by which the Company may repurchase up to 1,000,000 shares of the
Company's outstanding common stock from time to time. The total cost of the
program cannot exceed $3,000,000. Company stock may be repurchased on the open
market or in negotiated transactions, depending upon the stock price, market
conditions and other factors. The repurchased shares will be held as treasury
shares and will be available for general corporate purposes. As of January 31,
1998, the Company has purchased 50,000 shares at an aggregate cost of $151,130.
As of January 31, 1998, the Company has remaining authorization under the Stock
Repurchase Program to acquire up to an additional 950,000 shares at a cost not
to exceed $2,848,870.
NOTE 9 - STOCK COMPENSATION PLANS
1996 Stock Option Plan
On January 3, 1996, the Board of Directors and Stockholders of The Leap
Partnership, Inc. adopted the 1996 Stock Option Plan (the "1996 Stock Option
Plan"), which was subsequently amended and restated on March 12, 1996, by the
Board of Directors and Stockholders of the Company, whereby certain eligible
employees may be granted options. The 1996 Stock Option Plan allows issuance of
incentive stock options and nonqualified options. The 1996 Stock Option Plan is
administered by the Stock Option Committee of the Board of Directors. The
exercise price of incentive stock options shall not be less than the stock's
intrinsic fair market value on the date of grant. No more shares were available
for grant under this plan as of January 31, 1997. However, due to current year
cancellations, 7,333 are available for grant as of January 31, 1998.
Employee Incentive Compensation Plan
Effective May 29, 1996, the Company adopted the Employee Incentive Compensation
Plan (the "Incentive Plan"), which permits grants of incentive stock options,
nonqualified stock options, stock appreciation rights, performance shares,
restricted stock, deferred stock and other stock-based awards. The Incentive
Plan authorizes the issuance of up to 2,000,000 shares of Common Stock in
connection with such awards. During fiscal 1998, because of the recent
acquisitions of the Company, 1,500,000 of additional shares were authorized by
shareholders for grant and were reserved under this plan, so that a total of
3,500,000 shares are reserved under this plan. Directors, officers,
30
<PAGE>
employees and consultants of the Company are eligible to receive grants under
the Incentive Plan. At January 31, 1998, 1,787,000 shares were available for
grant under this plan.
Employee Stock Purchase Plan
Effective May 29, 1996, the Company's Board of Directors adopted the Employee
Stock Purchase Plan (the "Stock Purchase Plan"), which provides for the
issuance of a maximum of 500,000 shares of Common Stock. Under Section 423 of
the Internal Revenue Code (the "Code"), eligible employees can have earnings
withheld to be used to purchase shares of the Common Stock on specified dates
determined by the Board of Directors up to a maximum of $25,000 per year. The
price of the Common Stock purchased under the Stock Purchase Plan will be equal
to 85% of the lower of the fair market value of the Common Stock on the
commencement date of each offering period or the specified purchase date (in
each case, averaged over the prior ten trading days). On December 31, 1997,
participating employees purchased 22,199 shares of Company stock. At January 31,
1998, 477,801 shares were available for purchase under the plan.
Non-Employee Director's Stock Option Plan
On May 29, 1996, the Board of Directors adopted the 1996 Non-Employee Directors'
Stock Option Plan (the "Directors' Plan"). The Directors' Plan provides for the
issuance of up to 200,000 nonstatutory stock options to non-employee directors
of the Company. On the effective date of the Offering, each of the three non-
employee directors were granted immediately exercisable options to purchase
20,000 shares of Common Stock at an exercise price equal to the Initial Public
Offering price. Each person who becomes a non-employee director of the Company
after the date of the Offering will automatically be granted nonstatutory
options to purchase 5,000 shares of Common Stock on the date of such directors'
initial election or appointment to the Board of Directors and on each
anniversary of the initial grant date. Such options shall become exercisable one
year after the date of grant or earlier if so provided in the agreement granting
the option to the non-employee director at an exercise price equal to the
intrinsic fair market value of the Common Stock on the date of grant. All
options granted under the Directors' Plan will have a five-year term. At January
31, 1998, 175,000 shares were available for grant under this plan.
Pro Forma Stock-Based Compensation Disclosures
Under various plans, the Company may grant stock options and other awards to key
executives, directors, management and creative personnel. Transactions under the
various stock option plans for the periods indicated were as follows:
<TABLE>
<CAPTION>
Weighted Average
STOCK OPTIONS OUTSTANDING AT: Shares Exercise Price
- --------------------------------------------------------------------------------
January 31, 1995 -
- --------------------------------------------------------------------------------
<S> <C> <C>
Granted 504,000 $3.00
Exercised - -
Canceled - -
- --------------------------------------------------------------------------------
January 31, 1996 504,000 $3.00
- --------------------------------------------------------------------------------
Granted 2,086,000 $7.40
Exercised - -
Canceled - -
- --------------------------------------------------------------------------------
January 31, 1997 2,590,000 $5.96
- --------------------------------------------------------------------------------
Granted 1,719,000 $3.57
Exercised 14,667 $3.00
Canceled 274,333 $7.00
- --------------------------------------------------------------------------------
January 31, 1998 4,020,000 $5.26
- --------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
The following table summarizes information about stock options outstanding at
January 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------- ---------------------------
Weighted Average Weighted Average Weighted
Exercise Price Shares Exercise Price Remaining Term Shares Average Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.92-$2.75 543,000 $1.96 4.72 177,667 $1.96
$3.00-$4.75 1,552,000 $3.83 8.39 752,000 $3.41
$7.00-$10.00 1,925,000 $7.34 8.11 1,580,167 $7.32
- ------------------------------------------------------------------------------------------------------
4,020,000 $5.26 7.76 2,509,834 $5.77
</TABLE>
The Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its plans.
If the compensation expense for the Company's stock-based compensation plans had
been determined based on the fair value at the grant date consistent with the
requirements of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, then the Company's pro forma net income (loss) and
pro forma net income (loss) per share would have been as indicated below:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported ($5,610,832) $ 1,305,931 $700,460
Pro forma ($6,395,506) ($4,511,769) $450,995
- ---------------------------------------------------------------------------
Net income (loss) per share
As reported ($0.41) $0.12 $0.07
Pro forma ($0.47) ($0.41) $0.05
- ---------------------------------------------------------------------------
</TABLE>
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.34%-5.55% 6.78% 6.78%
Expected life 1-5 years 5-10 years 10 years
Expected volatility 57% 75% 75%
Expected dividend yield 0% 0% 0%
- ----------------------------------------------------------------------------
</TABLE>
NOTE 10 - EMPLOYEE RETIREMENT PLANS
Effective January 1, 1997, the Company adopted a defined contribution plan
established pursuant to Section 401(k) of the Internal Revenue Code. Employees
contribute a percentage of their salaries to the plan, subject to the maximum
IRS prescribed deferral percentage and dollar limitation. The terms of the plan
call for discretionary profit sharing contributions by the Company as determined
annually by the Board of Directors. There were no Company contributions made to
the plan through January 31, 1998.
The Company has no other obligations for post-retirement benefits.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space, telephones, copiers and other equipment under
operating leases and computer equipment under capital leases. Minimum future
lease payments under these leases are as follows:
32
<PAGE>
<TABLE>
<CAPTION>
Operating Capital
Fiscal Year ending January 31, leases leases Totals
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 $1,322,039 $ 428,877 $1,750,916
2000 1,236,336 389,230 1,625,566
2001 1,122,967 43,802 1,166,769
2002 1,132,782 - 1,132,782
2003 980,924 - 980,924
Thereafter 1,958,100 - 1,958,100
- -----------------------------------------------------------------------------------------------------
Total future minimum lease payments $7,753,148 $ 861,909 $8,615,057
Less amount representing interest (73,312)
---------
Obligations under capital leases $ 788,597
Less current portion of capital lease obligation (368,006)
---------
Non-current portion of capital lease obligation $ 420,591
=========
</TABLE>
Litigation
In February 1998, Venture Direct Worldwide, Inc. filed a lawsuit in the Supreme
Court of New York against an employee of Quantum Leap Communications, 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 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.
Employment Agreements
The Company has entered into employment agreements with seven key executives
providing for annual salaries ranging from $200,000 to $300,000, which expire at
various dates ranging from March 1999 through November 2000. Mr. Lutterbach's
employment with the Company terminated in April 1998. Certain key executives
have agreed to voluntarily reduce their annual salary for fiscal 1999 to
$52,000.
NOTE 12 - OTHER INCOME AND EXPENSE
Included in Other Income and Expense for the years ended January 31, 1998, 1997
and 1996, is interest income of $1,313,365, $619,000 and $0, and interest
expense of $1,044,341, $163,000 and $161,000, respectively.
NOTE 13 - INCOME TAXES
Income tax expense is calculated according to the provisions of Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes, which
requires the liability method as described in Note 3.
33
<PAGE>
The income tax provisions (benefits) charged to net income are summarized as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
--------------------------------
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current ($290,000) $292,229 $ 16,230
Deferred (2,516,314) 188,475 406,125
- -----------------------------------------------------------------
($2,806,314) 480,704 $422,355
State:
Current ($30,000) $ 14,429 -
Deferred (674,051) 41,229 71,668
- -----------------------------------------------------------------
($704,051) $ 55,658 $ 71,668
- -----------------------------------------------------------------
Total Tax Provision (Benefit) ($3,510,365) $536,362 $494,023
</TABLE>
The statutory federal income tax rate is reconciled to the
Company's effective income tax rate below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
-----------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate (34.0)% 34.0% 34.0%
State, net of Federal tax benefit (3.9) 4.8 4.9
Interest income, exempt from State income taxes (0.8) (2.2) -
Change in valuation allowance - (9.7) 1.3
Other 0.2 2.2 1.2
- -----------------------------------------------------------------------------------
Effective rate (38.5)% 29.1% 41.4%
</TABLE>
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
The components of the net current deferred income tax asset are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
-------------------------------
1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforward $ - $ 8,698
Alternative minimum tax credit - -
Compensation accruals 41,925 16,536
Bad debt reserves 244,431 27,300
Accrued restructuring costs 240,386 -
Other reserves 3,258 12,088
- -----------------------------------------------------------------
Net current deferred income tax asset $ 530,000 $ 64,622
The components of the net long-term deferred income tax asset
(liability) are as follows:
FISCAL YEAR ENDED JANUARY 31,
-------------------------------
1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforward $2,930,067 $ 34,792
Property and Equipment (12,217) 34,158
Capitalized software costs (364,130) (363,276)
Goodwill (104,217) -
Other (19,442) -
- -----------------------------------------------------------------
Net long-term deferred income tax
asset/(liability) $2,430,061 ($294,326)
</TABLE>
34
<PAGE>
The Company has net operating loss carryforwards for federal and state income
tax purposes of approximately $6.6 million and $8.7 million, respectively. These
carryforwards begin to expire in the fiscal year 2013.
At January 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.
The Company's estimates of future taxable income are based on projections which
include a number of assumptions related to revenues and expenses. These
projections anticipate an overall return to profitability during fiscal 1999,
based primarily on anticipated taxable income from YAR and Kang & Lee and the
impact of significant cost reductions implemented at The Leap Partnership. The
projections beyond fiscal 1999 assume increased revenues from new business, of
which there can be no assurances that such new business will be generated. If
the assumed revenue increases do not occur, management intends to make any
additional cost-cutting efforts as deemed necessary to maintain overall Company-
wide profitability. Management will continue to evaluate the realizability of
the deferred tax asset and, if adverse changes occur in the Company's business,
it is possible that a valuation reserve could be provided against some or all of
the deferred tax asset in a future period. Such a reserve would result in a
charge to the Company's income tax provision which could be material to the
operating results of that period.
NOTE 14 - LOSS OF SIGNIFICANT CLIENTS
In prior years, revenues from one major client represented approximately 66.4%
of the Company's total revenues in fiscal 1996. In December 1995, the Company
resigned the account of this client in order to pursue other assignments.
In March 1997, a client representing approximately 3.1%, 25.1% and 5.5% of
revenues during the years ended January 31, 1998, 1997 and 1996, respectively,
gave the Company a notice of termination effective June 10, 1997.
In October, 1997, a client representing 5.5%, 23.4% and 0.04% of revenues during
the years ended January 31, 1998, 1997 and 1996, respectively, gave the Company
notice of termination effective December 31, 1997.
NOTE 15 - SUBSEQUENT EVENTS
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 $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.
Acquisition
In connection with the YAR acquisition, a final determination on the acquisition
escrow balance has been made. The Company received $3 million of cash on April
30, 1998, which will reduce the purchase price of the acquisition and the amount
of recorded goodwill.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
There have been no changes in or disagreements with independent auditors on
accounting and financial disclosure.
35
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Reference is made to the 1998 Proxy Statement under the headings "Election of
Directors" and "Executive Compensation and Certain Transactions--Other Executive
Officers" (hereby incorporated by reference) for this information.
Item 11. Executive Compensation.
Reference is made to the 1998 Proxy Statement under the heading "Executive
Compensation and Certain Transactions" (hereby incorporated by reference) for
this information.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Reference is made to the 1998 Proxy Statement under the headings "Security
Ownership of Management and Certain Beneficial Owners" (hereby incorporated by
reference) for this information.
Item 13. Certain Relationships and Related Transactions.
Reference is made to the 1998 Proxy Statement under the heading "Executive
Compensation and Certain Transactions" (hereby incorporated by reference) for
this information.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Consolidated Financial Statements--
The following Consolidated Financial Statements and related Notes and
Report of Independent Public Accountants appearing in the 1998 Annual
Report, are contained herein in Part II, Item 8.
Report of Arthur Andersen LLP, Independent Public Accountants
Consolidated Balance Sheets as of January 31, 1998 and 1997
Consolidated Statements of Operations for the Fiscal Years Ended January
31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended
January 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Fiscal Years Ended January
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
36
<PAGE>
2. Financial Statement Schedules--
Are not submitted because they are not required or because the required
information is included in the Consolidated Financial Statements or Notes
thereto.
3. Exhibits--
The following exhibits are filed with this Report or incorporated by reference
as set forth below.
<TABLE>
<CAPTION>
Exhibit Number Exhibits
- -------------- --------
<C> <S>
*3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
*3.2 Amended and Restated Bylaws of the Registrant.
*4.1 Specimen Stock Certificate Representing Common Stock.
****10.1 Line of Credit Agreement, dated November 5, 1997, between
YAR Communications, Inc. and The Chase Manhattan Bank (a.k.a.
The Chemical Bank)
10.2 Mortgage Agreement, dated January 27, 1998, between The Leap
Partnership, Inc. and Alliance Banking Company.
*10.3 Revolving Credit Agreement, dated October 7, 1996, by and
between the Company and the Union Bank of Switzerland for a
line of credit up to $24,000,000, and related documentation.
***10.4 Revolving Credit Agreement, dated February 18, 1997, by and
between the Company and Manufacturers Bank, for a line of
credit up to $8,000,000, and related documentation.
10.4a Second Loan Modification Agreement, dated January 30, 1998,
between The Leap Group, Inc. and Manufacturer's Bank
**10.8 The Leap Group, Inc. Employee Incentive Compensation Plan.
**10.9 The Leap Group, Inc. Non-employee Directors' Stock Option
Plan.
**10.10 The Leap Group, Inc. Employee Stock Purchase Plan.
**10.11 The Leap Group, Inc. Amended and Restated 1996 Stock Option
Plan.
*10.13 Employment Agreement dated March 12, 1996 by and between the
Company and R. Steven Lutterbach.
*10.14 Employment Agreement dated March 12, 1996 by and between the
Company and Thomas Sharbaugh.
*10.15 Employment Agreement dated March 12, 1996 by and between the
Company and Frederick Smith.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
*10.16 Employment Agreement dated March 12, 1996 by and between the
Company and George Gier.
*10.17 Employment Agreement dated March 12, 1996 by and between the
Company and Joseph A. Sciarrotta.
*10.18 Form of Indemnification Agreement.
11. Statement Regarding Computation of Per Share Earnings.
13.2 Selected Financial Data from the 1998 Annual Report.
21. Subsidiaries of the Registrant.
23. Consent of Arthur Andersen LLP.
27. Financial Data Schedule.
</TABLE>
* Previously filed with the Securities and Exchange Commission (the "SEC") as
an Exhibit to the Registrant's Registration Statement on Form S-1 (File No.
333-050501) as amended, and incorporated herein by reference.
** Previously filed with the SEC as an Exhibit to the Registrant's
Registration Statement on Form S-8 (File No. 333-24389), and incorporated
herein by reference.
*** Previously filed with the SEC as an Exhibit to the Annual Report on Form
10-K which was filed on May 1, 1997.
****Previously filed with the SEC as an Exhibit to the Quarterly Report on Form
10-Q filed for the Quarter Ended October 31, 1997 on December 15, 1997.
(b) Reports on Form 8-K
Form 8-K dated November 11, 1997 and filed with the Commission on November
26, 1997, describing the acquisition of Kang & Lee Advertising, Inc. and K&L
West Advertising, Inc.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE LEAP GROUP, INC.
By: /s/ FREDERICK A. SMITH
--------------------------------
Frederick A. Smith
Vice Chairman and
Chief Executive Officer
(principal executive, financial
and accounting officer)
Date: May 1, 1998
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities indicated on the 1st day of May, 1998:
/s/ FREDERICK A. SMITH /s/ JOHN G. KEANE
- -------------------------------- --------------------------------
Frederick A. Smith John G. Keane
Chief Executive Officer Director
/s/ THOMAS R. SHARBAUGH /s/ CHARLES J. RUDER
- -------------------------------- --------------------------------
Thomas R. Sharbaugh Charles J. Ruder
Director and President Director
/s/ GEORGE GIER
- --------------------------------
George Gier
Director, Chief Marketing
and Information Officer
and Executive Vice President
39
<PAGE>
EXHIBIT 10.2
The Leap Group, Inc.
Mortgage Agreement, dated January 27, 1997,
between The Leap Partnership, Inc.,
and Alliance Banking Company.
<PAGE>
This document was prepared by:
Alliance Banking Company
- ----------------------------------
500 W. Buffalo Street, P O Box 808
- ----------------------------------
New Buffalo, MI 49117
- ----------------------------------
- --------State of Illinois--------Space Above This Line For Recording Data-------
MORTGAGE
(with Future Advance Clause)
1. DATE AND PARTIES. The date of this Mortgage (Security Instrument) is
January 27, 1998 and the parties, their addresses and tax identification
numbers, if required, are as follows:
MORTGAGOR:
The Leap Partnership, Inc.
22 W. Hubbard Street
Chicago, IL 60610
LENDER: Alliance Banking Company
500 W. Buffalo Street
P.O. Box 808
New Buffalo, MI 49117
2. CONVEYANCE. For good and valuable consideration, the receipt and
sufficiency of which is acknowledged, and to secure the Secured Debt
(defined below) and Mortgagor's performance under this Security Instrument,
Mortgagor grants, bargains, sells, conveys, mortgages and warrants to
Lender the following described property: Lot 5 and the West 1 and 1/3 Feet
of Lot 4 in Wo1cott's Addition to Chicago in the East 1/2 of the North East
1/4 of Section 9, Township 39 North, Range 14 East of the Third Principal
Meridian, in Cook County, Illinois
The property is located in Cook County at 22 W. Hubbard Street, Chicago,
Illinois 60610.
Together with all rights, easements, appurtenances, royalties, mineral
rights, oil and gas rights, all water and riparian rights, ditches, and
water stock and all existing and future improvements, structures, fixtures,
and replacements that may now, or at any time in the future, be part of the
real estate described above (all referred to as "Property").
3. SECURED DEBT AND FUTURE ADVANCES. The term "Secured Debt" is defined as
follows:
A. Debt Incurred under the terms of all promissory note(s),
contract(s), guaranty(s) or other evidence of debt described
below and all their extensions, renewals, modifications or
substitutions. (When referencing the debts below it is suggested
that you include items such as borrowers' names, note amounts,
interest rates, maturity dates, etc.)
/s/ TPS /s/ FS
------- ------
ILLINOIS MORTGAGE (NOT FOR FNMA, FHLMC, FHA OR VA USE) (page 1 of 6)
<PAGE>
B. All future advances from Lender to Mortgagor or other future
obligations of Mortgagor to Lender under any promissory note,
contract, guaranty, or other evidence of debt executed by
Mortgagor in favor of Lender executed after this Security
Instrument whether or not this Security Instrument is
specifically referenced. If more than one person signs this
Security Instrument, each Mortgagor agrees that this Security
Instrument will secure all future advances and future obligations
that are given to or incurred by any one or more Mortgagor, or
any one or more Mortgagor and others. All future advances and
other future obligations are secured by this Security Instrument
even though all or part may not yet be advanced. All future
advances and other future obligations are secured as if made on
the date of this Security Instrument. Nothing in this Security
Instrument shall constitute a commitment to make additional or
future loans or advances in any amount. Any such commitment must
be agreed to in a separate writing.
C. All obligations Mortgagor owes to Lender, which may later arise,
to the extent not prohibited by law, including, but not limited
to, liabilities for overdrafts relating to any deposit account
agreement between Mortgagor and Lender.
D. All additional sums advanced and expenses incurred by Lender for
insuring, preserving or otherwise protecting the Property and its
value and any other sums advanced and expenses incurred by Lender
under the terms of this Security Instrument.
This Security Instrument will not secure any other debt if Lender fails to
give any required notice of the right of rescission.
4. PAYMENTS. Mortgagor agrees that an payments under the Secured Debt will be
paid when due and in accordance with the terms of the Secured Debt and this
Security Instrument.
5. PRIOR SECURITY INTERESTS. With regard to any other mortgage, deed of trust,
security agreement or other lien document that created a prior security
interest or encumbrance on the Property, Mortgagor agrees:
A. To make all payments when due and to perform or comply with all
covenants.
B. To promptly deliver to Lender any notices that Mortgagor receives
from the holder.
C. Not to allow any modification or extension of, nor to request any
future advances under any note or agreement secured by the lien
document without Lender's prior written consent.
6. CLAIMS AGAINST TITLE. Mortgagor will pay all taxes, assessments, liens,
encumbrances, lease payments, ground rents, utilities, and other charges
relating to the Property when due. Lender may require Mortgagor to provide
to Lender copies of an notices that such amounts are due and the receipts
evidencing Mortgagor's payment. Mortgagor will defend title to the Property
against any claims that would impair the lien of this Security Instrument.
Mortgagor agrees to assign to Lender, as requested by Lender, any rights,
claims or defenses Mortgagor may have against parties who supply labor or
materials to maintain or improve the Property.
7. DUE ON SALE OR ENCUMBRANCE. Lender may, at its option, declare the entire
balance of the Secured Debt to be immediately due and payable upon the
creation of, or contract for the creation of, any lien, encumbrance,
transfer or sale of the Property, except for any and all liens from
Manufacturer's Bank. This right is subject to the restrictions imposed by
federal law (12 C.F.R. 591), as applicable. This covenant shall run with
the Property and shall remain in effect until the Secured Debt is aid in
full and this Security Instrument is release .
8. PROPERTY CONDITION, ALTERATIONS AND INSPECTION. Mortgagor will keep the
Property in good condition and make all repairs that are reasonably
necessary. Mortgagor shall not commit or allow any waste, impairment, or
deterioration of the Property. Mortgagor will keep the Property free of
noxious weeds and grasses. Mortgagor agrees that the nature of the
occupancy and use will not substantially change without Lender's prior
written consent. Mortgagor will not permit any change in any license,
restrictive covenant or easement without Lender's prior written consent.
Mortgagor will notify Lender of all demands, proceedings, claims and
actions against Mortgagor, and of any loss or damage to the Property.
Lender or Lender's agents may, at Lender's option, enter the Property at
any reasonable time for the purpose of inspecting the Property. Lender
shall give Mortgagor notice at the time of or before an inspection
specifying a
/s/ TPS /s/ FS
------- ------
(page 2 of 6)
<PAGE>
reasonable purpose for the inspection. Any inspection of the Property shall
be entirely for Lender's benefit and Mortgagor will in no way rely on
Lender's inspection.
9. AUTHORITY TO PERFORM. If Mortgagor fails to perform any duty or any of the
covenants contained in this Security Instrument, Lender may, without
notice, perform or cause them to be performed. Mortgagor appoints Lender as
attorney in fact to sign Mortgagor's name or pay any amount necessary for
performance. Lender's right to perform for Mortgagor shall not create an
obligation to perform, and Lender's failure to perform will not preclude
Lender from exercising any of Lender's other rights under the law or this
Security Instrument. if any construction on the Property is discontinued or
not carried on in a reasonable manner, Lender may take all steps necessary
to protect Lender's security interest in the Property, including completion
of the construction.
10. ASSIGNMENT OF LEASES AND RENTS. Mortgagor irrevocably grants, bargains,
sells, conveys and warrants to Lender as additional security all the right,
title and interest in and to any and all existing or future leases,
subleases, and any other written or verbal agreements for the use and
occupancy of any portion of the Property, including any extensions,
renewals, modifications or Substitutions of such agreements (all referred
to as "Leases") and rents, issues and profits (all referred to as "Rents").
Mortgagor will promptly provide Lender with true and correct copies of all
existing and future Leases. Mortgagor may collect, receive, enjoy and use
the Rents so long as Mortgagor is not in default under the terms of this
Security Instrument.
Mortgagor agrees that this assignment is immediately effective after
default between the parties to this Security Instrument and effective as to
third parties on the recording of the Security Instrument, and this
assignment will remain effective during any period of redemption by the
Mortgagor until the Secured Debt is satisfied. Mortgagor agrees that Lender
may take actual possession of the property without the necessity of
commencing legal action and that actual possession is deemed to occur when
Lender, or its agent, notifies Mortgagor of default and demands that any
tenant pay all future Rents directly to Lender. On receiving notice of
default, Mortgagor will endorse and deliver to Lender any payment of Rents
in Mortgagor's possession and will receive any Rents in trust for Lender
and will not commingle the Rents with any other funds. Any amounts
collected will be applied as provided in this Security Instrument.
Mortgagor warrants that no default exists under the Leases or any
applicable landlord/tenant law. Mortgagor also agrees to maintain and
require any tenant to comply with the terms of the Leases and applicable
law.
11. LEASEHOLDS; CONDOMINIUMS; PLANNED UNIT DEVELOPMENTS. Mortgagor agrees to
comply with the provisions of any lease if this Security Instrument is on a
leasehold. if the Property includes a unit in a condominium or a planned
unit development, Mortgagor will perform all of Mortgagor's duties under
the covenants, by-laws, or regulations of the condominium or planned unit
development.
12. DEFAULT. Mortgagor will be in default if any party obligated on the Secured
Debt fails to make payment when due. Mortgagor will be in default if a
breach occurs under the terms of this Security Instrument or any other
document executed for the purpose of creating, securing or guarantying the
Secured Debt. A good faith belief by Lender that Lender at any time is
insecure with respect to any person or entity obligated on the Secured Debt
or that the prospect of any payment or the value of the Property is
impaired shall also constitute an event of default.
13. REMEDIES ON DEFAULT. In some instances, federal and state law will require
Lender to provide Mortgagor with notice of the right to cure or other
notices and may establish time schedules for foreclosure actions. Subject
to these limitations, if any, Lender may accelerate the Secured Debt and
foreclose this Security Instrument in a manner provided by law if Mortgagor
is in default. Upon default, Lender shall have the right, without declaring
the whole indebtedness due and payable, to foreclose against all or part of
the Property. This Mortgage shall continue as a lien on any part of the
Property not sold on foreclosure.
At the option of Lender, all or any part of the agreed fees and charges.
accrued interest and principal shall become immediately due and payable,
after giving notice if required by law, upon the occurrence of a default or
anytime thereafter. In addition, Lender shall be entitled to all the
remedies provided by law, the terms of the Secured Debt, this Security
Instrument and any related documents. All remedies are distinct, cumulative
and not exclusive, and the Lender is entitled to all remedies provided at
law or equity, whether or not expressly set forth. The acceptance by Lender
of any sum in payment or partial payment on the Secured Debt after the
balance is due or is accelerated or
/s/ TPS /s/ FS
------- ------
(page 3 of 6)
<PAGE>
after foreclosure proceedings are filed shall not constitute a waiver of
Lender's right to require complete cure of any existing default. By not
exercising any remedy on Mortgagor's default, Lender does not waive
Lender's right to later consider the event a default if it continues or
happens again
14. EXPENSES; ADVANCES ON COVENANTS; ATTORNEYS' FEES; COLLECTION COSTS. Except
when prohibited by law, Mortgagor agrees to pay all of Lender's expenses if
Mortgagor breaches any covenant in this Security Instrument. Mortgagor will
also pay on demand any amount incurred by Lender for insuring, inspecting,
preserving or otherwise protecting the Property and Lender's security
interest. These expenses will bear interest from the date of the payment
until paid in full at the highest interest rate in effect as provided in
the terms of the Secured Debt. Mortgagor agrees to pay all costs and
expenses incurred by Lender in collecting, enforcing or protecting Lender's
rights and remedies under this Security Instrument. This amount may
include, but is not limited to, attorneys' fees, court costs, and other
legal expenses. This Security Instrument shall remain in effect until
released.
15. ENVIRONMENTAL LAWS AND HAZARDOUS SUBSTANCES. As used in this section, (1)
Environmental Law means, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA. 42 U.S.C.
9601 et seq.), and all other federal, state and local laws, regulations,
ordinances, court orders, attorney general opinions or interpretive letters
concerning the public health, safety, welfare, environment or a hazardous
substance; and (2) Hazardous Substance means any toxic, radioactive or
hazardous material, waste, pollutant or contaminant which has
characteristics which render the substance dangerous or potentially
dangerous to the public health, safety, welfare or environment. The term
includes, without limitation, any substances defined as "hazardous
material," "toxic substances," "hazardous waste," "hazardous substance," or
"regulated substance" under any Environmental Law.
Mortgagor represents, warrants and agrees that:
A. Except as previously disclosed and acknowledged in writing to
Lender, no Hazardous Substance is or will be located, stored or
released on or in the Property. This restriction does not apply
to small quantities of Hazardous Substances that are generally
recognized to be appropriate for the normal use and maintenance
of the Property.
B. Except as previously disclosed and acknowledged in writing to
Lender, Mortgagor and every tenant have been, are, and shall
remain in full compliance with any applicable Environmental Law.
C. Mortgagor shall immediately notify Lender if a release or
threatened release of a Hazardous Substance occurs on, under or
about the Property or there is a violation of any Environmental
Law concerning the Property. In such an event, Mortgagor shall
take all necessary remedial action in accordance with any
Environmental Law.
D. Mortgagor shall immediately notify Lender in writing as soon as
Mortgagor has reason to believe there is any pending or
threatened investigation, claim, or proceeding relating to the
release or threatened release of any Hazardous Substance or the
violation of any Environmental Law.
16. CONDEMNATION. Mortgagor will give Lender prompt notice of any pending or
threatened action, by private or public entities to purchase or take any or
all of the Property through condemnation, eminent domain, or any other
means. Mortgagor authorizes Lender to intervene in Mortgagor's name in any
of the above described actions or claims. Mortgagor assigns to Lender the
proceeds of any award or claim for damages connected with a condemnation or
other taking of all or any part of the Property. Such proceeds shall be
considered payments and will be applied as provided in this Security
Instrument. This assignment of proceeds is subject to the terms of any
prior mortgage, deed of trust, security agreement or other lien document.
17. INSURANCE. Mortgagor shall keep Property insured against loss by fire,
flood, theft and other hazards and risks reasonably associated with the
Property due to its type and location. This insurance shall be maintained
in the amounts and for the periods that Lender requires. The insurance
carrier providing the insurance shall be chosen by Mortgagor subject to
Lender's approval, which shall not be unreasonably withheld. If Mortgagor
fails to maintain the coverage described above, Lender may, at Lender's
option, obtain coverage to protect Lender's rights in the Property
according to the terms of this Security Instrument.
(page 4 of 6)
/s/ TPS /s/ FS
------- ------
<PAGE>
All insurance policies and renewals shall be acceptable to Lender and shall
include a standard "mortgage clause" and, where applicable, "loss payee
clause." Mortgagor shall immediately notify Lender of cancellation or
termination of the insurance. Lender shall have the right to hold the
policies and renewals. If Lender requires, Mortgagor shall immediately give
to Lender all receipts of paid premiums and renewal notices. Upon loss,
Mortgagor shall give immediate notice to the insurance carrier and Lender.
Lender may make proof of loss if not made immediately by Mortgagor.
Unless otherwise agreed in writing, all insurance proceeds shall be applied
to the restoration or repair of the Property or to the Secured Debt,
whether or not then due, at Lender's option. Any application of proceeds to
principal shall not extend or postpone the due date of the scheduled
payment nor change the amount of any payment. Any excess will be paid to
the Mortgagor. if the Property is acquired by Lender, Mortgagor's right to
any insurance policies and proceeds resulting from damage to the Property
before the acquisition shall pass to Lender to the extent of the Secured
Debt immediately before the acquisition.
18. ESCROW FOR TAXES AND INSURANCE. if otherwise provided in a separate
agreement, Mortgagor may be required to pay to Lender funds for taxes and
insurance in escrow.
19. FINANCIAL REPORTS AND ADDITIONAL DOCUMENTS. Mortgagor will provide to
Lender upon request, any financial statement or information Lender may deem
reasonably necessary. Mortgagor agrees to sign, deliver, and file any
additional documents or certifications that Lender may consider necessary
to perfect, continue, and preserve Mortgagor's obligations under this
Security Instrument and Lender's lien status on the Property.
20. JOINT AND INDIVIDUAL LIABILITY; CO-SIGNERS; SUCCESSORS AND ASSIGNS BOUND.
All duties under this Security Instrument are joint and individual. If
Mortgagor signs this Security Instrument but does not sign an evidence of
debt, Mortgagor does so only to mortgage Mortgagor's interest in the
Property to secure payment of the Secured Debt and Mortgagor does not agree
to be personally liable on the Secured Debt. if this Security Instrument
secures a guaranty between Lender and Mortgagor, Mortgagor agrees to waive
any rights that may prevent Lender from bringing any action or claim
against Mortgagor or any party indebted under the obligation. These rights
may include, but are not limited to, any anti-deficiency or one-action
laws. Mortgagor agrees that Lender and any party to this Security
Instrument may extend, modify or make any change in the terms of this
Security Instrument or any evidence of debt without Mortgagor's consent.
Such a change will not release Mortgagor from the terms of this Security
Instrument. The duties and benefits of this Security Instrument shall bind
and benefit the successors and assigns of Mortgagor and Lender.
21. APPLICABLE LAW; SEVERABILITY; INTERPRETATION. This Security Instrument is
governed by the laws of the jurisdiction in which Lender is located, except
to the extent otherwise required by the laws of the jurisdiction where the
Property is located. This Security Instrument is complete and fully
integrated. This Security Instrument may not be amended or modified by oral
agreement. Any section in this Security Instrument, attachments, or any
agreement related to the Secured Debt that conflicts with applicable law
will not be effective, unless that law expressly or impliedly permits the
variations by written agreement. if any section of this Security Instrument
cannot be enforced according to its terms, that section will be severed and
will not affect the enforceability of the remainder of this Security
Instrument. Whenever used, the singular shall include the plural and the
plural the singular. The captions and headings of the sections of this
Security Instrument are for convenience only and are not to be used to
interpret or define the terms of this Security Instrument. Time is of the
essence in this Security Instrument
22. NOTICE. Unless otherwise required by law, any notice shall be given by
delivering it or by mailing it by first class mail to the appropriate
party's address on page 1 of this Security Instrument, or to any other
address designated in writing. Notice to one mortgagor will be deemed to be
notice to all mortgagors.
23. WAVERS. Except to the extent prohibited by law, Mortgagor waives all
appraisement and homestead exemption rights relating to the Property.
(page 5 of 6)
/s/ TPS /s/ FS
------- ------
<PAGE>
24. MAXIMUM OBLIGATION LIMIT. The total principal amount secured by this
Security Instrument at any one time shall not exceed $665,000.00----. This
limitation of amount does not include interest, attorneys fees, and other
fees and charges validly made pursuant to this Security Instrument. Also,
this limitation does not apply to advances made under the terms of this
Security Instrument to protect Lender's security and to perform any of the
covenants contained in this Security Instrument.
25. OTHER TERMS. if checked, the following are applicable to this Security
Instrument:
[_] Line of Credit. The Secured Debt includes a revolving line of
credit provision. Although the Secured Debt may be reduced to a
zero balance, this Security Instrument will remain in effect
until released.
[_] Construction Loan. This Security Instrument secures an obligation
incurred for the construction of an improvement on the Property.
[_] Fixture Filing. Mortgagor grants to Lender a security interest in
all goods that Mortgagor Owns now or in the future and that are
or will become fixtures related to the Property. This Security
Instrument suffices as a financing statement and any carbon,
photographic or other reproduction may be filed of record for
purposes of Article 9 of the Uniform Commercial Code.
[_] Riders. The covenants and agreements of each of the riders
checked below are incorporated into and supplement and amend the
terms of this Security Instrument. [Check all applicable boxes]
[_] Condominium Rider [_] Planned Unit Development Rider
[_] Other ________________________________________________
[X] Additional Terms.
If this mortgage covers more than one lot or parcel, the lender
reserves the right to conduct a sale en masse in order to
adequately protect its secured position.
SIGNATURES: By signing below, Mortgagor agrees to the terms and covenants
contained in this Security Instrument and in any attachments. Mortgagor also
acknowledges receipt of a copy of this Security Instrument on the date stated
on page 1.
[_] if checked, refer to the attached Addendum incorporated herein, for
additional Mortgagors, their signatures and acknowledgments;
The Leap Partnership, Inc.
/s/ Thomas Sharbaugh 1/27/98
- --------------------------------------------------
(Signature) Thomas Sharbaugh, President (Date)
/s/ Robert C. Bramlette 1/27/98
- --------------------------------------------------
(Signature) Robert C. Bramlette, Secretary (Date)
ACKNOWLEDGMENT:
STATE OF Michigan, COUNTY OF Berrien } ss.
(Individual) This instrument was acknowledged before me this 27th day of
January, 1998
by Thomas Sharbough and Robert C. Bramlette.
My commission expires: 03/27/01
(Seal) _________________________________________
Ruth Ann Lowery (Notary Public)
(page 6 of 6)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
The Leap Group. Inc. Alliance Banking Company Loan number 74049-01000
22 W. Hubbard Street 500 W. Buffalo St., P0 Box 808 Date January 27, 1998
Chicago IL 60610 New Buffalo, MI 49117 Maturity Date January 27, 2001
312/494-0300 36-4079500 LGB-001 Loan Amount $665,000.00
Renewal Of ______________________
BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS
"I" includes each borrower above, "You" means the lender, its successors
jointly and severally. and assigns.
- -----------------------------------------------------------------------------------------------------------------------------------
For value received, I promise to pay to you, or your order, at your address listed above the PRINCIPAL sum of Six Hundred Sixty-Five
Thousand---------------------------------------------------------------------- Dollars $665,000.00-------------------------------
[ X ] Single Advance: I will receive all of this principal sum on ________________________________. No additional advances are
contemplated under this note.
[ ] Multiple Advance: The principal sum shown above is the maximum amount of principal I can borrow under this note.
On ______________________________ I will receive the amount of $ ______________________________ and future principal
advances are contemplated.
Conditions: The conditions for future advances are ________________________________________________________________________
____________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________
[ ] Open Ended Credit: You and I agree that I may borrow up to the maximum principal sum more than one time. This
feature is subject to all other conditions and expires on _________________________________________________________.
[ ] Closed End Credit: You and I agree that I may borrow (subject to all other conditions) up to the maximum principal
sum only one time.
INTEREST: I agree to pay interest on the outstanding principal balance from January 27, 1998 at the rate of 9.00% per year until
January 27, 2001.
[ ] Variable Rate: This rate may then change as stated below.
[ ] Index Rate: The future rate will be _________________________________ the following index rate: _____________________
____________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________
[ ] No Index: The future rate will not be subject to any internal or external index. It will be entirely in your control.
[ ] Frequency and Timing: The rate on this note may change as often as _________________________________________________.
A change in the interest rate will take effect _____________________________________________________________________.
[ ] Limitations: During the term of this loan, the applicable annual Interest rate will not be more than _______________%
or less than _________________ %. The rate may not change more than ___________________ % each ____________________.
Effect of Variable Rate: A change in the interest rate will have the following effect on the payments:
[ ] The amount of each scheduled payment will change. [ ] The amount of the final payment will change.
[ ] _____________________________________________________________________________________________________________________
ACCRUAL METHOD: Interest will be calculated on a 365/360 day basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note owing after maturity, and until paid in full,
as stated below:
[ ] on the same fixed or variable rate basis in effect before maturity (as indicated above).
[ X ] at a rate equal to 11.00%.
[ ] LATE CHARGE: If a payment is not made within ______________ days after it is due, I agree to pay a late charge of __________
____________________________________________________________________________________________________________________________
[ ] ADDITIONAL CHARGES: In addition to interest, I agree to pay the following charges which [ ] are [ ] are not included
in the principal amount above: ____________________________________________________________________________________________
____________________________________________________________________________________________________________________________
PAYMENTS: I agree to pay this note as follows:
[ ] Interest: I agree to pay accrued interest __________________________________________________________________________________
____________________________________________________________________________________________________________________________
[ ] Principal: I agree to pay the principal ____________________________________________________________________________________
____________________________________________________________________________________________________________________________
[ X ] Installments: I agree to pay this note in 36 payments. The first payment will be in the amount of $5,992.00 and will be due
February 27, 1998. A payment of $5,992.00 will be due on the 27th day of each month thereafter. The final payment of the
entire unpaid balance of principal and interest will be due January 27, 2001.
PURPOSE: The purpose of this loan is mortgage property at 22 W. Hubbard, Chicago, IL.
ADDITIONAL TERMS:
SECURITY INTEREST: I give you a security interest in all of the Property described below that I now own and that I may own in the
future (including, but not limited to, all parts, accessories, repairs, improvements, and accessions to the Property),
wherever the Property is or may be located, and all proceeds and products from the Property.
[ ] Inventory: All inventory which I hold for ultimate sale or lease, or which has been or will be supplied under
contracts of service, or which are raw materials, work in process, or materials used or consumed in my business.
[ ] Equipment: All equipment including, but not limited to, all machinery, vehicles, furniture, fixtures, manufacturing
equipment, farm machinery and equipment, shop equipment, office and recordkeeping equipment, and parts and tools. All
equipment described in a list or schedule which I give to you will also be included in the secured property, but such
a list is not necessary for a valid security interest in my equipment.
[ ] Farm Products: All farm products including, but not limited to:
(a) all poultry and livestock and their young, along with their products, produce and replacements;
(b) all crops, annual or perennial, and all products of the crops; and
(c) all feed, seed, fertilizer, medicines, and other supplies used or produced in my farming operations.
[ ] Accounts, Instruments, Documents, Chattel Paper and Other Rights to Payment: All rights I have now and that I may have
in the future to the payment of money including, but not limited to:
(a) payment for goods and other property sold or leased or for services rendered, whether or not I have earned such
payment by performance; and
(b) rights to payment arising out of all present and future debt instruments, chattel paper and loans and obligations
receivable. The above include any rights and interests (including all liens and security interests) which I may
have by law or agreement against any account debtor or obligor of mine.
[ ] General Intangibles: All general intangibles including, but not limited to, tax refunds, applications for patents,
patents, copyrights, trademarks, trade secrets, good will, trade names, customer lists, permits and franchises, and
the right to use my name.
[ ] Government Payments and Programs: All payments, accounts, general intangibles, or other benefits (including, but not
limited to, payments in kind, deficiency payments, letters of entitlement, warehouse receipts, storage payments,
emergency assistance payments, diversion payments, and conservation reserve payments) in which I now have and in the
future may have any rights or interest and which arise under or as a result of preexisting, current or future Federal
or state governmental program (including, but not limited to, all programs administered by the Commodity Credit
Corporation and the ASCS).
[ X ] The secured property includes, but is not limited by, the following:
Real Estate Mortgage dated 01/27/98
Personal Guarantee of Frederick A. Smith
</TABLE>
<PAGE>
[_] Open Ended Credit: You and I agree that I may borrow up to the maximum
principal sum more than one time. This feature is subject to all other
conditions and expires on ____________________________________________
[_] Closed End Credit: You and I agree that I may borrow (subject to all
other conditions) up to the maximum principal sum only one time.
INTEREST: I agree to pay interest on the outstanding principal balance from
January 27, 1998 at the rate of 9.00% until January 27, 2001.
[_] Variable Rate: This rate may then change as stated below.
[_] Index Rate: The future rate will be ___________________________ the
following index rate: ________________________________________________
______________________________________________________________________
[_] No Index: The future rate will not be subject to any internal or
external Index. It will be entirely in your control.
[_] Frequency and Timing: The rate on this note may change as often as
___________________________________________________________. A change
in the interest rate will take effect________________________________.
[_] Limitations: During the term of this loan, the applicable annual
interest rate will not be more than ______________________% or less
than _________________%. The rate may not change more than
___________________% each _________________________________.
Effect of Variable Rate: A change in the interest rate will have the
following effect on the payments:
[_] The amount of each scheduled payment will change. [_] The amount
of the final payment will change.
[_] _____________________________________________________________________.
ACCRUAL METHOD: Interest will be calculated on a 365/360 day basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note
owing after maturity, and until paid in full, as stated below:
[_] on the same fixed or variable rate basis in effect before maturity (as
indicated above).
[X] at a rate equal to 11.00%.
[_] LATE CHARGE: If a payment is not made within ______________ days after it
is due, I agree to pay a late charge of ___________________________________
__________________________________________________________________________.
[_] ADDITIONAL CHARGES: In addition to interest, I agree to pay the following
charges which: [_] are [_] are not included in the principal amount
above:____________________________________________________________________.
PAYMENTS: I agree to pay this note as follows:
[_] Interest: I agree to pay accrued interest _________________________________
________________________________________________________________________
[_] Principal: I agree to pay the principal ___________________________________
________________________________________________________________________
[X] Installments: I agree to pay this note in 36 payments. The first payment
will be in the amount of $5,992.00 and will be due February 27, 1998.
A payment of $5,992.00 will be due on the 27th day of each month
thereafter. The final payment of the entire unpaid balance of principal
and interest will be due January 27, 2001.
PURPOSE: The purpose of this loan is: mortgage property at 22 W. Hubbard,
Chicago, IL.
ADDITIONAL TERMS:
SECURITY INTEREST: I give you a security interest in all of the Property
described below that I now own and that I may own in the future (including,
but not limited to, all parts, accessories, repairs, improvements, and
accessions to the Property), wherever the Property is or may be located, and
all proceeds and products from the Property.
[_] Inventory: All inventory which I hold for ultimate sale or lease, or
which has been or will be supplied under contracts of service, or which
are raw materials, work in process, or materials used or consumed in my
business.
[_] Equipment: All equipment including, but not limited to, all machinery,
vehicles, furniture, fixtures, manufacturing equipment, farm machinery
and equipment, shop equipment, office and recordkeeping equipment, and
parts and tools. All equipment described in a list or schedule which I
give to you will also be included in the secured property, but such a
list is not necessary for a valid security interest in my equipment.
[_] Farm Products: All farm products including, but not limited to:
(a) all poultry and livestock and their young, along with their
products, produce and replacements;
(b) all crops, annual or perennial, and all products of the crops; and
(c) all feed, seed, fertilizer, medicines, and other supplies used or
produced in my farming operations.
[_] Accounts, Instruments, Documents, Chattel Paper and Other Rights to
Payment: All rights I have now and that I may have in the future to the
payment of money including, but not limited to:
(a) payment for goods and other property sold or leased or for services
rendered, whether or not I have earned such payment by performance;
and
(b) rights to payment arising out of all present and future debt
instruments, chattel paper and loans and obligations receivable.
The above include any rights and interests (including all liens and
security interests) which I may have by law or agreement against any
account debtor or obligor of mine.
[_] General Intangibles: All general intangibles including, but not limited
to, tax refunds, applications for patents, patents, copyrights,
trademarks. trade secrets, good will, trade names, customer lists,
permits and franchises, and the right to use my name.
[_] Government Payments and Programs: All payments, accounts, general
intangibles, or other benefits (including, but not limited to, payments
in kind, deficiency payments, letters of entitlement, warehouse
receipts, storage payments, emergency assistance payments, diversion
payments, and conservation reserve payments) in which I now have, and in
the future may have any rights or interest and which arise under or as a
result of any preexisting, current or future Federal or state
governmental program (including, but not limited to, all programs
administered by the Commodity Credit Corporation and the ASCS).
[X] The secured property includes, but is not limited by, the following:
Real Estate Mortgage dated 01/27/98
Personal Guarantee of Frederick A. Smith
If this agreement covers timber to be cut, minerals (including oil and gas),
fixtures or crops growing or to be grown, the description of the real estate is:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
[_] If checked, file this agreement on the real estate records.
Record owner (if not me)________________________________________________________
________________________________________________________________________________
The Leap Partnership, Inc., co-maker
by: /s/ Thomas Sharbaugh
----------------------------------
Thomas Sharbaugh, President
by: /s/ Robert C. Bramlette
----------------------------------
Robert C. Bramlette, Secretary
The Property will be used for a [_] personal [_] business
[_] agricultural [_] _____________________________________ purpose.
SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE 2). I
have received a copy on today's date.
The Leap Group, Inc.
by: /s/ Fredrick A. Smith
----------------------------------
Fredrick A. Smith, Acting CEO
by: /s/ Robert C. Bramlette
----------------------------------
Robert C. Bramlette, Secretary
________________________________________________________________________________
(page 1 of 2)
<PAGE>
ADDITIONAL TERMS OF THE NOTE
DEFINITIONS - As used on page 1, "[X]" means the terms that apply to this loan.
"I," "me" or "my" means each Borrower who signs this note and each other person
or legal entity (including guarantors, endorsers, and sureties) who agrees to
pay this note (together referred to as "us"). "You" or "your" means the Lender
and its successors and assigns.
APPLICABLE LAW - The law of the state in which you are located will govern this
agreement. Any term of this agreement which is contrary to applicable law will
not be effective, unless the law permits you and me to agree to such a
variation. If any provision of this agreement cannot be enforced according to
its terms, this fact will not affect the enforceability of the remainder of this
agreement. No modification of this agreement may be made without your express
written consent. Time is of the essence in this agreement.
PAYMENTS - Each payment I make on this note will first reduce the amount I owe
you for charges which are neither interest nor principal. The remainder of each
payment will then reduce accrued unpaid interest, and then unpaid principal. If
you and I agree to a different application of payments, we will describe our
agreement on this note. I may prepay a part of, or the entire balance of this
loan without penalty, unless we specify to the contrary on this note. Any
partial prepayment will not excuse or reduce any later scheduled payment until
this note is paid in full (unless, when I make the prepayment, you and I agree
in writing to the contrary).
INTEREST - Interest accrues on the principal remaining unpaid from time to time,
until paid in full. If I receive the principal in more than one advance, each
advance will start to earn interest only when I receive the advance. The
interest rate in effect on this note at any given time will apply to the entire
principal sum outstanding at that time. Notwithstanding anything to the
contrary, I do not agree to pay and you do not intend to charge any rate of
interest that is higher than the maximum rate of interest you could charge under
applicable law for the extension of credit that is agreed to in this note
(either before or after maturity). If any notice of interest accrual is sent and
is in error, we mutually agree to correct it, and if you actually collect more
interest than allowed by law and this agreement, you agree to refund it to me.
INDEX RATE - The index will serve only as a device for setting the interest rate
on this note. You do not guarantee by selecting this index, or the margin, that
the interest rate on this note will be the same rate you charge on any other
loans or class of loans you make to me or other borrowers.
POST MATURITY RATE - For purposes of deciding when the "Post Maturity
Rate"(shown on page 1) applies, the term "maturity" means the date of the last
scheduled payment indicated on page 1 of this note or the date you accelerate
payment on the note, whichever is earlier.
SINGLE ADVANCE LOANS - If this is a multiple advance loan, you and I expect that
you will make only one advance of principal. However, you may add other amounts
to the principal If you make any payments described in the "PAYMENTS BY LENDER"
paragraph below.
MULTIPLE ADVANCE LOANS - If this is a multiple advance loan, you and I expect
that you will make more than one advance of principal. If this is closed end
credit, repaying a part of the principal will not entitle me to additional
credit.
SET-OFF - I agree that you may set off any amount due and payable under this
note against any right I have to receive money from you.
"Right to receive money from you" means:
(1) any deposit account balance I have with you;
(2) any money owed to me on an item presented to you or in your possession
for collection or exchange; and
(3) any repurchase agreement or other nondeposit obligation.
"Any amount due and payable under this note" means the total amount of which
you are entitled to demand payment under the terms of this note at the time you
set off. This total includes any balance the due date for which you probably
accelerate under this note.
If my right to receive money from you is also owned by someone who has not
agreed to pay this note, your right of set-off will apply to my interest in the
obligation and to any other amounts I could withdraw on my sole request or
endorsement. Your right of set-off does not apply to any account or other
obligation where my rights are only as a representative. It also does not apply
to any Individual Retirement Account or other tax-deferred retirement account.
You will not be liable for the dishonor of any check when the dishonor occurs
because you set off this debt against any of my accounts. I agree to hold you
harmless from any such claims arising as a result of your exercise of your right
to set-off.
DEFAULT - I will be in default if any one or more of the following occur: (1) I
fail to make a payment on time or in the amount due; (2) I fail to keep the
Property Insured, if required; (3) I fail to pay, or keep any promise, on any
debt or agreement I have with you; (4) I die, am declared incompetent, make an
assignment for the benefit of creditors, or become insolvent (either because my
liabilities exceed my assets or I am unable to pay my debts as they become due);
(5) I make any written statement or provide any financial information that is
untrue or inaccurate at the time it was provided; (6) I do or fail to do
something which causes you to believe you will have difficulty collecting the
amount I owe you; (7) any collateral securing this note is used in a manner or
for a purpose which threatens confiscation by a legal authority; (8) I change my
name or assume an additional name without first notifying you before making such
a change.
REMEDIES - If I am in default on this note you have, but are not limited to, the
following remedies:
(1) You may demand immediate payment of all I owe you under this note
(principal, accrued unpaid interest and other accrued unpaid charges).
(2) You may set off this debt against any right I have to the payment of
money from you, subject to the terms of the "SET-OFF" paragraph herein.
(3) You may demand security, additional security, or additional parties to
be obligated to pay this note as a condition for not using any remedy.
(4) You may refuse to make advances to me or allow purchases on credit by
me.
(5) You may use any remedy you have under state or federal law.
(6) You may make use of any remedy given to you in any agreement securing
this note.
By selecting any one or more of these remedies you do not give up your right
to use later any other remedy. By waiving your right to declare an event to be a
default, you do not waive your right to consider later the event a default if it
continues or happens again.
COLLECTION COSTS AND ATTORNEY'S FEES - I agree to pay all costs of collection,
replevin or any other or similar type of cost if I am in default. In addition,
if you hire an attorney to collect this note, I also agree to pay any fee you
incur with such attorney plus court costs (except where prohibited by law). To
the extent permitted by the United States Bankruptcy Code, I also agree to pay
the reasonable attorney's fees and costs you incur to collect this debt as
awarded by any court exercising jurisdiction under the Bankruptcy Code.
WAIVER - I give up my rights to require you to do certain things. I will not
require you to:
(1) demand payment of amounts due (presentment);
(2) obtain official certification of nonpayment (protest); or
(3) give notice that amounts due have not been paid (notice of dishonor).
I waive any defense I have based on suretyship or impairment of collateral.
OBLIGATIONS INDEPENDENT - I understand that I must pay this note even if someone
else has also agreed to pay it (by, for example, signing this form or a separate
guarantee or endorsement). You may sue me alone, or anyone else who is obligated
on this note, or any number of us together, to collect this note. You may
without notice release any party to this agreement without releasing any other
party. If you give up any of your rights, with or without notice, it will not
affect my duty to pay this note. Any extension of new credit to any of us, or
renewal of this note by all or less than all of us will not release me from my
duty to pay it. (Of course, you are entitled to only one payment in full.) I
agree that you may at your option extend this note or the debt represented by
this note, or any portion of the note or debt, from time to time without limit
or notice and for any term without affecting my liability for payment of the
note. I will not assign my obligation under this agreement without your prior
written approval.
CREDIT INFORMATION - I agree and authorize you to obtain credit information
about me from time to time (for example, by requesting a credit report) and to
report to others your credit experience with me (such as a credit reporting
agency). I agree to provide you, upon request, any financial statement or
information you may deem necessary. I warrant that the financial statements and
information I provide to you are or will be accurate, correct and complete.
ADDITIONAL TERMS OF THE SECURITY AGREEMENT
GENERALLY - This agreement secures this note and any other debt I have with you,
now or later. However, it will not secure other debts if you fail with respect
to such other debts, to make any required disclosure about this security
agreement or if you fail to give any required notice of the right of rescission.
If property described in this agreement is located in another state, this
agreement may also, in some circumstances, be governed by the law of the state
in which the Property is located.
OWNERSHIP AND DUTIES TOWARD PROPERTY - I represent that I own all of the
Property, or to the extent this is a purchase money security interest I will
acquire ownership of the Property with the proceeds of the loan. I will defend
it against any other claim. Your claim to the Property is ahead of the claims of
any other creditor, except for any and all liens from Manufacturer's Bank. I
agree to do whatever you require to protect your security interest and to keep
your claim in the Property ahead of the claims of other creditors. I will not do
anything to harm your position.
I will keep books, records and accounts about the Property and my business in
general. I will let you examine these records at any reasonable time. I will
prepare any report or accounting you request, which deals with the Property.
I will keep the Property in my possession and will keep it in good repair and
use it only for the purpose(s) described on page 1 of this agreement. I will not
change this specified use without your express written permission.
I will keep the Property at my address listed on page 1 of this agreement,
unless we agree I may keep it at another location. If the Property is to be used
in another state, I will give you a list of those states. I will not try to sell
the Property unless it is inventory or I receive your written permission to do
so. If I sell the Property I will have the payment made payable to the order of
you and me.
You may demand immediate payment of the debt(s) if the debtor is not a
natural person and without your prior written consent; (1) a beneficial Interest
in the debtor is sold or transferred, or (2) there is a change in either the
identity or number of members of a partnership, or (3) there is a change in
ownership of more than 25 percent of the voting stock of a corporation.
I will pay all taxes and charges on the Property as they become due. You have
the right of reasonable access in order to inspect the Property. I will
immediately inform you of any loss or damage to the Property.
If I fail to perform any of my duties under this security agreement, or any
mortgage, deed or trust, lien or other security interest, you may without notice
to me perform the duties or cause them to be performed. Your right to perform
for me shall not create an obligation to perform and your failure to perform
will not preclude you from exercising any of your other rights under the law or
this security agreement.
PAYMENTS BY LENDER - You are authorized to pay, on my behalf, charges I am or
may become obligated to pay to preserve or protect the secured property (such as
property insurance premiums). You may treat those payments as advances and add
them to the unpaid principal under the note secured by this agreement or you may
demand immediate payment of the amount advanced.
INSURANCE - I agree to buy insurance on the Property against the risks and for
the amounts you require and to furnish you continuing proof of coverage. I will
have the insurance company name you as loss payee on any such policy. You may
require added security if you agree that insurance proceeds may be used to
repair or replace the Property. I will buy insurance from a firm licensed to do
business in the state where you are located. The firm will be reasonably
acceptable to you. The insurance will last until the Property is released from
this agreement. If I fail to buy or maintain the insurance (or fail to name you
as loss payee) you may purchase it yourself.
REMEDIES - I will be in default on this security agreement if I am in default on
any note this agreement secures or if I fail to keep any promise contained in
the terms of this agreement. If I default, you have all of the rights and
remedies provided in the note and under the Uniform Commercial Code. You may
require me to make the secured property available to you at a place which is
reasonably convenient. You may take possession of the secured property and sell
it as provided by law. The proceeds will be applied first to your expenses and
then to the debt. I agree that 10 days written notice sent to my last known
address by first class mail will be reasonable notice under the Uniform
Commercial Code. My current address is on page 1. I agree to inform you in
writing of any change of my address.
FILING - A carbon, photographic or other reproduction of this security agreement
or the financing statement covering the Property described in this agreement may
be used as a financing statement where allowed by law. Where permitted by law,
you may file a financing statement which does not contain my signature, covering
the Property secured by this agreement.
- --------------------------------------------------------------------------------
Any person who signs within this box does so to give you a security interest in
the Property described on page 1. This person does not promise to pay the note.
"I" as used in this security agreement will include the borrower and any person
who signs within this box.
Date 1/27/98
--------------
Signed /s/ Frederick A. Smith
----------------------------------
/s/ Thomas Sharbaugh
- --------------------------------------------------------------------------------
(page 2 of 2)
<PAGE>
advance will start to earn interest
only when I receive the advance. The interest rate in effect on this note at any
given time will apply to the entire principal sum outstanding at that time.
Notwithstanding anything to the contrary, I do not agree to pay the maximum rate
of interest you could charge under applicable law for the extension of credit
that is agreed to in this note (either before or after maturity). If any notice
of interest accrual is sent and is in error, we mutually agree to correct it,
and if you actually collect more interest than allowed by law and this agreement
, you agree to refund it to me.
INDEX RATE - The index will serve only as a device for setting the interest rate
on this note. You do not guarantee by selecting this index, or the margin, that
the interest rate on this note will be the same rate you charge on any other
loans or class of loans you make to me or other borrowers.
POST MATURITY RATE - For purposes of deciding when the "Post Maturity
Rate"(shown on page 1) applies, the term "maturity" means the date of the last
scheduled payment indicated on page 1 of this note or the date you accelerate
payment on the note, whichever is earlier.
SINGLE ADVANCE LOANS - If this is a multiple advance loan, you and I expect that
you will make only one advance of principal. However, you may add other amounts
to the principal If you make any payments described in the "PAYMENTS BY LENDER"
paragraph below.
MULTIPLE ADVANCE LOANS - If this is a multiple advance loan, you and I expect
that you will make more than one advance of principal. If this is closed end
credit, repaying a part of the principal will not entitle me to additional
credit.
SET-OFF - I agree that you may set off any amount due and payabl under this note
against any right I have to receive money from you.
"Right to receive money from you" means:
(1) any deposit account balance I have with you;
(2) any money owed to me on an item presented to you in your possession for
collection or exchange; and
(3) any repurchase agreement or other nondeposit obligation.
"Any amount due and payable under this note" means the total amount of which
entitled to demand payment under the terms of this note at the time you set off.
This total includes any balance the due date for which you probably accelerate
under this note.
If my right to receive money from you is also owned by someone who has not
agreed to pay this note, your right of set-off will apply to my interest in the
obligation and to any other amounts I could withdraw on my sole request or
endorsement. Your right of set-off does not apply to any account or other
obligation where my rights are only as a representative. It also does not apply
to any Individual Retirement Account or other tax-deferred retirement account.
You will not be liable for the dishonor of any check when the dishonor occurs
because you set off this debt against any of my accounts. I agree to hold you
harmless from any such claims arising as a result of your exercise of your right
to set-off.
DEFAULT - I will be in default if any one or more of the following occur: (1) I
fail to make a payment on time or in the amount due; (2) I fail to keep the
property insured, if required; (3) I fail to pay, or keep any promise, on any
debt or agreement I have with you; [Provision deleted (4) any other creditor of
mine attempts to collect any debt I owe him through court proceedings]; (5) I
die, am declared incompetent, make an assignment for the benefit of creditors,
or become insolvent (either because my liabilities exceed my assets or I am
unable to pay my debts as they become due); (6) I make any statement or provide
any financial information that is untrue or inaccurate at the time it was
provided; (7) I do or fail to do something which causes you to believe you will
have difficulty collecting the amount I owe you; (8) any collateral securing
this not is used in a manner or for the purpose which threatens confiscation by
a legal authority; (9) I change my name or assume an additional name without
first notifying you before making such a change; [Provision deleted (10) I fail
to plant, cultivate and harvest crops in due season; (11) any loan proceeds are
used for a purpose that will contribute to excessive erosion of highly erodible
land or to the conversion of wetlands to produce an agricultural commodity, as
further explained in 7 O.F.R Part 1940, Subpart G, Exhibit M.
REMEDIES - If I am in default on this note you have, but are not limited to, the
following remedies:
(1) You may demand immediate payment of all I owe you under this note
(principal, accrued unpaid interest and other accrued unpaid charges).
(2) You may set off this debt against any right I have to the payment of money
from you, subject to the terms of the "SET-OFF" paragraph herin.
(3) You may demand security, additional security, or additional parties to be
obligated to pay this note as a condition for not using any remedy.
(4) You may refuse to make advances to me or allow purchases on credit by me.
(5) You may use any remedy you have under state or federal law.
(6) You may make use of any remedy given to you in any agreement securing this
note.
By selecting any one or more of these remedies you do not give up your right
to use later any remedy. By waiving your right to declare an event to be a
default, you do not waive your right to consider later the event a default if it
continues or happens again.
COLLECTION COSTS AND ATTORNEY'S FEES - I agree to pay all costs of collection,
replevin or any other or similar type of cost if I am in default. In addition,
if you hire an attorney to collect this note, I also agree to pay any fee you
incur with such attorney plus court costs (except where prohibited by law). To
the extent permitted by the United States Bankruptcy Code, I also agree to pay
the reasonable attorney's fees and costs you incur to collect this debt as
awarded by any court exercising jurisdiction under the Bankruptcy Code.
WAIVER - I give up my rights to require you to do certain things. I will not
require you to:
(1) demand payment of amounts due (presentment);
(2) obtain official certification of nonpayment (protest); or
(3) give notice that amounts due have not been paid (notice of dishonor).
I waive any defense I have based on suretyship or impairment of collateral.
OBLIGATIONS INDEPENDENT - I understand that I must pay this note even if someone
else has also agreed to pay it (by, for example, signing this form or separate
guarantee or endorsement). You may sue me alone, or anyone else who is obligated
on this note, or any number of us together, to collect this note. You may
without notice release any party to this agreement without releasing any other
party. If you give up any of your rights, with or without notice, it will not
affect my duty to pay this note. Any extension of new credit to any of us, or
renewal of this note by all or less than all of us will not release me from my
duty to pay it. (Of course, you are entitled to only one payment in full.) I
agree that you may at you option extend this note or the debt represented by
this note, or any portion of the note or debt, from time to time without limit
or notice and for any term without affecting my obligation under this agreement
without your prior written approval.
CREDIT INFORMATION - I agree and authorize you to obtain credit information
about me from time to time (for example, by requesting a credit report) and to
report to others your credit experience with me (such as a credit reporting
agency). I agree to provide you, upon request, any financial statement or
information you may deem necessary. I warrant that the financial statements and
information I provide to you are or will be accurate, correct and complete.
ADDITIONAL TERMS OF THE SECURITY AGREEMENT
GENERALLY - This agreement secures this note and any other debt I have with you,
now or later. However, It will not secure other debts if you fail wit respect to
such other debts, to make any required disclosure about this security agreement
or if you fail to give any required notice of the right of rescission. If
property described in this agreement is located in another state, this agreement
may also, in some circumstances, be governed by the law of the state in which
the Property is located.
OWNERSHIP AND DUTIES TOWARD PROPERTY - I represent that I own all of the
Property, or to the extent this is a purchase money security interest I will
acquire ownership of the Property with the proceeds of the loan. I will defend
it against any other claim. Your claim to the Property is ahead of the claims of
any other creditor, except for any and all liens from Manufacturer's Bank. I
agree to do whatever you require to protect your security interest and to keep
your claim in the Property ahead of the claims of other creditors. I will not do
anything to harm your position.
I will keep books, records and accounts about the Property and my business in
general. I will let you examine these records at any reasonable time. I will
prepare any report or accounting you request, which deals with the Property.
I will keep the Property in my possession and keep it in good repair and use
it only for the purpose(s) described on page 1 of this agreement. I will not
change this specified use without your express written permission.
I will keep the Property at my address listed on page 1 of this agreement,
unless we agree that I can keep it at a different location. If the Property is
to be used in another state, I will give you a list of those states. I will not
try to sell the Property unless it is inventory or I receive your written
permission to do so. If I sell the Property I will have the payment made payable
to the order of you and me.
You may demand immediate payment of the debt(s) if the debtor is not a natural
person and without you prior written consent; (1) a beneficial interest in the
debtor is sold or transferred, or (2) there is a change in either the identity
or number of members of a partnership, or (3) there is a change in ownership of
more than 25 percent of the voting stock of a corporation.
I will pay all taxes and charges on the Property as they become due. You have
the right of reasonable access in order to inspect the Property. I will
immediately inform you of any loss or damage to the Property.
If I fail to perform any of my duties under this agreement, or any mortgage,
deed or trust, lien or other security interest, you may without notice to me
perform the duties or cause them to be performed. Your right to perform for me
shall not create an obligation to perform and your failure to perform will not
preclude you from exercising any of your other rights under the law or this
security agreemenr.
PAYMENTS BY LENDER - You are authorized to pay, on my behalf, charges I am or
may become obligated to pay to preserve or protect the secured property (such as
property insurance premiums). You may treat those payments as advances and add
them to the unpaid principal under the note secured by this agreement or you may
demand immediate payment of the amount advanced.
INSURANCE - I agree to buy insurance on the Property against the risks and for
the amounts you require and to furnish you continuing proof of coverage. I will
have the insurance company name you as loss payee on any such policy. You may
require added security if you agree that insurance proceeds may be used to
repair or replace the Property. I will buy insurance from a firm licensed to do
business in the state where you are located. The firm will be reasonably
acceptable to you. The insurance will last until the Property is released from
this agreement. If I fail to buy or maintain the insurance (or fail to name you
as loss payee) you may purchase it yourself.
REMEDIES - I will be in default on this security agreement if I am default on
any note this agreement secures or if I fail to keep any promise contained in
the terms of this agreement. If I default you have all of the rights and
remedies provided in the note and under the Uniform Commercial Code. You may
require me to make the secured property available to you at a place which is
reasonably convenient. You may take possession of the secured property and sell
it as provided by law. The proceeds will be applied first to your expenses and
then to the debt. I agree that 10 days written notice sent to my last known
address by first class mail will be reasonable notice under the Uniform
Commercial Code. My current address is on page 1. I agree to inform you in
writing of any change of my address.
FILING - A carbon, photographic or other reproduction of this security agreement
or the financing statement covering the Property described in this agreement may
be used as a financing statement where allowed by law. Where permitted by law,
you may file a financing statement which does not contain my signature, covering
the Property secured by this agreement.
Any person who signs within this box does so to give you a security interest in
the Property described on page 1. This person does not promise to pay the note.
"I" as used in this security agreement will include the borrower and any person
who signs within this box.
Date 1/27/98
---------
Signed /s/ Frederick A. Smith
------------------
/s/ Thomas Sharbaugh
----------------
(page 2 of 2)
<PAGE>
EXHIBIT 10.4a
The Leap Group, Inc.
Second Loan Modification Agreement, dated January 30, 1998,
between The Leap Group, Inc. and Manufacturer's Bank
<PAGE>
SECOND LOAN MODIFICATION AGREEMENT
----------------------------------
THIS SECOND LOAN MODIFICATION AGREEMENT (hereinafter referred to as this
"Second Modification") is made and entered into as of the 30th day of January,
1998, by THE LEAP GROUP, INC., a Delaware corporation (hereinafter referred to
as "Leap Group"), THE LEAP PARTNERSHIP, INC., an Illinois corporation
(hereinafter referred to as "Partnership"), QUANTUM LEAP COMMUNICATIONS, INC.,
an Illinois corporation (hereinafter referred to as "Quantum"), LILYPAD
SERVICES, INC., an Illinois corporation (hereinafter referred to as "Lilypad"),
BAR TV, INC., a Delaware corporation (hereinafter referred to as "Bar"), TADPOLE
PRODUCTIONS, INC., an Illinois corporation (hereinafter referred to as
"Tadpole"), and YAR COMMUNICATIONS, INC., a Delaware corporation (hereinafter
referred to as "Yar") (Leap Group, Partnership, Quantum, Lilypad, Bar, Tadpole
and Yar, being hereinafter referred to collectively as "Borrowers"); and (ii)
MANUFACTURERS BANK, an Illinois banking corporation (hereinafter referred to as
"Lender").
R E C I T A L S:
- - - - - - - -
A. Lender has heretofore on or about February 18, 1997 made a loan
(hereinafter referred to as the "Loan") to the Leap Group in the original
principal amount of EIGHT MILLION AND NO/100 DOLLARS ($8,000,000.00), as
described in and pursuant to a certain Business Loan Agreement dated as of
February 18, 1997.
B. The Loan was evidenced by a line of credit Promissory Note (the "Note")
dated February 18, 1997 in the principal amount of $8,000,000.00 with a maturity
date of February 17, 1998.
C. The Loan was modified by a Modification Agreement ("First
Modification") dated October 31, 1997 between Lender and Leap Group, whereby,
among other things, (i) Partnership, Quantum, Lilypad, Bar, Tadpole and Yar
became additional makers and obligors under the Note, (ii) Leap Group pledged
additional collateral for the Note, and (iii) the minimum Book Net Worth
requirement was reduced to $32,000,000.00. The First Modification and the
Business Loan Agreement are collectively referred to as the "Loan Agreement."
D. The Loan is secured by, among other things, a pledge by Borrowers of
the accounts, inventory, equipment and other assets of Borrowers as described in
seven (7) certain Security Agreements dated October 31, 1997, and evidenced by
UCC-l Financing Statements executed by Leap Group and Partnership in favor of
Lender and filed with the Secretary of State of Illinois and by Yar and filed
with the Secretary of State of New York (said Security Agreements and UCC-1
Financing Statements are hereinafter referred to collectively as the "Security
Documents").
E. The parties desire to modify and amend the Loan Agreement, the Note,
Security Documents and all other documents evidencing and securing the Loan and
to provide Lender with (i) a Junior Mortgage on the improved real property
commonly known as 22 W. Hubbard, Chicago, Illinois (the "Property") and (ii) a
Pledge by Leap Group of 100% of the stock in One
<PAGE>
World Communications, Inc., a Delaware corporation, its wholly owned subsidiary
(hereinafter referred to collectively as the "Loan Documents") as provided
herein.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
covenants and agreements contained herein, and other good and valuable
considerations, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
ARTICLE 1
---------
1.1 Recitals. The Recitals hereto are incorporated herein by reference as
being the understandings and agreements of the parties as fully and with the
same force and effect as if each and every term, condition and provision of such
preambles was specifically recited herein at length.
ARTICLE 2
---------
AMENDMENT OF LOAN DOCUMENTS
---------------------------
2.1 Modification of Note. The terms and provisions of the Note are hereby
amended and modified as follows:
A. The "Maturity Date" of the Note is extended from February 17,
1998 to June 30, 1998;
B. The first sentence of the second paragraph of the Note styled
PAYMENT is deleted and replaced with the following:
"Borrowers shall pay this loan in one payment of all
outstanding principal, plus all accrued interest on June 30,
1998. Advances under the Note shall not exceed $4,073,000.00
notwithstanding anything to the contrary herein."
2.2 Modification of Loan Agreement. The terms and provisions of the Loan
Agreement are hereby amended and modified as follows:
A. All references to the "Note" shall include, without limitation,
the Note as modified by this Second Modification.
B. The Maturity Date is extended from February 17, 1998 to June 30,
1998.
C. The minimum Book Net Worth shall be $30,500,000.00 to be tested
quarterly commencing as of January 31, 1998.
2
<PAGE>
D. All references to the "Borrower" shall include, without limitation,
the Borrowers.
E. Lender shall not be obligated to make Loan Advances in excess of
$4,073,000.00.
ARTICLE 3
---------
REAFFIRMATION OF NOTE AND OTHER LOAN DOCUMENTS
----------------------------------------------
3.1 Borrowers hereby acknowledge and reaffirm their obligations under the
Note and the Loan Agreement and the indebtedness evidenced thereby, and
acknowledges and agrees that such indebtedness is owing to the Lender and is
enforceable against Borrowers in accordance with the terms of the Note and the
Loan Agreement as modified by this Second Modification, subject to no defenses,
counterclaims, deductions or set-offs whatsoever, including any defenses based
on the covenant of good faith, all such defenses, counterclaims, deductions and
setoffs being expressly waived by Borrowers.
3.2 Nothing contained in this Second Modification, or the transactions
contemplated hereby, shall be deemed or construed to be a consent to or waiver
of any breach or default in the performance by Borrowers of their obligations to
Lender, whether evidenced by the Note, the Loan Agreement, or otherwise, nor
shall Lender be impaired or limited in its ability to fully and completely
enforce any and all the rights and remedies presently available to Lender under
the Loan Agreement and any other agreements and related loan documents as may
exist at the time of the making of this Second Modification between or among
Lender and Borrowers.
ARTICLE 4
---------
CONDITIONS
----------
4.1 Conditions Precedent. Notwithstanding anything to the contrary herein
contained, the agreements of Lender hereunder, and the effectiveness of the
Second Modification provided for herein, are subject to and conditioned upon the
following (herein called the "Conditions Precedent").
4.2 Fees and Costs. Borrowers shall pay all costs, fees and expenses
(including legal fees) incurred by Lender in connection with this Second
Modification.
4.3 Documents. A. Borrowers shall have executed and delivered to Lender
four (4) originals of this Second Modification.
B. Partnership shall execute and deliver to Lender two copies of a Junior
Mortgage, Assignment of Leases and Security Agreement ("Junior Mortgage") in the
form of the Junior Mortgage attached as Exhibit 1.
3
<PAGE>
C. Borrowers, at their sole cost and expense, shall provide Lender with an
ALTA Loan Policy ("Title Policy") issued by a title insurance company acceptable
to Lender in the amount of $500,000.00, naming Lender, as an insured party,
insuring the lien of the Junior Mortgage as a second lien upon the Property,
insuring all utility, access, support and other easements necessary for the
operation of such real estate, and subject to no exceptions other than
exceptions approved in writing by Lender. In addition, the Title Policy shall
include a comprehensive endorsement and a zoning endorsement including parking,
a revolving credit endorsement, a doing business endorsement, a creditors'
rights endorsement, a usury endorsement and such other endorsements as the
Lender may reasonably require.
D. Leap Group shall execute and deliver to Lender and cause One World
Communications, Inc. to execute the Pledge Agreement attached as Exhibit 2.
E. Borrowers shall each execute and deliver to Lender UCC-1 financing
statements in the manner and form of the statements attached hereto as Group
Exhibit 3.
F. Borrowers shall cause Alliance Banking Company to execute and deliver
to Lender releases of UCC-1 financing statements in the manner and form of the
releases attached as Group Exhibit 4.
4.4 Board Resolutions. Lender shall have received a certified copy of a
resolution of the board of directors of Borrowers authorizing the execution and
delivery of and the consummation of the transactions contemplated by this Second
Modification and all other documents or instruments to be executed and delivered
in conjunction herewith.
ARTICLE 5
---------
MISCELLANEOUS
-------------
5.1 Reaffirmation of Representations and Warranties. Borrowers hereby
acknowledge and reaffirm that their representations and warranties as stated in
the Loan Agreement are true and correct as of the date hereof, that Borrowers
are and shall remain in full compliance with all terms and conditions contained
in the Loan Documents.
5.2 Intent of Parties. The parties expressly agree that the liens
evidenced by the Loan Agreement shall in no way be deemed to have been
subordinated, released, modified, terminated, or otherwise affected by this
Second Modification, it being understood by the parties hereto that the liens of
said document shall continue in full force and effect, and are to have the same
validity, priority and effect that they had immediately prior to the execution
of this Second Modification and the documents and instruments executed and
delivered pursuant to this Second Modification, shall survive and not be merged
into the execution and delivery of this Second Modification.
5.3 Release of Claims. Borrowers acknowledge and agree that Lender has
fulfilled any and all of Lender's obligations under the Loan Agreement and
related loan documents to date. They hereby release, remise, forever discharge
and hold Lender harmless from and against
4
<PAGE>
any and all claims, actions, counterclaims, defenses, lawsuits, damages, costs
and expenses whatsoever, known or unknown, which they, or any of them, may have
had or currently have against Lender, its directors, officers, employees,
agents, successors and assigns, including, without limitation, all matters
arising out of or related to the Loan Agreement or the related loan documents.
5.4 No Third Party Beneficiaries. This Second Modification is made and
entered into for the sole protection and benefit of Lender and the signatories
hereto, and no other person, entity or entities shall have the right of action
hereon, right to claim any right or benefit from the terms contained herein, or
be deemed a third party beneficiary hereunder.
5.5 Successors and Assigns; Assignability. This Second Modification shall
be binding upon and inure to the benefit of the parties hereto, their respective
successors, legal representatives and assigns.
5.6 Effect of Amendment. Except as specifically amended or modified by
the terms of this Second Modification, all terms and provisions of the Loan
Agreement are approved, ratified and confirmed and are and shall remain in full
force and effect. Lender's agreement to modify the Note as set forth herein
shall not be interpreted or construed as obligating Lender to make any future
modifications to, or extensions of the Note or Loan Agreement.
5.7 Governing Law. This Agreement shall be governed by and be construed
in accordance with the internal laws of the State of Illinois.
5.8 Captions. The title of this Second Modification and the headings of
the various paragraphs of this Second Modification have been inserted only for
the purposes of convenience and are not part of this Second Modification and
should not be deemed in any manner to modify, explain, expand or restrict any of
the provisions of this Second Modification.
BORROWERS: THE LEAP GROUP, INC., a Delaware
corporation
By: /s/ Robert C. Bramlette
-------------------------------------
Its: Secretary
-------------------------------
THE LEAP PARTNERSHIP, INC., an
Illinois corporation
By: /s/ Robert C. Bramlette
-------------------------------------
Its: Secretary
-------------------------------
5
<PAGE>
QUANTUM LEAP COMMUNICATIONS,
INC., an Illinois corporation
By: /s/ Robert C. Bramlette
-------------------------------------
Its: Secretary
LILYPAD SERVICES, INC., an Illinois
corporation
By: /s/ Robert C. Bramlette
-------------------------------------
Its: Secretary
BAR TV, INC., an Delaware corporation
By:
-------------------------------------
Its: President
------------------------------
TADPOLE PRODUCTIONS, INC., an
Illinois corporation
By: /s/ Robert C. Bramlette
-------------------------------------
Its: Secretary
YAR COMMUNICATIONS, INC., a Delaware
corporation
By:
-------------------------------------
Its: President
------------------------------
LENDER:
MANUFACTURERS BANK, an Illinois
banking corporation
By:
-------------------------------------
Its:
------------------------------
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<PAGE>
THIS DOCUMENT PREPARED BY
AND AFTER RECORDING RETURN
TO:
Michael Weininger, Esq.
Katz Randall & Weinberg
333 West Wacker Drive
Suite 1800
Chicago, Illinois 60606
(312) 807-3800
KRW File No.07995.00300
This space reserved for Recorder.
JUNIOR MORTGAGE, ASSIGNMENT OF
RENTS AND LEASES AND SECURITY AGREEMENT
---------------------------------------
THIS INDENTURE made as of the 30th day of January, 1998, by and between THE
LEAP PARTNERSHIP, INC., an Illinois corporation, whose address is 22 W. Hubbard
St., Chicago, Illinois (herein referred to as "Mortgagor") and MANUFACTURERS
BANK, whose address is 1200 North Ashland Ave., Chicago, Illinois 60622 (herein
referred to as "Mortgagee").
WITNESSETH:
----------
THAT, WHEREAS, Mortgagor is justly indebted to Mortgagee in the principal
sum of FOUR MILLION SEVENTYTHREE THOUSAND AND NO/100 ($4,073,000.00) DOLLARS,
evidenced by that certain Promissory Note of Mortgagor dated February 18, 1997
as thereafter modified by Modification Agreements dated October 31, 1997 and
January 30, 1998 (hereinafter referred to as the "Note"), made payable to the
order of Mortgagee and delivered to Mortgagee, in and by which Note Mortgagor
promises to pay the said principal sum and interest at the rate and in
installments as provided in the Note, with a final payment of the balance, if
not sooner paid, to be due on the 30th day of June, 1998, and all of said
principal and interest are made payable at such place as the holder of the Note
may, from time to time in writing appoint, and in absence of such appointment,
then at the office of Mortgagee.
NOW, THEREFORE, Mortgagor, to secure the payment of said principal sum of
money and said interest in accordance with the terms, provisions and limitations
of this Mortgage, and of the Note secured hereby, and any other sums advanced by
Mortgagee to protect the security of this Mortgage or discharge the obligations
of Mortgagor hereunder, and the performance of the covenants and agreements
herein contained and contained in the Note and in any other documents evidencing
or securing the loan evidenced by the Note (the Note, this Mortgage and such
other documents being hereinafter referred to collectively as the "Loan
Documents"), by Mortgagor to be performed, and also in consideration of the sum
of One Dollar ($1.00) in hand paid, the receipt whereof is hereby acknowledged,
does by these presents MORTGAGE, GRANT, CONVEY and RELEASE unto Mortgagee, its
successors and assigns, the following-described real estate (hereinafter
referred to as the "Land") and all of its estate,
<PAGE>
right, title and interest therein, situate, lying and being in the County of
Cook and State of Illinois, to-wit:
THE LAND MORTGAGED HEREBY IS DESCRIBED ON
EXHIBIT A ATTACHED HERETO AND MADE A PART HEREOF
which Land, with the property hereinafter described, is referred to herein
collectively as the "Premises" or as the "Mortgaged Premises."
TOGETHER with all easements, rights of way, strips and gores of land.
vaults, streets, alleys, water rights, mineral rights, and rights used in
connection with the Land or to provide a means of access to the Land, and all
tenements, hereditaments and appurtenances thereof and thereto pertaining or
belonging, and all underground and overhead passageways and licenses in
connection therewith;
TOGETHER with all leasehold estates, right, title and interest of
Mortgagor in any and all leases, subleases, management agreements, arrangements,
concessions, or agreements, written or oral, relating to the use and occupancy
of the Land and improvements or any portion thereof located thereon, now or
hereafter existing or entered into;
TOGETHER with all rents, issues and profits thereof for so long and
during all such times as Mortgagor may be entitled thereto and together with all
proceeds of insurance with respect thereto and any and all other proceeds
therefrom (all of which are pledged primarily and on a parity with said real
estate and not secondarily);
TOGETHER with any and all buildings and improvements now or hereafter
erected on the Land, including, but not limited to, the fixtures, attachments,
appliances, equipment, machinery, and other articles attached to said buildings
and improvements and all tangible personal property owned by Mortgagor now or
any time hereafter located on or at the Land or used in connection therewith,
including, but not limited to, all goods, machinery, tools, equipment (including
fire sprinklers and alarm Systems, air conditioning, heating, boilers,
refrigerating, electronic monitoring, water, lighting, power, sanitation, waste
removal, entertainment, recreational, window or structural cleaning rigs,
maintenance and all other equipment of every kind), lobby and all other indoor
or outdoor furniture (including tables, chairs, planters, desks, sofas, shelves,
lockers and cabinets), furnishings, appliances. inventory, rugs, carpets and
other floor coverings, draperies, drapery rods and brackets, awnings, venetian
blinds, partitions, chandeliers and other lighting fixtures, and all other
fixtures, apparatus, equipment, furniture, furnishings, all construction,
architectural and engineering contracts, subcontracts and other agreements now
or hereafter entered into by Mortgagor and pertaining to the construction or
remodeling of improvements on the Land, plans and specifications and other tests
or studies now or hereafter prepared in contemplation of constructing or
remodeling improvements on the Land, it being understood that the enumeration of
any specific articles of property shall in nowise result in or be held to
exclude any items of property not specifically mentioned;
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<PAGE>
TOGETHER with all the estate, interest, right, title, other claim or
demand, including claims or demands with respect to the proceeds of insurance in
effect with respect thereto, which Mortgagor now has or may hereinafter acquire
in the Premises, and any and all awards made for the taking by eminent domain,
or by any proceedings or purchase in lieu thereof, of the whole or any part of
the Premises, including, without any limitation, any awards resulting from the
change of grade of streets and awards for severance damages.
All of the land, estate and property hereinabove described, real, personal
and mixed, whether affixed or annexed or not (except where otherwise hereinabove
specified) and all rights hereby conveyed and mortgaged are intended so to be as
a unit and are hereby understood, agreed and declared to form a part and parcel
of the real estate and to be appropriated to the use of the real estate, and
shall for the purposes of this Mortgage be deemed to be real estate and conveyed
and mortgaged hereby.
Mortgagor covenants that it is lawfully seized of the Premises, that the
same are unencumbered except for title exceptions approved by Mortgagee, and
that it has good right, full power and lawful authority to convey and mortgage
the same, and that it will warrant and forever defend the Premises and the quiet
and peaceful possession of the same against the lawful claims of all persons
whomsoever.
TO HAVE AND TO HOLD the Premises unto Mortgagee, its successors and assigns
forever, free from all rights and benefits under and by virtue of the Homestead
Exemption Laws of the State of Illinois (which rights and benefits are hereby
expressly released and waived), for the uses and purposes herein set forth,
together with all right to retain possession of the Premises after any default
in the payment of all or any part of the indebtedness hereby secured, or the
breach of any covenant or agreement herein contained, or upon the occurrence of
any Event of Default as hereinafter defined.
IT IS FURTHER UNDERSTOOD AND AGREED THAT:
1. Maintenance, Repair and Restoration of Improvements, Payment of Prior
Liens. etc: Mortgagor shall (a) promptly repair, restore or rebuild any
buildings or improvements now or hereafter on the Premises which may become
damaged or be destroyed; (b) keep the Premises in good condition and repair,
without waste, and free from mechanics' liens or claims for lien not expressly
subordinated to the lien hereof; provided, however, that Mortgagor shall have
the right to contest in good faith and with reasonable diligence the validity of
any such lien or claim upon furnishing (i) to the title insurance company
approved by Mortgagee such security or indemnity as it may require to induce
said title insurance company to issue its title insurance commitment or its
mortgage title insurance policy insuring against all such claims or liens, in
form satisfactory to Mortgagee, and (ii) to Mortgagee such other security with
respect to such claim as may be acceptable to Mortgagee; (c) pay when due any
indebtedness or installment or portion thereof which may be secured by a lien or
charge on the Premises and comply with all requirements of all loan documents
evidencing or securing such indebtedness, and upon request exhibit satisfactory
evidence of the discharge of such lien to
3
<PAGE>
Mortgagee; (d) complete within a reasonable time any building or buildings now
or at any time in process of erection upon the Premises; (e) comply and cause
the Premises at all times to be operated in compliance with all requirements of
law, municipal ordinances, or restrictions of record with respect to the
Premises and the use thereof, and with all federal, state, local and municipal
environmental, health and safety laws, statutes, ordinances, rules and
regulations, so that no cleanup requirement or any claim or other obligation or
responsibility arises from a violation of any such laws, statutes, ordinances,
rules and regulations; (f) make no material alterations in the Premises except
as required by law or municipal ordinance; (g) suffer or permit no change in the
general nature of the occupancy of the Premises, without Mortgagee's written
consent; (h) initiate or acquiesce in any classification or change in any
zoning, use, building code, or other law, ordinance, statute, or regulation
governing the use or development of the Premises, without Mortgagee's prior
written consent; (i) pay each item of indebtedness, or installment or portion
thereof, due from Mortgagor (or, if Mortgagor is a trust, from Mortgagor's
beneficiary) to Mortgagee other than the. indebtedness evidenced by the Note;
and j) pay each item of indebtedness secured by this Mortgage when due according
to the terms hereof or of the Note.
2. Representations and Covenants: Mortgagor hereby represents and
covenants to Mortgagee that:
2.1 Power. etc.: Mortgagor (a) is a corporation duly organized,
validly existing and in good standing under the laws of the State of Illinois
and has complied with all conditions prerequisite to its doing business in the
State of Illinois; (b) has the power and authority to own its properties and to
carry on its business as now being conducted; (c) is qualified to do business in
every jurisdiction in which the nature of its business or its properties makes
such qualification necessary; and (d) is in compliance with all laws,
regulations, ordinances and orders of public authorities applicable to it.
2.2 Validity of Loan Instruments: (a) the execution, delivery and
performance by Mortgagor of the Note, this Mortgage and all additional Loan
Documents, and the borrowing evidenced by the Note (1) are within the powers of
Mortgagor; (2) have been duly authorized by all requisite actions; (3) have
received all necessary governmental approval; and (4) do not violate any
provision of any law, any order of any court or agency of government or any
indenture, agreement or other instrument to which Mortgagor is a party, or by
which it or any portion of the Mortgaged Premises is bound, or be in conflict
with, result in breach of, or constitute (with due notice and/or lapse of time)
a default under any such indenture, agreement, or other instrument, or result in
the creation or imposition of any lien, charge or encumbrance of any nature
whatsoever, upon any of its property or assets, except as contemplated by the
provisions of this Mortgage and any additional Loan Documents; and (b) the Note,
this Mortgage and all additional Loan Documents, when executed and delivered by
Mortgagor, will constitute the legal, valid and binding obligations of
Mortgagor, and other obligors named (herein, if any, in accordance with their
respective terms; subject, however, to such exculpation provisions as may be
hereinafter specifically set forth.
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<PAGE>
2.3 Other Information: All other information, reports, papers,
balance sheets, statements of profit and loss, and data given to Mortgagee, its
agents, employees, representatives or counsel in respect of Mortgagor or others
obligated under the terms of the Note, this Mortgage and all other Loan
Documents are accurate and correct in all material respects and complete insofar
as completeness may be necessary to give Mortgagee a true and accurate knowledge
of the subject matter.
2.4 Litigation: There is not now pending against or affecting
Mortgagor or others obligated under the terms of the Note, this Mortgage and all
other Loan Documents, nor, to the knowledge. of Mortgagor or others obligated
under the terms of the Note, this Mortgage and all other Loan Documents, is
there threatened, any action, suit or proceeding at law or in equity or by or
before any administrative agency which if adversely determined would materially
impair or affect the financial condition or operation of Mortgagor or the
Mortgaged Premises.
3. Payment of Taxes. Mortgagor shall pay before any penalty attaches all
general taxes, and shall pay special taxes, special assessments, water charges,
sewer service charges, and other charges against the Premises and any personal
property located thereon, and/or against the rents and other income derived from
the Premises, when due, and shall, upon written request, furnish to Mortgagee
duplicate receipts therefor. To prevent default hereunder, Mortgagor shall pay
in full under protest, in the manner provided by statute, any tax or assessment
which Mortgagor may desire to contest.
4. Tax Deposits: Mortgagor covenants and agrees to deposit at such place
as Mortgagee may from lime to time in writing appoint, and in the absence of
such appointment, then at the office of Mortgagee commencing on the first day of
the first month after request therefor by Mortgagee, and on the first day of
each month thereafter until the indebtedness secured by this Mortgage is fully
paid, and all other obligations secured by this Mortgage are fully discharged, a
sum equal to one-twelfth of the last total annual taxes and assessments for the
last ascertainable year (general and special) on the Premises (unless said taxes
are based upon assessments which exclude the improvements or any part thereof
now constructed, or to be constructed, in which event the amount of such
deposits shall be based upon Mortgagee's reasonable estimate as to the amount of
taxes and assessments to be levied and assessed). In addition, Mortgagor shall,
concurrently with the disbursement of the loan evidenced by the Note and secured
hereby, also deposit with Mortgagee an amount, based upon the taxes and
assessments so ascertainable or so estimated by Mortgagee, as the case may be,
for taxes and assessments on the Premises, on an accrual basis, for the period
from January 1 of the year in which said loan was initially disbursed to and
including the date of the first deposit in this paragraph hereinabove mentioned
Such deposits are to be held without any allowance of interest and need not be
kept separate and apart, and are to be used for the payment of taxes and
assessments (general and special) on said Premises next due and payable when
they become due. If the funds so deposited are insufficient to pay any such
taxes or assessments (general and special) for any year when the same shall
become due and payable, Mortgagor shall, within ten (10) days after receipt of
demand therefor, deposit such additional funds as may be necessary to
5
<PAGE>
pay such taxes and assessments (general and special) in full. If the funds so
deposited exceed the amount required to pay such taxes and assessments (general
and special) for any year, the excess shall be applied on subsequent deposit or
deposits. Receipts showing and evidencing payment of all such taxes and
assessments (general and special) shall be exhibited to Mortgagee within thirty
(30) days after the due date for payment of same.
5. Mortgagee's Interest in and Use of Deposits: Upon the occurrence of an
"Event of Default" under this Mortgage, Mortgagee may at its option, without
being required to do so, apply any monies at the time on deposit pursuant to
this Mortgage on any of Mortgagor's obligations herein or in the Note contained,
in such order and manner as Mortgagee may elect When the indebtedness secured
hereby has been fully paid, any remaining deposits shall be paid to Mortgagor or
to the then owner or owners of the Mortgaged Premises. Such deposits are hereby
pledged as additional security for the indebtedness hereunder and shall be held
in trust to be irrevocably applied by the depositary for the purposes for which
made hereunder and shall not be subject to the direction or control of
Mortgagor; provided. however, that neither Mortgagee nor said depositary shall
be liable for any failure to apply to the payment of taxes and assessments any
amount so deposited unless Mortgagor, while not in default hereunder, shall have
requested said depositary in writing to make application of such funds to the
payment of the particular taxes or assessments for payment of which they were
deposited, accompanied by the bills for such taxes and assessments. All deposits
made by or for the benefit of Mortgagee hereunder shall be held without
allowance of interest and need not be kept separate and apart, but may be
commingled with any funds then in control of Mortgagee.
6. Insurance: Mortgagor shall keep the Premises, including all buildings
and improvements now or hereafter situated on the Land, insured against loss or
damage by fire and extended coverage, malicious mischief and vandalism and such
other hazards in such amounts as may reasonably be required by Mortgagee, but
such insurance shall provide coverage for the full insurable value thereof, and
shall include, without limitation on the generality of the foregoing, war damage
insurance whenever in the opinion of Mortgagee such protection is necessary.
Mortgagor shall also provide and keep in effect plate glass and comprehensive
public liability insurance with such limits for personal injury and death and
property damage as Mortgagee may reasonably require, and will also keep in
effect rent loss insurance and/or business interruption insurance in amounts
deemed reasonably necessary by Mortgagee for payment of all obligations secured
hereby for a period of twelve (12) months, employer's liability and workmen's
compensation insurance, in such amounts as Mortgagee may reasonably require. All
policies of insurance to be furnished hereunder shall be in forms, companies and
amounts reasonably satisfactory to Mortgagee, with standard mortgagee loss
payable clauses attached to all policies in favor of and in form satisfactory to
Mortgagee, including a provision requiring that the coverage evidenced thereby
shall not be terminated or materially modified without thirty (30) days' prior
written notice to Mortgagee. Mortgagor shall deliver the original of all
policies, including additional and renewal policies, to Mortgagee, and, in the
case of insurance about to expire, shall deliver renewal policies not less than
thirty (30) days prior to their respective dates of expiration. If any renewal
policy is not delivered to Mortgagee thirty (30) days before the expiration of
any existing policy or policies, with evidence of premium paid, Mortgagee may,
6
<PAGE>
but is not obligated to, obtain the required insurance on behalf of Mortgagor
(or insurance in favor of Mortgagee alone) and pay the premiums thereon. Any
monies so advanced shall be so much additional indebtedness secured hereby and
shall become immediately due and payable with interest thereon at the Default
Rate as defined in Paragraph 41 hereof.
So long as any sum remains due hereunder or under the Note secured hereby,
Mortgagor covenants and agrees that it shall not place, or cause to be placed or
issued, any separate casualty, fire, rent loss, liability, or war damage
insurance from the insurance required to be maintained under the terms hereof,
unless in each such instance Mortgagee herein is included therein as the payee
under a standard mortgagee's loss payable clause. Mortgagor covenants to advise
Mortgagee whenever any such separate insurance coverage is placed, issued or
renewed, and agrees to deposit the original of all such policies with Mortgagee.
Mortgagor will deposit with Mortgagee upon request of Mortgagee, an amount
sufficient to pay premiums due or which may become due relating to any insurance
required hereunder in such manner and at such times as Mortgagee may, in its
sole discretion, deem advisable. Such deposits shall be held without any
allowance of interest and need not be kept separate and apart. In no event shall
Mortgagee be liable for any damages arising out of Mortgagee's manner or method
of estimating or making such payments.
In the event of a foreclosure of this Mortgage, or in case of any transfer
of title to the Mortgaged Premises in extinguishment of the debt secured hereby,
all right, title and interest of Mortgagor to any insurance policy covering the
Mortgaged Premises shall pass to Mortgagee or transferee of the Mortgaged
Premises.
7. Adjustment of Losses with Insurer and Application of Proceeds of
Insurance:
A. In case of loss, Mortgagee (or after entry of decree of
foreclosure, purchaser at the sale, or the decree creditor, as the case may be)
is hereby authorized to settle any insurance claim filed for more than TWENTY-
FIVE THOUSAND AND N01100 ($25,000.00) DOLLARS and any claim for TWENTY-FIVE
THOUSAND AND N01100 ($25,000.00) DOLLARS or less shall be adjusted and settled
by Mortgagor, provided that Mortgagee shall have the right to settle any claims
that Mortgagor has not settled on or before ninety (90) days after the date of
such loss. All insurance proceeds relating to any loss or casualty may, at the
option of Mortgagee, either be applied in reduction of the indebtedness secured
hereby, whether due or not, or be held by Mortgagee and used to reimburse
Mortgagor for the cost of the rebuilding or restoration of the buildings or
improvements on the Premises: provided, however, that if (i) no Event of Default
has occurred and is continuing hereunder; and (ii) Mortgagor is obligated to
restore or replace the damaged or destroyed buildings or improvements under the
terms of any lease or leases which are or may be prior to the lien of this
Mortgage, and (iii) such damage or destruction does not result in cancellation
or termination of such lease, and (iv) the insurers do not deny liability as to
the insurers, all insurance proceeds shall, after deducting therefrom any
expenses incurred in the collection thereof, subject to the
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<PAGE>
provisions of subparagraphs B and C hereof, be used to reimburse Mortgagor for
the cost of rebuilding or restoration of buildings and improvements on the
Premises. In the event Mortgagee elects to apply said insurance proceeds in
reduction of the indebtedness secured hereby, all expenses and fees of
collection shall first be deducted and paid to Mortgagee, and it is further
covenanted and agreed that should the net insurance proceeds be insufficient to
pay the then existing indebtedness secured hereby, together with all accrued
interest thereon, fees and charges, Mortgagee may, at its sole election, declare
the entire unpaid balance of the debt secured hereby to be immediately due and
payable, and the failure of the payment thereof shall be a default hereunder.
B. In the event Mortgagee is required or elects to permit any such
insurance proceeds to be applied to pay for the cost of rebuilding or
restoration of the buildings and improvements on the Mortgaged Premises, such
funds will be made available for disbursement by Mortgagee; provided however,
that (i) should any insurance company have, in the opinion of Mortgagee, a
defense against Mortgagor (but not against Mortgagee) to any claim for payment
due to damage or destruction of the Mortgaged Premises or any part thereof by
reason of fire or other casualty submitted by Mortgagee or any party on behalf
of Mortgagee, or should such company raise any defense against Mortgagor (but
not against Mortgagee) to such payment, or (ii) should the net proceeds of such
insurance collected by Mortgagee be less than the estimated cost of the
requisite work as determined by Mortgagee, which estimate shall include a
reasonable contingency, and Mortgagor fails to deposit with Mortgagee the amount
of such deficiency, then Mortgagee may, at its option, whether or not Mortgagee
has received funds from any insurance settlements, declare the unpaid balance of
the debt secured hereby to be immediately due and payable, and Mortgagee may
then treat the same as in the case of any other default hereunder. In the event
such proceeds are applied toward restoration or rebuilding, the buildings and
improvements shall be so restored or rebuilt as to be of at least equal value
and substantially the same character as prior to such damage or destruction.
Such proceeds shall be made available, from time to time, upon such reasonable
conditions as are imposed by Mortgagee and upon Mortgagee being furnished with
satisfactory evidence of the estimated cost of completion thereof and with such
architect's certificates, waivers of lien, contractors' sworn statements and
other evidence of cost and of payments, including, insurance against mechanic's
liens and/or a performance bond or bonds in form satisfactory to Mortgagee which
shall be the sole or a dual obligee, and which bonds shall be written with such
surety company or companies as may be satisfactory to Mortgagee. All plans and
specifications for such rebuilding or restoration shall be presented to and
approved by Mortgagee prior to the commencement of any such repair or
rebuilding. Disbursement of such insurance proceeds shall not exceed ninety
(90%) percent of the value of the work performed from time to time, and at all
times the undisbursed balance of said proceeds remaining in the hands of
Mortgagee shall be at least sufficient to pay for the cost of completion of the
work free and clear of liens.
C. In case of loss occurring after any Event of Default. as
hereinafter defined, has occurred hereunder, or in the event insurance proceeds
are received after any Event of Default has occurred hereunder, whether or not,
in either event, foreclosure proceedings have been instituted, the proceeds of
any such insurance policy or policies, shall, notwithstanding
8
<PAGE>
anything to the contrary herein contained, be applied at the sole option of
Mortgagee in payment or reduction of the indebtedness secured hereby or in
payment or reduction of the amount due in accordance with any decree of
foreclosure that may be entered in any such proceedings, and the balance, if
any, shall be paid to the owner of the equity of redemption if he shall then be
entitled to the same, or as the court may direct. In case of the foreclosure of
this Mortgage, the court in its decree may provide that the mortgage clause
attached to each of said insurance policies may be cancelled and that the decree
creditor may cause a new loss clause to be attached to each of said policies
making the loss thereunder payable to said decree creditor; and any such
foreclosure decree may further provide that in case of one or more redemptions
under said decree, pursuant to the statute in such case made and provided, then
and in every such case, each successive redemptor may cause the preceding loss
clause attached to each insurance policy to be cancelled and a new loss clause
to be attached thereto, making the loss thereunder payable to such redemptor. In
the event of foreclosure sale, Mortgagee is hereby authorized, without the
consent of Mortgagor, to assign any and all insurance policies to the purchaser
at the sale, or to take such other steps as Mortgagee may deem advisable, to
cause the interest of such purchaser to be protected by any of the said
insurance policies.
D. Anything in this Paragraph 7 to the contrary notwithstanding, it
is an operating covenant hereof that in case the Premises have been submitted to
the Condominium Property Act of the State of Illinois, and pursuant thereto in
the event a Condominium Declaration covering the Premises has been duly executed
and filed, then and in such case the proceeds of any insurance resulting from
fire or other insured casualty, shall be used to repair such damage, and restore
the Premises, notwithstanding the state or condition of this Mortgage or the
Note; and with the further proviso that any excess insurance loss proceeds after
payment of the full cost of the repair and restoration of the Premises shall be
used for the purposes set forth in the Condominium Declaration. It is the
express purpose and intention of this Mortgage and the express understanding of
the parties hereto that so long as a Condominium Declaration covering the
Premises is of record and in full force and effect, the negotiations for,
settlement, receipt of, use and disposition of insurance loss proceeds shall be
governed by the terms and provisions of the Condominium Declaration, the
interest or estate of Mortgagee notwithstanding.
E. Nothing contained in this Mortgage shall create any
responsibility or obligation on Mortgagee to collect any amount owing on any
insurance policy to rebuild, repair or replace any damaged or destroyed portion
of the Premises, including any improvements, or to perform any act hereunder.
8. Method of Taxation:
8.1 Stamp, Tax: If, by the laws of the United States of America, or of any
state, municipality or other governmental body having jurisdiction over
Mortgagor or its property, any tax imposition or assessment is due or becomes
due in respect of the issuance of the Note, this Mortgage or upon the interest
of Mortgagee in the Premises, or any tax, assessment or imposition is imposed
upon Mortgagee relating to the lien created hereunder, or any of the foregoing,
Mortgagor covenants and agrees to pay such tax, levy, assessment or imposition
in the
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manner required by any such law and the failure to so pay same shall constitute
an Event of Default hereunder and at the option of Mortgagee all sums secured
hereby shall in such event be immediately due and payable. Mortgagor further
covenants to hold harmless and agrees to indemnify Mortgagee, its successors or
assigns, against any liability incurred by reason of the imposition of any tax
on the issuance of the Note.
8.2 Change in Method of Taxation: In the event of the enactment after this
date of any law of the state in which the Premises are located deducting from
the value of land for the purpose of taxation any lien thereon, or imposing upon
Mortgagee the payment of the whole or any part of the taxes or assessments or
charges or liens herein required to be paid by Mortgagor, or changing in any way
the laws relating to the taxation of mortgages or debts secured by mortgages or
Mortgagee's interest in the Premises, or the manner of collection of taxes, so
as to affect this Mortgage or the debt secured hereby or the holder hereof,
then, and in any such event, Mortgagor, upon demand by Mortgagee, shall pay such
taxes or assessments, or reimburse Mortgagee therefor; provided, however, that
if in the opinion of counsel for Mortgagee (a) it might be unlawful to require
Mortgagor to make such payment; or (b) the making of such payment might result
in the imposition of interest beyond the maximum amount permitted by law, then
and in such event, Mortgagee may elect, by notice in writing given to Mortgagor,
to declare all of the indebtedness secured hereby to be and become due and
payable without penalty or premium sixty (60) days from the giving of such
notice.
9. No Merger: It being the desire and intention of the parties hereto
that this Mortgage and the lien hereof do not merge in fee simple title to the
Premises, it is hereby understood and agreed that should Mortgagee acquire any
additional interest in or to the Premises or the ownership thereof, then, unless
a contrary intent is manifested by Mortgagee, as evidenced by an express
statement to that effect in an appropriate document duly recorded, this Mortgage
and the lien hereof shall not merge in the fee simple tide, toward the end that
this Mortgage may be foreclosed as if owned by a stranger to the fee simple
title.
10. Prepayment Privilege: At such time as Mortgagor is not in default
either under the terms of the Note or under the terms of this Mortgage,
Mortgagor shall have the privilege of making prepayments on the principal of the
Note (in addition to the required payments) in accordance with the terms and
conditions set forth in the Note.
11. Assignment of Rents and Leases:
A. To further secure the indebtedness secured hereby. Mortgagor does
hereby sell, assign and transfer unto Mortgagee all the rents, issues and
profits now due with respect to the Premises and does hereby sell, assign and
transfer onto Mortgagee all Mortgagor's right, title and interest as lessor
under or by virtue of any lease, whether written or verbal, or any letting of,
or of any agreement for the use or occupancy of the Premises or any part
thereof, which may have been heretofore or may be hereafter made or agreed to or
which may be made or agreed to by Mortgagor or its agents or beneficiaries under
the powers herein granted, it being the intention hereby to establish an
absolute transfer and assignment of all of such leases and
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agreements, and all the avails thereunder, unto Mortgagee, and Mortgagor does
hereby appoint irrevocably Mortgagee its true and lawful attorney in its name
and stead (with or without taking possession of the Premises as provided in
Paragraph 17 hereof) to rent, lease or let all or any portion of the Premises to
any party or parties at such rental and upon such terms as Mortgagee shall, in
its discretion, determine, and to collect all of said avails, rents, issues and
profits arising from or accruing at any time hereafter, and all now due or that
may hereafter exist on the Premises, with the same rights and powers and subject
to the same immunities, exoneration of liability and rights of recourse and
indemnity as Mortgagee would have upon taking possession pursuant to the
provisions of Paragraph 17 hereof.
B. Mortgagor represents and agrees that no rent has been or will be
paid by any person in possession of any portion of the Premises for more than
one installment in advance and that the payment of none of the rents to accrue
for any portion of the Premises has been or will be, without Mortgagee's
consent, waived, released, reduced, discounted, or otherwise discharged or
compromised by Mortgagor. Mortgagor shall not grant any rights of set off or
permit any set off to rent by any person in possession of any portion of the
Premises. Mortgagor agrees that it will not assign any lease or any rents or
profits of the Premises, except to Mortgagee or with the prior written consent
of Mortgagee.
C. Nothing herein contained shall be construed as constituting
Mortgagee as a mortgagee in possession in the absence of the taking of actual
possession of the Premises by Mortgagee pursuant to Paragraph 17 hereof. In the
exercise of the powers herein granted Mortgagee, no liability shall be asserted
or enforced against Mortgagee, all such liability being expressly waived and
released by Mortgagor.
D. Mortgagor further agrees to assign and transfer to Mortgagee all
future leases upon all or any part of the Premises and to execute and deliver,
at the request of Mortgagee, all such further assurances and assignments in the
Premises as Mortgagee shall from time to time require.
E. Although it is the intention of the parties that the assignment
contained in this Paragraph 11 shall be a present assignment, it is expressly
understood and agreed, anything herein contained to the contrary
notwithstanding, that so long as there is no Event of Default hereunder,
Mortgagor shall have the privilege of collecting and retaining the rents
accruing under the leases assigned hereby, until such time as Mortgagee shall
elect to collect such rents pursuant to the terms and provisions of this
Mortgage.
F. Mortgagor expressly covenants and agrees that if Mortgagor, as
lessor under any lease for all or any part of the Mortgaged Premises, shall fail
to perform and fulfill any term, covenant, condition or provision in said lease
or leases, or any of them on its part to be performed or fulfilled, at the times
and in the manner in said lease or leases provided, or if Mortgagor shall suffer
or permit to occur any breach or default under the provisions of any assignment
of any lease or leases given as additional security for the payment of the
indebtedness
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secured hereby, such breach or default shall constitute a default hereunder and
entitle Mortgagee to all rights available to it in such event.
G. At the option of Mortgagee, this Mortgage shall become subject
and subordinate, in whole or in part (but not with respect to priority of
entitlement to insurance proceeds or any award in eminent domain), to any one or
more leases affecting any part of the Premises, upon the execution by Mortgagee
and recording or registration thereof, at any time hereafter, in the office
wherein this Mortgage was registered or filed for record, of a unilateral
declaration to that effect.
12. Additional Rights of Mortgagee: Mortgagor hereby covenants and agrees
that:
12.1 If the payment of the indebtedness secured hereby or any part thereof
be extended or varied or if any part of the security be released, all persons
now or at any time hereafter liable therefor, or interested in the Premises,
shall be held to assent to such extension. variation or release, and their
liability and the lien and all provisions hereof shall continue in full force,
the right of recourse against all such persons being expressly reserved by
Mortgagee, notwithstanding such extension, variation or release.
12.2 In the event the ownership of the Mortgaged Premises, or any part
thereof, becomes vested in a person or entity other than Mortgagor (without
hereby implying Mortgagee's consent to any assignment, transfer or conveyance of
the Mortgaged Premises) Mortgagee may, without notice to Mortgagor, deal with
such successor or successors in interest with reference to this Mortgage and to
said debt in the same manner as with Mortgagor without in any way vitiating or
discharging Mortgagor's liability hereunder or upon the debt. No sale of the
Mortgaged Premises, no forbearance on the part of Mortgagee and no extension of
the time for the payment of the debt hereby secured given by Mortgagee shall
operate to release, modify, change, or affect the original liability, if any, of
Mortgagor, either in whole or in part.
12.3 Mortgagee, at its sole option and without notice, (a) may release any
part of the Mortgaged Premises, or any person liable for the debt, without in
any way affecting the lien hereof upon any part of the Mortgaged Premises not
expressly released; (b) may agree with any party obligated on the debt, or
having any interest in the Mortgaged Premises, to extend the time for payment of
any part or all of the debt; (c) may accept a renewal note or notes therefor;
(d) may take or release other or additional security for the indebtedness; (e)
may consent to any plat, map or plan of the Premises; (f) may consent to the
granting of any easement; (g) may join in any extension or subordination
agreement; (h) may agree in writing with Mortgagor to modify the rate of
interest or period of amortization of the Note or change the time of payment or
the amount of the monthly installments payable thereunder; or (i) may waive or
fail to exercise any right, power or remedy granted by law or herein or in any
other instrument given at any time to evidence or secure the payment of the
indebtedness. Any such agreement shall not in any way release or impair the lien
hereof, but shall, as applicable, extend the lien hereof as against the
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title of all parties having any interest in the Mortgaged Premises which
interest is subject to this Mortgage.
12.4 This Mortgage is intended only as security for the obligations herein
set forth. Notwithstanding anything to the contrary contained in this Mortgage,
Mortgagee shall have no obligation or liability under, or with respect to, or
arising out of this Mortgage and shall not be required or obligated in any
manner to perform or fulfill any of the obligations of Mortgagor hereunder.
12.5 Upon the occurrence of an Event of Default hereunder, Mortgagee may,
but need not, make any payment or perform any act herein required of Mortgagor
in any form and manner deemed expedient. By way of illustration and not in
limitation of the foregoing, Mortgagee may (but need not) do all or any of the
following: make payments of principal or interest or other amounts on any lien,
encumbrance or charge on any part of the Premises; complete construction; make
repairs; collect rents; prosecute collection of any sums due with respect to the
Premises; purchase, discharge, compromise or settle any tax lien or any other
lien, encumbrance, suit, proceeding, title or claim thereof; contest any tax or
assessment; and redeem from any tax sale or forfeiture affecting the Premises.
All monies paid for any of the purposes herein authorized and all expenses paid
or incurred in connection therewith, including attorneys' fees, and any other
monies advanced by Mortgagee to protect the Mortgaged Premises and the lien
hereof, shall be so much additional indebtedness secured hereby, and shall
become immediately due and payable without notice and with interest thereon at
Default Rate as defined in Paragraph 41 hereof. in making any payment or
securing any performance relating to any obligation of Mortgagor hereunder,
Mortgagee shall (as long as it acts in good faith) be the sole judge of the
legality, validity and amount of any lien or encumbrance and of all other
matters necessary to be determined in satisfaction thereof. No such action of
Mortgagee, and no inaction of Mortgagee hereunder, shall ever be considered as a
waiver of any right accruing to it on account of any default on the part of
Mortgagor. All sums paid by Mortgagee for the purposes herein authorized, or
authorized by any Loan Document shall be considered additional advances made
under the Note and pursuant to this Mortgage and shall be secured by the
Mortgage.
13. Reliance on Tax Bills: Mortgagee in making any payment hereby
authorized: (a) relating to taxes and assessments, may do so according to any
bill, statement or estimate procured from the appropriate public office without
inquiry into the accuracy of such bill, statement or estimate or into the
validity of any tax, assessment, sale, forfeiture, tax lien or title or claim
thereof; or (b) for the purchase, discharge, compromise or settlement of any
other prior lien, may do so without inquiry as to the validity or amount of any
claim for lien which may be asserted.
14. Acceleration of Indebtedness in Case of Default: Any one of the
following events shall be deemed an "Event of Default" hereunder: (a) if default
be made in the due and punctual payment of the Note, or any installment due in
accordance with the terms thereof, either of principal or interest or in the
payment of any other sum required to be paid by Mortgagor or the maker of the
Note set forth in the Note or pursuant to the terms of any other
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Loan Document executed in connection with this Mortgage or the indebtedness
secured hereby, and any such default continues after the expiration of any
applicable grace or cure period; or (b) if any other default be made in the
performance of any other of the non-monetary covenants or conditions contained
in the Note or in any other Loan Document, and such default continues after the
expiration of any applicable grace or cure period; or (c) if Mortgagor, any
beneficiary of Mortgagor, the general partner of said beneficiary or any
guarantor of the obligation secured hereby (the foregoing patties are herein
referred to collectively as the "Obligors" and individually as an "Obligor")
shall file a petition in voluntary bankruptcy or under Tide 11 of the United
States Code or any other similar law, statute or regulation, state or federal,
whether now or hereafter existing, or an answer admitting insolvency or
inability to pay its debts, or fail to obtain a vacation or stay of involuntary
proceedings within thirty (30) days; or (d) if any Obligor shall be adjudicated
a bankrupt, or a trustee or receiver shall be appointed for such Obligor for all
of its property or the major part thereof in any involuntary proceeding, or any
court shall have taken jurisdiction of the property of any Obligor or the major
part thereof in any involuntary proceedings for the reorganization, dissolution,
liquidation or winding up of such Obligor, and such trustee or receiver shall
not be discharged or such jurisdiction relinquished or vacated or stayed on
appeal or otherwise stayed within thirty (30) days; or (e) if any Obligor shall
make an assignment for the benefit of creditors, or shall admit in writing its
inability to pay its debts generally as they become due, or shall consent to the
appointment of a receiver or trustee or liquidator of all of its property or the
major part thereof; or (f) if any representation or warranty made by Mortgagor
or others in, under or pursuant to the Note, this Mortgage or any other Loan
Document shall prove to have been false or misleading in any material aspect as
of the date on which such representation or warranty was made; or (g) if the
holder of a mortgage or of any other lien on the Mortgaged Premises (without
hereby implying Mortgagee's consent to any such mortgage or other lien) accepts
or agrees to accept a deed in lieu of foreclosure or institutes foreclosure
proceedings or other proceedings for the enforcement of its remedies thereunder
and the same remain undischarged or unbonded to Mortgagee's satisfaction for a
period of seven (7) days; or (h) if there is a violation of Paragraph 43 of this
Mortgage; or (i) there is a violation of or default under any environmental
undertaking, indemnity or other agreement executed by one or more Obligors in
connection with the loan evidenced by the Note; or (1) Mortgagee reasonably
deems itself to be insecure; or (k) if default shall be made in the due
observance or performance of any other of the covenants, agreements or
conditions contained in this Mortgage, and required to be kept or performed or
observed by Mortgagor, other than the defaults described in the preceding
clauses (a) through (1) of this Paragraph 14 and any other defaults deemed to be
"Events of Default" hereunder, and the same shall continue for fifteen (15) days
after written notice given by Mortgagee to Mortgagor. Upon the occurrence of an
Event of Default, then and in every such case the whole of said principal sum
hereby secured shall, at once, at the option of Mortgagee, become immediately
due and payable, together with accrued interest thereon, without notice to
Mortgagor.
If while any insurance proceeds or condemnation awards are held by or for
Mortgagee to reimburse Mortgagor or any lessee for the costs of repair,
rebuilding or restoration of building(s) or other improvements on the Land, as
set forth in Paragraphs 7 and 20 hereof, Mortgagee shall be or become entitled
to accelerate the maturity of the indebtedness, then and
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in such event, Mortgagee shall be entitled to apply all such insurance proceeds
and condemnation awards then held by or for it in reduction of the indebtedness,
and any excess held by it over the amount of the indebtedness shall be paid to
Mortgagor or any party entitled thereto, without interest, as the same appear on
the records of Mortgagee.
15. Foreclosure: Expense of Litigation:
A. If an Event of Default has occurred hereunder, or when the
indebtedness hereby secured, or any part thereof, shall become due, whether by
acceleration or otherwise, Mortgagee shall have the right to foreclose the lien
hereof for such indebtedness or part thereof, and in the event of the default in
the payment of any installment due under the Note secured hereby, the owner of
the Note may accelerate the payment of same and may institute proceedings to
foreclose this Mortgage for the entire amount then unpaid with respect to the
Note. In any suit to foreclose the lien hereof, there shall be allowed and
included as additional indebtedness in the decree for sale all expenditures and
expenses which may be paid or incurred by or on behalf of Mortgagee for
attorney's fees, appraiser's fees, outlays for documentary and expert evidence,
stenographer's charges, publication costs, and costs (which may be estimated as
to items to be expended after entry of the decree) of procuring all such
abstracts of title, title searches and examinations, title insurance policies,
Torrens certificates, and similar data and assurances with respect to title as
Mortgagee may deem reasonably necessary either to prosecute such suit or to
evidence to bidders at any sale which may be had pursuant to such decree the
true condition of the title to or the value of the Premises. All expenditures
and expenses of the nature in this paragraph mentioned, and such expenses and
fees as may be incurred in the protection of said Premises and the maintenance
of the lien of this Mortgage, including the fees of any attorney employed by
Mortgagee in any litigation or proceeding affecting this Mortgage, the Note or
the Premises, including probate and bankruptcy proceedings, or in preparations
for the commencement or defense of any proceeding or threatened suit or
proceeding, shall be immediately due and payable by Mortgagor, with interest
thereon at the Default Rate as set forth in Paragraph 41 hereof and shall be
secured by this Mortgage.
B. This Mortgage may be foreclosed once against all, or successively
against any portion or portions of the Premises, as Mortgagee may elect. This
Mortgage and the right of foreclosure hereunder shall not be impaired or
exhausted by one or any foreclosure or by one or any sale, and may be foreclosed
successively and in parts, until all of the Premises have been foreclosed
against and sold. Mortgagor waives and relinquishes any and all rights that
Mortgagor may have to cause or compel a sale of any part or parcel of the
Premises less than the entire Premises.
C. Mortgagee may employ counsel for advice or other legal service at
Mortgagee's discretion in connection with any dispute as to the obligations of
Mortgagor hereunder, or as to the title of Mortgagee to the Mortgaged Premises
pursuant to this Mortgage, or in any litigation to which Mortgagee may be a
party which may affect the title to the Mortgaged Premises or the validity of
the indebtedness hereby secured, and any reasonable attorneys' fees so incurred
shall be added to and be a part of the debt hereby secured. Any costs
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and expenses reasonably incurred in connection with any other dispute or
litigation affecting said debt or Mortgagee's title to the Mortgaged Premises,
including reasonably estimated amounts to conclude the transaction, shall be
added to and be a part of the indebtedness hereby secured. All such amounts
shall be payable by Mortgagor to Mortgagee without formal demand, and if not
paid, shall be included as a part of the mortgage debt and shall include
interest at the Default Rate as set forth in Paragraph 41 hereof from the dates
of their respective expenditures.
D. The proceeds of any foreclosure sale of the Premises shall be
distributed and applied in the following order of priority: First, on account of
all costs and expenses incident to the foreclosure proceedings, including all
such items as are mentioned in the preceding paragraph hereof; second, on
account of all other items which under the terms hereof constitute secured
indebtedness additional to that evidenced by the Note, with interest thereon as
herein provided; third, on account of all principal and interest remaining
unpaid on the Note in the order of priority therein described; and fourth, any
overplus to Mortgagor, its successors or assigns, as their rights may appear.
E. After an Event of Default, Mortgagee shall have the right and
option to commence a civil action to foreclose the lien of this Mortgage and to
obtain an order or judgment of foreclosure and sale subject to the rights of any
tenant or tenants of the Premises. The failure to join any tenant or tenants of
the Premises as party defendants in any such civil action or the failure of any
such order or judgment to foreclose their rights shall not be asserted by
Mortgagor as a defense in any civil action instituted to collect the
indebtedness secured hereby, or any part thereof or any deficiency remaining
unpaid after foreclosure and sale of the Premises, any statute or rule of law at
any time existing to the contrary notwithstanding.
16. Appointment of Receiver: Upon, or at any time after the filing of a
complaint to foreclose this Mortgage, the court in which such complaint is filed
shall, upon the election of Mortgagee, appoint a receiver of the Premises. Such
appointment may be made either before or after sale, without notice, without
regard to the solvency or insolvency of Mortgagor at the time of application for
such receiver and without regard to the then value of the Premises or whether
the same shall be then occupied as a homestead or not and Mortgagee hereunder or
any holder of the Note may be appointed as such receiver. Such receiver shall
have power to collect the rents, issues and profits of the Premises during the
pendency of such foreclosure suit and, in case of a sale and a deficiency,
during the full statutory period of redemption, whether there be redemption or
not, as well as during any further times when Mortgagor, except for the
intervention of such receiver, would be entitled to collect such rents, issues
and profits, and all other powers which may be necessary or are usual in such
cases for the protection, possession, control, management and operation of the
Premises during the whole of said period. The court from time to time may
authorize the receiver to apply the net income in his hands after deducting
reasonable compensation for the receiver and his counsel as allowed by the
court, in payment (in whole or in part) of any or all of any obligation secured
hereby, including without limitation the following, in such order of application
as Mortgagee may elect: (i) amounts due upon the Note, (ii) amounts due upon any
decree entered in any suit foreclosing this Mortgage, (iii) costs and expenses
of foreclosure and litigation upon the Premises; (iv) insurance premiums,
repairs, taxes,
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special assessments, water charges and interest, penalties and costs, in
connection with the Premises; (v) any other lien or charge upon the Premises
that may be or become superior to the lien of this Mortgage, or of any decree
foreclosing the same; provided that such application is made prior to
foreclosure sale, and (vi) the deficiency in case of a sale and a deficiency.
17. Mortgagee's Right of Possession in Case of Default:
A. In any case in which under the provisions of this Mortgage
Mortgagee has a right to institute foreclosure proceedings, whether before or
after the whole principal sum secured hereby is declared to be immediately due
as aforesaid, or whether before or after the institution of legal proceedings to
foreclose the lien hereof or before or after sale thereunder, forthwith, upon
demand of Mortgagee, Mortgagor shall surrender to Mortgagee and Mortgagee shall
be entitled to take actual possession of the Premises or any part thereof
personally, or by its agents or attorneys, as for condition broken, and
Mortgagee in its discretion may, with or without force and with or without
process of law, enter upon and take and maintain possession of all or any part
of the Premises, together with all documents, books, records, papers and
accounts of Mortgagor or then owner of the Premises relating thereto, and may
exclude Mortgagor, its agents or servants, wholly therefrom and may as attorney
in fact or agent of Mortgagor, or in its own name as Mortgagee and under the
powers herein granted, hold, operate, manage and control the Premises and
conduct the business, if any, thereof, either personally or by its agents,
contractors or nominees and with full power to use such measures, legal or
equitable, as in its discretion or in the discretion of its successors or
assigns may be deemed proper or necessary to enforce the payment or security of
the avails, rents, issues and profits of the Premises, including actions for the
recovery of rent, actions in forcible detainer and actions in distress for rent,
hereby granting full power and authority to exercise each and every of the
rights, privileges and powers herein granted at any and all times hereafter,
without notice to Mortgagor, and with full power: (i) to cancel or terminate any
lease or sublease for any cause or on any ground which would entitle Mortgagor
to cancel the same; (ii) to elect to disaffirm any lease or sublease made
subsequent to this Mortgage or subordinated to the lien hereof; (iii) to make
all necessary or proper repairs, decorating, renewals, replacements,
alterations, additions, betterments and improvements to the Premises, including
completion of construction in progress, as to it may seem judicious; (iv) to
insure and reinsure the same and all risks incidental to Mortgagee's possession,
operation and management thereof; (v) to employ watchmen to protect the
Mortgaged Premises; (vi) to continue any and all outstanding contracts for the
erection and completion of improvements to the Premises; (vii) to make and enter
into any contracts and obligations wherever necessary in its own name, and to
pay and discharge all debts, obligations and liabilities incurred thereby, all
at the expense of Mortgagor; (viii) to receive all avails, rents, issues,
profits and proceeds therefrom and to perform such other acts in connection with
the management and operation of the Mortgaged Premises as Mortgagee, in its
discretion, may deem proper; and (ix) to extend or modify any then existing
leases and to make new leases, which extensions, modifications and new leases
may provide for terms to expire, or for options to lessees to extend or renew
terms to expire, or for options to lessees to extend or renew terms to expire
beyond the date of the issuance of a deed or deeds to a purchaser or purchasers
at a foreclosure sale, it being understood and agreed that any such leases, and
the options or other
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such provisions to be contained therein, shall be binding upon Mortgagor and all
persons whose interests in the Premises are subject to the lien hereof and upon
the purchaser or purchasers at any foreclosure sale, notwithstanding any
redemption from sale, discharge of the Mortgage indebtedness, satisfaction of
any foreclosure decree or issuance of any certificate of sale or deed to any
purchaser.
B. Mortgagee shall not be obligated to perform or discharge, nor does
it hereby undertake to perform or discharge, any obligation, duty or liability
under any leases, and Mortgagor shall and does hereby agree to indemnify and
hold Mortgagee harmless of and from any and all liability, loss or damage which
it may or might incur under said leases or under or by reason of the assignment
thereof and of and from any and all claims and demands whatsoever which may be
asserted against it by reason of any alleged obligations or undertakings on its
part to perform or discharge any of the terms, covenants or agreements contained
in said leases. Should Mortgagee incur any such liability, loss or damage, under
said leases or under or by reason of the assignment thereof, or in the defense
of any claims or demands, the amount thereof, including costs, expenses and
reasonable attorneys' fees, shall be secured hereby, and Mortgagor shall
reimburse Mortgagee therefor immediately upon demand.
18. Application of Income Received by Mortgagee: Mortgagee, in the
exercise of the rights and powers hereinabove conferred upon it by Paragraph 11
and Paragraph 17 hereof, shall have full power to use and apply the avails,
rents, issues and profits of the Premises to the payment of or on account of the
following, in such order as Mortgagee may determine: (a) to the payment of the
operating expenses of the Premises including cost of management and leasing
thereof (which shall include reasonable compensation to Mortgagee and its agent
or agents, if management be delegated to an agent or agents, and shall also
include lease commissions and other compensation and expenses of seeking and
procuring tenants and entering into leases), established claims for damages, if
any, and premiums on insurance hereinabove authorized; (b) to the payment of
taxes and special assessments now due or which may hereafter become due on the
Premises; (c) to the payment of all repairs, decorating, renewals, replacements,
alterations, additions, betterments, and improvements of the Premises, and of
placing said property in such condition as will, in the judgment of Mortgagee,
make it readily rentable; and (d) to the payment of any indebtedness secured
hereby or any deficiency which may result from any foreclosure sale.
19. Access by Mortgagee: Mortgagor will at all times deliver to Mortgagee
duplicate originals or certified copies of all leases, agreements and documents
relating to the Premises and shall permit access by Mortgagee to its books and
records, construction project reports, if any, tenant registers, insurance
policies and other papers for examination and making copies and extracts
thereof. Mortgagee, its agents and designees shall have the right to inspect the
Premises at all reasonable times and access thereto shall be permitted for that
purpose.
20. Condemnation. Mortgagor hereby assigns, transfers and sets over unto
Mortgagee its entire interest in the proceeds (hereinafter referred to as
the "Condemnation Proceeds") of any award or any claim for damages for any of
the Mortgaged Premises taken or
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damaged under the power of eminent domain or by condemnation or any action in
lleu of condemnation (hereinafter referred to as "Condemnation"). Mortgagor
hereby empowers Mortgagee, in Mortgagee's sole discretion, and at its election
to settle, compromise and adjust any and all claims or rights arising under any
Condemnation relating to the Premises or any portion thereof. Mortgagor shall so
settle, compromise and adjust such claims or rights in the event Mortgagee does
not elect to do so as provided above. Nothing contained in this Mortgage shall
create any responsibility or obligation on Mortgagee to collect any amount owing
due to any Condemnation or to rebuild, repair or replace any portion of the
Premises or any improvements thereon or to perform any act hereunder. Mortgagee
may elect to apply the Condemnation Proceeds upon or in reduction of the
indebtedness secured hereby, whether due or not, or to require Mortgagor to
restore or rebuild, in which event the Condemnation Proceeds shall be held by
Mortgagee and used to reimburse Mortgagor for the cost of the rebuilding or
restoring of buildings or improvements on the Premises, in accordance with plans
and specifications to be submitted to and approved by Mortgagee. Notwithstanding
the foregoing, if Mortgagor is obligated to restore or replace the damaged or
destroyed buildings or improvements under the terms of any lease or leases which
are or may be prior to the lien of this Mortgage and if such taking does not
result in cancellation or termination of such lease, the Condemnation Proceeds
shall first be used to reimburse Mortgagor for the cost of rebuilding or
restoring of buildings or improvements on the Premises, provided no Event of
Default then exists under this Mortgage. In the event Mortgagor is required or
authorized, by Mortgagee's election as aforesaid, to rebuild or restore, the
Condemnation Proceeds shall be paid out in the same manner as is provided in
Paragraph 7 hereof for the payment of insurance proceeds toward the cost of
rebuilding or restoration. If the amount of the Condemnation Proceeds is
insufficient to cover the cost of rebuilding or restoration, Mortgagor shall pay
such cost in excess of the award, before being entitled to reimbursement out of
the award. Any surplus which may remain out of said award after payment of such
cost of rebuilding or restoration shall, at the option of Mortgagee, be applied
on account of the indebtedness secured hereby or be paid to any other party
entitled thereto.
21. Release Upon Payment and Discharge of Mortgagor's Obligations:
Mortgagee shall release this Mortgage and the lien thereof by proper instrument
upon payment and discharge of all indebtedness and other obligations secured
hereby and upon payment of a reasonable fee to Mortgagee for preparation of any
necessary instruments.
22. Waiver of Defense: No action for the enforcement of the lien or of
any provision hereof shall be subject to any defense which would not be good
and available to the party interposing same in an action at law upon the Note.
23. Waiver of Statutory Rights: To the full extent permitted by law,
Mortgagor hereby covenants and agrees that it will not at any time insist upon
or plead, or in any manner whatsoever claim or take any advantage of, and hereby
voluntarily and knowingly waives, any stay, exemption, redemption,
reinstatement, homestead or extension law or any so-called "Moratorium Law" now
or at any time hereafter in force, nor claim, take or insist upon any benefit or
advantage of or from any law now or hereafter in force providing for the
valuation
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or appraisement of the Mortgaged Premises, or any part thereof, prior to any
sale or sales thereof to be made pursuant to any provisions herein contained, or
to any decree, judgment or order of any court of competent jurisdiction; or
after such sale or sales claim or exercise any rights under any statute now or
hereafter in force to redeem the property so sold, or any part thereof, or
relating to the marshalling thereof, upon foreclosure sale or other enforcement
hereof, on its own behalf, on behalf of all persons or entities claiming or
having an interest (direct or indirect) by, through or under Mortgagor and on
behalf of each and every person or entity acquiring any interest in or title to
the Mortgaged Premises subsequent to the date hereof. Without limiting the
foregoing, Mortgagor acknowledges that the transaction of which this Mortgage is
a part is a transaction which does not include either agricultural real estate
(as defined in Paragraph 15-1201 of the Illinois Mortgage Foreclosure Law (735
ILCS 5/15-1101 et seq.) ("IMFL")), or residential real estate (as defined in
Paragraph 15-1601(b) of IMFL). To the full extent permitted by law, Mortgagor
agrees that it will not, by invoking or utilizing any applicable law or statute
or otherwise, hinder, delay or impede the exercise of any right, power or remedy
herein or otherwise granted or delegated to Mortgagee, but will suffer and
permit the exercise of every such right, power and remedy as though no such law
or statute or other restriction have been or will have been made or enacted. To
the full extent permitted by law, Mortgagor hereby agrees that no action for the
enforcement of the lien or any provision hereof shall be subject to any defense
which would not be good and valid in an action at law upon the Note. Mortgagor
hereby expressly waives any right which it may have to direct the order in which
any of the Mortgaged Premises shall be sold in the event of any sale thereof
pursuant hereto.
24. Power of Sale: Mortgagee acknowledges that a power of sale provisions
is not currently enforceable under IMFL. Mortgagor acknowledges that in the
event IMFL is hereafter amended to permit the enforcement of a power of sale
provision (the "Amendment"), such Amendment, to the extent permitted by law,
will be enforceable against Mortgagor and allow Mortgagee to proceed under the
power of sale provisions of IMFL so long as the Event of Default under which
Mortgagee is proceeding occurs on or after the effective date of the Amendment,
Mortgagee may elect to sell the Mortgaged Premises by power of sale and, upon
such election, such notice of the Event of Default and election to sell shall be
given as shall be required by the Amendment. Thereafter, upon the expiration of
such time and the giving of such notice of sale as may be required by law, lat
the time and place specified in the notice of sale, Mortgagee, or such selling
officer as required by the Amendment, shall sell such property, or any portion
thereof specified by Mortgagee, at public auction to the highest bidder for cash
in lawful money of the United States. Mortgagee may postpone the sale by public
announcement thereof at the time and place noticed therefor. If the Mortgaged
Premises consists of several lots, parcels or interests, Mortgagee may designate
the order in which the same shall be offered for sale or sold.
25. Maintenance of Mortgagor's Existence: So long as any part of the Note
remains unpaid, Mortgagor shall maintain its existence and shall not merge into
or consolidate with any other corporation, firm, joint venture or association;
nor convey, transfer, lease or otherwise dispose of all or substantially all of
its property, assets or business; nor assume,
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guarantee or become primarily or contingently liable on any indebtedness or
obligation of any other person, firm, joint venture or corporation, without
prior written consent from Mortgagee.
26. Mortgagor's Additional Covenants: Mortgagor further covenants and
agrees with Mortgagee, its successors and assigns as follows:
26.1 Mortgagor will fully comply and cause compliance by tenants with all
6f the material terms, conditions and provisions of all leases on the Premises
so that the same shall not become in default or be cancelled, terminated or
declared void, and will do all that is needful to preserve all said leases in
force. Except for taxes and assessments to be paid by Mortgagor pursuant to
Paragraph 3 of this Mortgage, Mortgagor will not create or suffer or permit to
be created, subsequent to the date of this Mortgage, any lien or encumbrance
which may be or become superior to any lease affecting the Premises; and
26.2 No construction shall be commenced upon the Land or upon any
adjoining land at any time owned or controlled by Mortgagor or by other business
entities related to Mortgagor, unless the plans and specifications for such
construction shall have been submitted to and approved in writing by Mortgagee
to the end that such construction shall not, in the reasonable judgment of
Mortgagee, entail prejudice to the loan evidenced by the Note and secured by
this Mortgage.
26.3 In the event of the happening of any casualty, of any kind or nature,
ordinary or extraordinary, foreseen or unforeseen (including any casualty for
which insurance was not obtained or obtainable) resulting in damage to or
destruction of the Mortgaged Premises or any part thereof, Mortgagor will give
notice thereof to Mortgagee, and will promptly, at Mortgagor's sole cost and
expense (whether or not there are sufficient and available insurance proceeds),
commence and diligently continue to restore, replace, repair or rebuild the
Mortgaged Premises to be of at least equal value and substantially the same
character and condition as prior to such casualty; provided, however, that if
Mortgagee has elected to apply insurance loss proceeds toward payment of the
mortgage indebtedness as provided for in this Mortgage, the provisions of this
Paragraph 26.3 shall not apply.
26.4 Mortgagor will not commit or permit any waste on the Mortgaged
Premises and will keep the buildings, fences and other improvements now or
hereafter erected on the Mortgaged Premises in sound condition and in good
repair and free from mechanic's liens or other liens or claims for liens not
expressly subordinate to the lien hereof, and will neither do nor permit to be
done anything to the Mortgaged Premises that may impair the value thereof; and
Mortgagee shall have the right of entry upon the Mortgaged Premises at all
reasonable times for the purpose of inspecting the same.
26.5 No building or other property now or hereafter covered by the lien of
this Mortgage shall be removed, demolished or materially altered, without the
prior written consent of Mortgagee, except that Mortgagor shall have the right
to remove and dispose of, free from the lien of this Mortgage, such equipment as
from time to time may become worn out or obsolete,
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provided that either (i) simultaneously with or prior to such removal any such
equipment shall be replaced with other equipment of a value at least equal to
that of the replaced equipment and free from any tide retention or security
agreement or other encumbrances, and by such removal and replacement Mortgagor
shall be deemed to have subjected such equipment to the lien of this Mortgage,
or (ii) any net cash proceeds received from such disposition shall be paid over
promptly to Mortgagee to be applied to the last installments due on the
indebtedness secured, without any charge for prepayment.
26.6 Mortgagor will pay all utility charges incurred in connection with
the Premises and all improvements thereon and maintain all utility services
now or hereafter available for use at the Premises.
26.7 Mortgagor will at all times fully comply with and cause the Premises
and the use and condition thereof to fully comply with all federal, state,
county, municipal, local and other governmental statutes, ordinances,
requirements, regulations, rules, orders and decrees of any kind whatsoever that
apply or relate thereto, and will observe and comply with all conditions and
requirements necessary to preserve and extend any and all rights, licenses,
permits, privileges, franchises and concessions (including, without limitation,
those relating to land use and development, landmark preservation. construction,
access, water rights, use, noise and pollution) which are applicable to
Mortgagor or the Premises.
26.8 Mortgagor shall within fifteen (15) days after a written request by
Mortgagee furnish from time to time a signed statement setting forth the
amount of the obligation secured hereby and whether or not any Event of Default,
offset or defense then is alleged to exist against the same and, if so,
specifying the nature thereof.
26.9 Mortgagor will, for the benefit of Mortgagee, fully and promptly
perform each obligation and satisfy each condition imposed on it under any
contract relating to the Premises, or other agreement relating thereto, so that
there will be no default thereunder and so that the persons (other than
Mortgagor) obligated thereon shall be and remain at all times obligated to
perform for the benefit of Mortgagee; and Mortgagor will not permit to exist any
condition, event or fact which could allow or serve as a basis or justification
for any such person to avoid such performance.
26.10 Mortgagor will pay all filing, registration, recording and search
and information fees, and all expenses incident to the execution and
acknowledgement of this Mortgage and all other documents securing the
indebtedness secured hereby and all federal, state, county and municipal taxes,
other taxes, duties, imposts, assessments and charges arising Out of or in
connection with the execution, delivery, filing, recording or registration of
the indebtedness secured hereby, this Mortgage and all other documents securing
the indebtedness secured hereby and all assignments thereof.
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26.11 Mortgagor covenants that the proceeds of the indebtedness secured
hereby will not be used for the purchase or carrying of registered equity
securities within the purview and operation of Regulation G issued by the
Board of Governors of the Federal Reserve System.
26.12 Whenever provision is made herein for the approval, satisfaction or
consent of Mortgagee, or that any matter be to Mortgagee's satisfaction, unless
specifically stated to the contrary, such approval or consent shall be at
Mortgagee's sole discretion.
27. Usury Laws. Etc.:
27.1 Mortgagor represents and agrees that the proceeds of the Note will
be used for the purposes specified in 815 ILCS 205/4(l)(c) and 205/4.1, and
that the principal obligation secured hereby constitutes a business loan which
comes within the purview of said paragraph.
27.2 If from any circumstances whatever fulfillment of any provision of
this Mortgage or the Note at the time performance of such provision shall be
due shall involve transcending the limit of validity prescribed by applicable
usury statute or any other law, then ipso facto the obligation to be fulfilled
shall be reduced to the limit of such validity, and paid according to the
provisions of the Note, so that in no event shall any exaction be possible under
this Mortgage or the Note that is in excess of the limit of such validity; but
such obligation shall be fulfilled to the limit of such validity. In no event
shall Mortgagor, its successors or assigns, be bound to pay for the use,
forbearance or detention of the money loaned and secured hereby interest of more
than the legal limit, and the right to demand any such excess shall be and
hereby is waived. The provisions of this paragraph shall control every other
provision of this Mortgage and the Note.
28. Binding on Successors and Assigns; Gender: This Mortgage and all
provisions hereof shall extend to and be binding upon Mortgagor, its successors,
vendees and assigns and all persons claiming under or through Mortgagor, and the
word "Mortgagor" when used herein shall include all such persons and all persons
liable for the payment of the indebtedness or any part thereof, whether or not
such persons shall have executed the Note or this Mortgage. The word "Mortgagee"
when used herein shall include the successors, vendees and assigns of Mortgagee
named herein, and the holder or holders, from time to time, of the Note.
Wherever used, the singular number shall include the plural and the plural the
singular, and the use of any gender shall be applicable to all genders.
29. Captions: The captions and headings of various paragraphs of this
Mortgage are for convenience only and are not to be construed as defining
or limiting, in any way, the scope or intent of the provisions hereof.
30. Severability: In the event any of the provisions contained in this
Mortgage or in any other Loan Documents shall, for any reason, be held to be
invalid. illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability shall, at the option of Mortgagee, not affect any other
provision of this Mortgage, the obligations secured hereby or any
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other Loan Document and same shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein and therein. This
Mortgage has been executed and delivered at Chicago, Illinois and shall be
construed in accordance therewith and governed by the laws of the State of
Illinois.
31. No Liability on Mortgagee: Notwithstanding anything contained
herein, Mortgagee shall not be obligated to perform or discharge, and does not
hereby undertake to perform or discharge, any obligation, duty or liability of
Mortgagor, whether hereunder, under any of the leases affecting the Premises,
under any contract relating to the Premises or otherwise, and Mortgagor shall
and does hereby agree to indemnify against and hold Mortgagee harmless of and
from: (i) any and all liability, loss or damage which Mortgagee may incur under
or with respect to any portion of the Premises or under or by reason of its
exercise of rights hereunder; and (ii) any and all claims and demands whatsoever
which may be asserted against it by reason of any alleged obligation or
undertaking on its part to perform or discharge any of the terms, covenants or
agreements contained in any of the contracts, documents or instruments affecting
any portion of the Mortgaged Premises or affecting any rights of Mortgagor
thereto. Mortgagee shall not have responsibility for the control, care,
management or repair of the Premises or be responsible or liable for any
negligence in the management. operation, upkeep, repair or control of the
Premises resulting in loss or injury or death to any tenant, licensee, employee,
stranger or other person. No liability shall be enforced or asserted against
Mortgagee in its exercise of the powers herein granted to it, and Mortgagor
expressly waives and releases any such liability. Should Mortgagee incur any
such liability, loss or damage under any of the leases affecting the Premises or
under or by reason hereof. or in the defense of any claims or demands, Mortgagor
agrees to reimburse Mortgagee immediately upon demand for the full amount
thereof, including costs, expenses and attorneys' fees.
32. Mortgagor not a Joint Venturer or Partner: Mortgagor and Mortgagee
acknowledge and agree that in no event shall Mortgagee be deemed to be a partner
or joint venturer with Mortgagor or any beneficiary of Mortgagor. Without
limitation of the foregoing, Mortgagee shall not be deemed to be such a partner
or joint venturer on account of its becoming a mortgagee in possession or
exercising any rights pursuant to this Mortgage or pursuant to any other
instrument or document evidencing or securing any of the indebtedness secured
hereby, or otherwise.
33. Environmental Matters:
A. Mortgagor represents to Mortgagee that no substances, including
without limitation, asbestos or any substance containing more than one-tenth of
one percent (0.1%) asbestos, the group of compounds known as polychlorinated
biphenyls, flammable explosives, radioactive materials, oil, petroleum or any
refined petroleum product, chemicals known to cause cancer or reproductive
toxicity, pollutants, effluent, contaminants, emissions or related materials and
any items included in the definition of hazardous or toxic waste, materials or
substances (all of the forgoing are herein collectively referred to as
"Hazardous Materials" and any mixture of a Hazardous Material with other
materials shall be considered a Hazardous
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Material) in an amount actionable under any applicable law relating to
environmental conditions and industrial hygiene, including without limitation,
the Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. (S)(S)
6901 et seq., the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), 42 U.S.C. (S)(S) 9601 et seq., as amended by
the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Hazardous
Materials Transportation Act, 49 U.S.C. (S)(S) 1801, et seq., the Federal Water
Pollution Control Act, 33 U.S.C. (S)(S) 1251 et seq., the Clean Air Act, 42
U.S.C. (S)(S) 7401 et seq., the Toxic Substances Control Act, 15 U.S.C. (S)(S)
2601-2629, the Safe Drinking Water Act, 42 U.S.C. (S)(S) 300f et seq., and the
similar federal, state and local environmental statutes, ordinances and the
regulations, orders, decrees now or hereafter promulgated thereunder (such laws
are hereinafter collectively referred to as the "Hazardous Material Laws"), have
been installed, used, generated, manufactured, treated, handled, refined,
produced, processed, stored, or otherwise exist in or on the Premises or any
portion thereof or have been disposed of or discharged from the Premises or any
portion thereof; (ii) tio activity has been undertaken on the Premises which
would cause: (1) the Premises or any portion thereof to become a hazardous waste
treatment, storage or disposal facility within the meaning of, or otherwise
bring the Premises or any portion thereof within the ambit of RCRA or any other
Hazardous Material Law; (2) a release or threatened release of Hazardous
Material from the Premises within the meaning of, or otherwise bring the
Premises or any portion thereof within the ambit of CERCLA or SARA or any other
Hazardous Material Law, or (3) the discharge of Hazardous Material into any
watercourse, body of surface or subsurface water or wetland, or the discharge
into the atmosphere of any Hazardous Material which would require a permit under
any Hazardous Material Law; (iii) no activity has been undertaken with respect
to the Premises or any portion thereof which would cause a violation or support
a claim under RCRA, CERCLA, SARA or any other Hazardous Material Law; (iv) no
underground storage tanks or underground Hazardous Material deposits are or were
located on the Premises or any portion thereof and subsequently removed or
filled; (v) no investigation, administrative order, litigation or settlement
with respect to any Hazardous Materials is threatened or in existence with
respect to the Premises or any portion thereof; and (vi) no notice has been
served on Mortgagor or any beneficiary or agent of Mortgagor from any entity,
governmental body, or individual claiming any violation of any Hazardous
Material Law, or requiring compliance with any Hazardous Material Law, or
demanding payment or contribution for environmental damage or injury to natural
resources.
B. Mortgagor covenants that Mortgagor will indemnify, hold harmless,
and defend Mortgagee and any current or former officer, director, employee or
agent of Mortgagee (hereinafter collectively referred to as the "Indemnitees")
from any and all claims, losses, damages, response costs, clean-up costs and
expenses arising out of or in any way relating to (i) the existence, presence,
suspected presence, release or suspected release of any Hazardous Materials
over, beneath, in or upon the Premises or adjacent parcels, or in the
improvements on the Premises, or (ii) a breach of any representations,
warranties, covenants or agreements set forth in Paragraph 33A hereof, in either
event including, but not limited to: (1) claims of third parties (including
governmental agencies) for damages, penalties, response costs, clean-up costs,
injunctive or other relief; (2) costs and expenses of removal, remediation and
restoration, including, without limitation, fees of attorneys and experts, and
costs of reporting the existence
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of Hazardous Materials to any governmental agency; and (3) any and all other
expenses or obligations, whether or not taxable as costs, including, without
limitation, attorneys' fees, witness fees, deposition costs, copying and
telephone charges and other expenses, all of which shall be paid by Mortgagor
when incurred. The foregoing indemnity shall survive the payoff of the loan
evidenced by the Note.
C. The representations, warranties, covenants and agreements
contained herein and the obligations of Mortgagor to indemnify Mortgagee and the
other Indemnitees with respect to the expenses, damages, losses, costs, damages
and liabilities set forth in Paragraph 33B hereof shall survive (i) any transfer
of all or any portion of the beneficial interest in, to and under Mortgagor,
(ii) the foreclosure of any liens on the Premises by Mortgagee or a third party
or the conveyance thereof by deed in lieu of foreclosure (and shall not be
limited to the amount of any deficiency in any foreclosure sale of Premises) and
(iii) all other indicia of the termination of the relationship between Mortgagor
and Mortgagee.
D. During the term of the loan evidenced by the Note, Mortgagee shall
have the right, at its option, to retain, at Mortgagor's expense, an
environmental consultant who shall prepare a report indicating whether the
Premises contain any wetlands or are being used for any activities involving,
directly or indirectly, the use, generation, treatment, storage or disposal of
any Hazardous Materials. Mortgagor hereby grants to Mortgagee and Mortgagee's
agents, employees, consultants and contractors the right to enter upon the
Premises and to perform such tests on the Premises as are reasonably necessary
to conduct any such investigation.
E. If any of the provisions of the Illinois Responsible Property
Transfer Act of 1988 ("IRPTA") are now or hereafter become applicable to the
Premises, Mortgagor shall comply with such provisions. Without limitation on the
generality of the foregoing, (i) if the delivery of a disclosure document is now
or hereafter required by IRPTA, Mortgagor shall cause the delivery of such
disclosure document to be made to all parties entitled to receive same within
the time period required by IRPTA: and (ii) Mortgagor shall cause any such
disclosure document to be recorded with the Recorder of Deeds of the County in
which the Premises are located and filed with the Illinois Environmental
Protection Agency, all within the time periods required by IRPTA. Mortgagor
shall promptly deliver to Mortgagee evidence of such recording and filing of
such disclosure document.
34. Defeasance Clause: If Mortgagor pays to Mortgagee said principal sum
and all other sums payable by Mortgagor to Mortgagee as are hereby secured, in
accordance with the provisions of the Note and in the manner and at the times
therein set forth, without deduction, fraud, or delay, then and from thenceforth
this Mortgage, and the estate hereby granted, shall cease and become void,
anything herein contained to the contrary notwithstanding.
35. Flood Insurance: If the Mortgaged Premises are now or hereafter
located in an area which has been identified by the Secretary of Housing and
Urban Development as a flood hazard area and in which flood insurance has been
made available under the National Flood Insurance Act of 1968 (the Act),
Mortgagor will keep the Mortgaged Premises covered for the
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term of the Note by flood insurance up to the maximum limit of coverage
available under the Act.
36. Mortgagee's Right to Exercise Remedies: The rights and remedies of
Mortgagee as provided in the Note, in this Mortgage, in any other Loan Document
or available under applicable law, shall be cumulative and concurrent and may be
pursued separately, successively or together against Mortgagor or against other
obligors, if any, or against the Mortgaged Premises, or against any one or more
of them, at the sole discretion of Mortgagee, and may be exercised as often as
occasion therefor shall arise. The failure to exercise any such right or remedy
shall in no event be construed as a waiver or release thereof. No delay or
omission of Mortgagee to exercise any right or power accruing upon any default
shall impair any such right or power, or shall be construed to be a waiver of
any such default or any acquiescence therein; and every power and remedy given
by this Mortgage to Mortgagee may be exercised from time to time as often as may
be deemed expedient by Mortgagee. Nothing in this Mortgage or in the Note shall
affect the obligation of Mortgagor to pay the principal of, and interest on, the
Note in the manner and at the time and place therein respectively expressed.
37. Incorporation of Riders. Exhibits and Addenda: All riders, exhibits
and addenda attached to this Mortgage are by express and specific reference
incorporated in and made a part of this Mortgage; and with the proviso that the
covenants contained in each of said riders, exhibits and addenda, and the other
things therein set forth shall have the same force and effect as any other
covenant or thing herein expressed.
38. Subrogation: To the extent that Mortgagee, on or after the date
hereof, pays any sum due under any provision or law or any instrument or
document creating any lien prior or superior to the lien of this Mortgage, or
Mortgagor or any other person pays any such sum with the proceeds of the loan
secured hereby, Mortgagee shall have and be entitled to a lien on the Mortgaged
Premises equal in priority to the lien discharged, and Mortgagee shall be
subrogated to, and receive and enjoy all rights and liens possessed, held or
enjoyed by, the holder of such lien, which shall remain in existence and benefit
Mortgagee in securing the indebtedness secured hereby. Mortgagee shall be
subrogated, notwithstanding their release of record, to the lien of all
mortgages, trust deeds, superior titles, vendors' liens, liens, charges,
encumbrances, rights and equities on the Mortgaged Premises, to the extent that
any obligation under any thereof is directly or indirectly paid or discharged
with proceeds of disbursements or advances under the Note or any Loan Document.
39. Mortgagee's Lien for Service Charge and Expenses: At all times,
regardless of whether any loan proceeds have been disbursed, this Mortgage
secures (in addition to any loan proceeds disbursed from time to time) the
payment of any and all loan commissions, service charges, liquidated damages,
expenses (with the exception of those relating to appraisals and Mortgagee's
attorney's fees) and all advances due to or incurred by Mortgagee in connection
with the loan to be secured hereby.
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40. Cooperative Ownership and Condominium: So long as any balance remains
due and owing under the Note, Mortgagor agrees that it will not, without the
written consent of Mortgagee first having been obtained, permit, allow or cause
any of the following events to occur, to-wit: (a) the conversion of the
Mortgaged Premises to a cooperative form of ownership, wherein the tenants or
occupants of the buildings on the Premises participate in a scheme, plan or
device to jointly own and operate the Mortgaged Premises and wherein the tide to
the Premises is vested in a trust, corporation or other titleholding device for
the use and benefit of the cooperative entity or its participants therein; or
(b) the conversion of the Mortgaged Premises to a condominium form of ownership
and in this connection to the Condominium Act of the state where the Premises
are located, and will not file (or cause to be filed) a Condominium Declaration
pursuant to the provisions of said Act without Mortgagee's express written
consent; and in case Mortgagor permits or causes any of the aforesaid events to
occur, without the written approval or consent of Mortgagee being first had and
obtained, Mortgagee may declare the loan secured hereby to be in default, in
consequence whereof Mortgagee may foreclose this Mortgage or avail itself of
such rights and remedies herein reserved or permitted by law as in such case
made and provided.
41. Default Rate: The term "Default Rate" when used in this Mortgage shall
be defined to mean the Default Rate set forth in the Note; provided, however, in
the event no Default Rate is set forth in the Note, the Default Rate shall be
deemed to be eighteen (18%) percent per annum.
42. Security Agreement. This Mortgage shall be deemed a Security Agreement
as defined in and for purposes of Article 9 of the Illinois Uniform Commercial
Code. This Mortgage creates a security interest in favor of Mortgagee in all
property including all personal property, fixtures and goods affecting property
either referred to or described herein or in anyway connected with the use or
enjoyment of the Premises. The remedies for any violation of the covenants,
terms and conditions of the agreements herein contained shall be (i) as
prescribed herein, or (ii) by general law, or (iii) as to such part of the
security which is also reflected in any Financing Statement filed to perfect the
security interest herein created, by the specific statutory consequences now or
hereinafter enacted and specified in the Illinois Uniform Commercial Code, all
at Mortgagee's sole election. Mortgagor and Mortgagee agree that the filing of
such a Financing Statement in the records normally having to do with personal
property shall never be construed as in anywise derogating from or impairing
this declaration and the hereby stated intention of the parties hereto, that
everything used in connection with the production of income from the Mortgaged
Premises and/or adapted for use therein and/or which is described or reflected
in this Mortgage is, and at all times and for all purposes and in all
proceedings both legal or equitable shall be, regarded as part of the real
estate irrespective of whether (i) any such item is physically attached to the
improvements, (ii) serial numbers are used for the better identification of
certain equipment items capable of being thus identified in a recital contained
herein or in any list filed with Mortgagee, or (iii) any such item is referred
to or reflected in any such Financing Statement so filed at any time. Similarly,
the mention in any such Financing Statement of (1) the rights in or the proceeds
of any fire and/or hazard insurance policy, or (2) any award in eminent domain
proceedings for a taking or for loss of value, or
28
<PAGE>
(3) the debtor's interest as lessor in any present or future lease or rights to
income growing out of the use and/or occupancy of the Premises, whether pursuant
to lease or otherwise, shall never be construed as in anywise altering any of
the rights of Mortgagee as determined by this instrument or impugning the
priority of Mortgagee's lien granted hereby or by any other recorded document,
but such mention in the Financing Statement is declared to be for the protection
of Mortgagee in the event any court or judge shall at any time hold with respect
to (1), (2) and (3) that notice of Mortgagee's priority of interest to be
effective against a particular class of persons, including, but not limited to,
the Federal government and any subdivisions or entity of the Federal government,
must be filed in the Commercial Code records.
Notwithstanding the aforesaid, Mortgagor covenants and agrees that so long
as any balance remains unpaid on the Note, it will execute (or cause to be
executed) and delivered to Mortgagee, such renewal certificates, affidavits,
extension statements or other documentation in proper form, so as to keep
perfected the lien created by any Security Agreement and Financing Statement
given to Mortgagee by Mortgagor, and to keep and maintain the same in full force
and effect until the entire principal indebtedness and all interest to accrue
thereunder has been paid in full; with the proviso that the failure of the
undersigned Mortgagor to so do shall constitute an Event of Default hereunder.
43. Prohibition on Sale or Financing.
43.1 Any sale, conveyance, assignment, pledge, hypothecation, encumbrance
or other transfer of title to, or any interest in, or the placing of any lien
upon the Premises, the beneficial interest in Mortgagor or any ownership
interest in Mortgagor or in the beneficiary of Mortgagor (whether voluntary or
by operation of law) without Mortgagee's prior written consent shall be an Event
of Default hereunder.
43.2 For the purpose of, and without limiting the generality of, Paragraph
43.1, the occurrence at any time of any of the following events shall be deemed
to be an unpermitted transfer of title to the Premises and therefore an Event of
Default hereunder: (a) any sale, conveyance, assignment or other transfer of or
granting of a security interest in any (i) general partnership interest in any
limited partnership or general partnership, (ii) corporation, or (iii) limited
liability company, which is the Mortgagor or the beneficiary of Mortgagor
hereunder; provided that if there is only one general partner and that general
partner dies or becomes incapacitated, a transfer to a successor general
partner, subject to the approval of Mortgagee, which approval will not
unreasonably be withheld, will not be an event of default; (b) any sale,
conveyance, assignment or other transfer of or granting of a security interest
in any ownership interest in any partnership, corporation or limited liability
company directly or indirectly controlling the Mortgagor or the beneficiary of
Mortgagor which results in any material change in the identity of the
individuals previously in control of the Mortgagor or the beneficiary of
Mortgagor or if the secured party holding such security interest would exercise
its remedies; or (c) any sale, conveyance, assignment or other transfer of or
granting of a security interest in the beneficial interest in Mortgagor, if
applicable.
29
<PAGE>
43.3 It is understood and agreed that the indebtedness secured hereby was
created solely due to the financial sophistication, creditworthiness, background
and business sophistication of Mortgagor (or in the event Mortgagor is a trust,
the beneficiary of Mortgagor) and Mortgagee continues to rely upon same as the
means of maintaining the value of the Premises. It is further understood and
agreed that any secondary or junior financing placed upon the Premises or the
improvements located thereon, or upon the interests of Mortgagor (or in the
event Mortgagor is a trust, the beneficial interest of the trust) may divert
funds which would otherwise be used to pay the indebtedness secured hereby, and
could result in acceleration an/or foreclosure by any such junior lienor. Any
such action would force Mortgagee to take measures, and incur expenses, to
protect its security, and would detract from the value of the Premises, and
impair the rights of Mortgagee granted hereunder.
43.4 Any consent by Mortgagee to, or any waiver of any event which is
prohibited under this Paragraph 43 shall not constitute a consent to, or waiver
of, any right, remedy or power of Mortgagee upon a subsequent event of default.
44. No Oral Modifications: This Mortgage may not be modified, amended,
discharged or waived orally, except by an agreement in writing and signed by the
party against whom enforcement of any such modification, amendment, discharge or
waiver is sought. It is understood and agreed that all understandings and
agreements heretofore had between the parties hereto are merged in this
Mortgage, the exhibits annexed hereto and the Loan Documents and other
instruments and documents referred to herein, which alone fully and completely
express their agreements, and that Mortgagor is not relying upon any statement
or representation, not embodied in this Mortgage or the Loan Documents and other
instruments and documents referred to herein, made by Mortgagee. Mortgagor
expressly acknowledges that, except as expressly provided in this Mortgage or
the Loan Documents and other instruments and documents referred to herein,
Mortgagee and the agents and representatives of Mortgagee have not made, and
Mortgagee is not liable for or bound in any manner by, any express or implied
warranties, guaranties, promises, statements, inducements, representations or
information pertaining to the transactions contemplated hereby.
45. Furnishing of Financial Statements to Mortgagee: Mortgagor covenants
and agrees to furnish to Mortgagee within ninety (90) days after the end of each
fiscal year of the operation of the Premises, commencing with the current fiscal
year, an annual operating statement containing statements of income and expense
relating to the Premises, setting forth in each case, the comparative form, the
figures for the previous fiscal year, all in form and detail satisfactory to
Mortgagee and prepared and certified by a certified public accountant of
recognized standing, licensed to do business in the State of Illinois selected
by Mortgagor and acceptable to Mortgagee or supported by an affidavit of a
principal owner of the beneficial interest in the trust agreement under which
title to the Premises is held, or if the Premises are not held in such a trust,
then a principal of Mortgagor.
46. Notices: All notices hereunder shall be in writing and shall be deemed
to have been sufficiently given or served for all purposes when presented
personally, forwarded by
30
<PAGE>
expedited messenger with evidence of delivery, or sent by registered or
certified mail to any party hereto at its address stated above or at such other
address of which it shall have notified the party giving such notice in writing.
Copies of all notices to Mortgagee shall be given to Michael Weininger, Katz
Randall & Weinberg, 333 West Wacker Drive, Suite 1800, Chicago, Illinois 60606.
Whenever in this Mortgage the giving of notice by mail or otherwise is required,
the giving of such notice may be waived in writing by the person or persons
entitled to receive such notice.
47. Junior Mortgage. This Mortgage is a Junior Mortgage, the lien of which
is junior, subject and subordinate to the lien of the Mortgage dated January 7,
1998 (hereinafter referred to as the "Alliance Mortgage") in favor of ALLIANCE
BANKING COMPANY (hereinafter referred to as "Alliance"), recorded on
______________________, 1998 with the Recorder of Deeds of Cook County, Illinois
as Document Number __________, to secure a note to Alliance (hereinafter
referred to as the "Alliance Note") in the original principal amount of SIX
HUNDRED FIFTY THOUSAND AND NO/l00 ($650,000.00) DOLLARS. The Alliance Mortgage
constitutes a first mortgage on all of the mortgaged premises. The indebtedness
evidenced by the Alliance Note and secured by the Alliance Mortgage is
hereinafter referred to as the "Alliance Indebtedness".
Mortgagor covenants and agrees that it shall well and truly perform and
discharge each and all of the obligations of the conditions of the Alliance
Mortgage and Alliance Note and all other documents relating thereto (the
Alliance Note, Alliance Mortgage and all such other documents being hereinafter
referred to collectively as the "Alliance Loan Documents"), and that a default.
or the occurrence of an event of default under any of the Alliance Loan
Documents shall constitute a default hereunder, in consequence whereof Mortgagee
may avail itself of any or all of the rights or remedies reserved herein or
allowed or permitted by law or in equity as in such case made and provided.
Notwithstanding anything herein to the contrary, all rights of Mortgagee
under this Mortgage are subject to the rights of the holder of the Alliance
Indebtedness so long as the same remains unpaid. In the event the provisions
hereof conflict or are inconsistent with provisions of the Alliance Loan
Documents such that Mortgagor is unable to fully comply with any provision
hereof as a result of Mortgagor's compliance with the provisions of any of the
Alliance Loan Documents, e.g. as to payment of taxes in installments or delivery
of insurance policies, Mortgagor shall not be in default hereunder so long as
Mortgagor continues to comply with the Alliance Loan Documents; provided,
however, that upon payment in full of the Alliance Indebtedness such provisions
hereunder are complied with by Mortgagor.
31
<PAGE>
IN WITNESS WHEREOF, THE LEAP PARTNERSHIP, INC., an Illinois corporation,
has caused these presents to be signed by its Secretary, the day and year first
above written.
THE LEAP PARTNERSHIP, INC.,
an Illinois corporation
By: Robert C. Bramlette
-------------------------
Robert Bramlette
Its: Secretary
STATE OF ILLINOIS )
)
COUNTY OF COOK )
I, Colleen C. Correra, a Notary Public in and for said County, in the State
aforesaid, DO HEREBY CERTIFY that ROBERT BRAMLETTE, as Secretary of THE LEAP
PARTNERSHIP, INC., an Illinois corporation, who is personally known to me to be
the same person whose name is subscribed to the foregoing instrument as such
Secretary of said Corporation, appeared before me this day in person and
acknowledged that he/she signed and delivered the said instrument as his/her own
free and voluntary act and as the free and voluntary act of said Corporation,
for the uses and purposes therein set forth.
GIVEN under my hand and notarial seal this 23 day of March, 1998.
Colleen C. Correra
---------------------------------
Notary Public
"OFFICIAL SEAL"
COLLEEN C. CORRERA
Notary Public, State of Illinois
My Commission Expires 8/22/98
32
<PAGE>
EXHIBIT "A"
Legal Description
-----------------
LOT 5 AND THE WEST 1 AND 1/3 FEET OF LOT 4 IN WOLCOTT'S ADDITION TO CHICAGO IN
THE EAST 1/2 OF THE NORTH EAST 1/4 OF SECTION 9, TOWNSHIP 39 NORTH, RANGE 14
EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS.
- ---------------------------------------
COMMON PROPERTY ADDRESS:
22 W Hubbard St.
Chicago, Illinois 60610
PERMANENT INDEX NUMBERS:
17-09-255-022-0000
<PAGE>
REORDER FROM
Registre, Inc.
514 PIERCE ST.
P.O. BOX 218
ANOKA, MN 55303
(612) 421-1713
STATE OF ILLINOIS
UNIFORM COMMERCIAL CODE - FINANCING STATEMENT - FORM UCC-1
INSTRUCTIONS 71016
1. This form must be typed. Fold only along perforation for mailing.
2. Remove Secured Party and Debtor copies and send other 3 copies with
interleaved carbon paper to the filing officer. Enclose filing fee.
3. If the space provided for any item(s) on the form is inadequate the item(s)
should be continued on additional sheets, preferably 5" x 8" or 8" x 10".
Only one copy of such additional sheets need be presented to the filing
officer with a set of three copies of the financing statement. Long
schedules of collateral, indentures, etc., may be on any size paper that is
convenient for the secured party.
4. At the time of filing, the filing officer will return third copy as an
acknowledgement, please enclose a self addressed envelope for this return.
- --------------------------------------------------------------------------------
This STATEMENT is presented to a filing officer for filing pursuant to the
Uniform Commercial Code.
- --------------------------------------------------------------------------------
Debtor(s) (Last Name First) and address(es)
Quantum Leap Communications, Inc.
an Illinois corporation
- --------------------------------------------------------------------------------
Secured Party(ies) and address(es)
Manufacturers Bank
1200 N. Ashland Ave.
Chicago, IL 60622-2298
- --------------------------------------------------------------------------------
For Filing Officer
(Date, Time, Number, and Filing Office)
- --------------------------------------------------------------------------------
1. This financing statement covers the following types (or items) of property:
See Exhibit "A" attached hereto and made a part hereof.
2. [X] Products of Collateral are also covered.
- --------------------------------------------------------------------------------
ASSIGNEE OF SECURED PARTY
- --------------------------------------------------------------------------------
_____ Additional sheets presented.
X Filed with Office of Secretary of State of Illinois.
_____
_____ Debtor is a transmitting utility as defined in UCC (S)9-105.
QUANTUM LEAP COMMUNICATIONS, INC.
By:_____________________________________________________________________________
Signature of (Debtor)
(Secured Party)*
*Signature of Debtor Required in Most Cases:
Signature of Secured Party in Cases Covered by UCC (S)9-402(2)
FILING OFFICER - ALPHABETICAL
STANDARD FORM - UNIFORM COMMERCIAL CODE - FORM UCC-1-REV. 1 . 75
This form of financing statement is approved by the Secretary of State
<PAGE>
EXHIBIT "A"
-----------
All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles;
whether any of the foregoing is owned now or acquired later; all accessories,
additions, replacements, and substitutions relating to any of the foregoing; all
records of any kind relating to any of the foregoing; all proceeds relating to
any of the foregoing (including insurance, general intangibles and other
accounts proceeds).
<PAGE>
REORDER FROM
Registre', Inc.
514 PIERCE ST.
P.O. BOX 218
ANOKA, MN 55303
(612) 421-1713
STATE OF ILLINOIS
UNIFORM COMMERCIAL CODE - FINANCING STATEMENT -- FORM UCC - 1
INSTRUCTIONS: 71013
1. This form must be typed. Fold only along perforation for mailing.
2. Remove Secured Party and Debtor copies and send other 3 copies with
interleaved carbon paper to the filing officer. Enclose filing fee.
3. If the space provided for any item(s) on the form is inadequate the item(s)
should be continued on additional sheets, preferably 5" x 8" or 8" x 10".
Only one copy of such additional sheets need be presented to the filing
officer with a set of three copies of the financing statement. Long
schedules of collateral, indentures, etc., may be on any size paper that is
convenient for the secured party.
4. At the time of filing, the filing officer will return third copy as an
acknowledgement, please enclose a self addressed envelope for this return.
- --------------------------------------------------------------------------------
This STATEMENT is presented to a filing officer for filing pursuant to the
Uniform Commercial Code.
- --------------------------------------------------------------------------------
Debtor(s) (Last Name First) and address(es)
Lilypad Services, Inc. an
Illinois corporation
- --------------------------------------------------------------------------------
Secured Party(ies) and address(es)
Manufactures Bank
1200 N. Ashland Ave.
Chicago, IL 60622-2298
- --------------------------------------------------------------------------------
For Filing Officer
(Date, Time, Number, and Filing Office)
- --------------------------------------------------------------------------------
1. This financing statement covers the following types (or items) of property:
See Exhibit "A" attached hereto and made a part hereof.
2. [X] Products of Collateral are also covered.
- --------------------------------------------------------------------------------
ASSIGNEE OF SECURED PARTY
- --------------------------------------------------------------------------------
_____ Additional sheets presented.
X Filed with Office of Secretary of State of Illinois.
_____
_____ Debtor is a transmitting utility as defined in UCC (S) 9-105.
LILYPAD SERVICES, INC.
By:_____________________________________________________________________________
Signature of (Debtor)
(Secured Party)*
*Signature of Debtor Required in Most Cases:
Signature of Secured Party in Cases Covered by UCC (S)9-402(2)
FILING OFFICER - ALPHABETICAL
STANDARD FORM - UNIFORM COMMERCIAL CODE - FORM UCC-1 - REV. 1 - 75
This form of financing statement is approved by the Secretary of State.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT "A"
-----------
All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles;
whether any of the foregoing is owned now or acquired later; all accessories,
additions, replacements, and substitutions relating to any of the foregoing; all
records of any kind relating to any of the foregoing; all proceeds relating to
any of the foregoing (including insurance, general intangibles and other
accounts proceeds).
<PAGE>
REORDER FROM
Registre', Inc.
514 PIERCE ST.
P.O. BOX 218
ANOKA, MN 55303
(612) 421-1713
STATE OF ILLINOIS
UNIFORM COMMERCIAL CODE - FINANCING STATEMENT -- FORM UCC-1
INSTRUCTIONS: 71014
1. This form must be typed. Fold only along perforation for mailing.
2. Remove Secured Party and Debtor copies and send other 3 copies with
interleaved carbon paper to the filing officer. Enclose filing fee.
3. If the space provided for any item(s) on the form is inadequate the item(s)
should be continued on additional sheets, preferably 5" x 8" or 8" x 10".
Only one copy of such additional sheets need be presented to the filing
officer with a set of three copies of the financing statement. Long
schedules of collateral, indentures, etc., may be on any size paper that is
convenient for the secured party.
4. At the time of filing, the filing officer will return third copy as an
acknowledgement, please enclose a self addressed envelope for this return.
- --------------------------------------------------------------------------------
This STATEMENT is presented to a filing officer for filing pursuant to the
Uniform Commercial Code.
- --------------------------------------------------------------------------------
Debtor(s) (Last Name First) and address(es)
Bar TV, Inc. a Delaware
corporation
- --------------------------------------------------------------------------------
Secured Party(ies) and address(es)
Manufacturers Bank
1200 N. Ashland Ave.
Chicago, IL 60622-2298
- --------------------------------------------------------------------------------
For Filing Officer
(Date, Time, Number, and Filing Office)
- --------------------------------------------------------------------------------
1. This financing statement covers the following types (or items) of property:
See Exhibit "A" attached hereto and made a part hereof.
2. [X] Products of Collateral are also covered.
- --------------------------------------------------------------------------------
ASSIGNEE OF SECURED PARTY
- --------------------------------------------------------------------------------
_____ Additional sheets presented.
X Filed with Office of Secretary of State of Illinois.
_____
_____ Debtor is a transmitting utility as defined in UCC (S) 9-105.
BAR TV, INC., a Delaware corporation
By:_____________________________________________________________________________
Signature of (Debtor)
(Secured Party)*
*Signature of Debtor Required in Most Cases:
Signature of Secured Party in Cases Covered by UCC (S)9-402(2)
FILING OFFICER - ALPHABETICAL
STANDARD FORM - UNIFORM COMMERCIAL CODE - FORM UCC-1 - REV.1 - 75
This form of financing statement is approved by the Secretary of State.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT "A"
-----------
All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles;
whether any of the foregoing is owned now or acquired later; all
accessories, additions, replacements, and substitutions relating to any of
the foregoing; all records of any kind relating to any of the foregoing;
all proceeds relating to any of the foregoing (including insurance, general
intangibles and other accounts proceeds).
<PAGE>
REORDER FROM
Registre', Inc.
514 PIERCE ST.
P.O. BOX 218
ANOKA, MN 55303
(612) 421-1713
STATE OF ILLINOIS
UNIFORM COMMERCIAL CODE - FINANCING STATEMENT -- FORM UCC-1
INSTRUCTIONS: 71015
1. This form must be typed. Fold only along perforation for mailing.
2. Remove Secured Party and Debtor copies and send other 3 copies with
interleaved carbon paper to the filing officer. Enclose filing fee.
3. If the space provided for any item(s) on the form is inadequate the item(s)
should be continued on additional sheets, preferably 5" x 8" or 8" x 10".
Only one copy of such additional sheets need be presented to the filing
officer with a set of three copies of the financing statement. Long
schedules of collateral, indentures, etc., may be on any size paper that is
convenient for the secured party.
4. At the time of filing, the filing officer will return third copy as an
acknowledgement, please enclose a self addressed envelope for this return.
- --------------------------------------------------------------------------------
This STATEMENT is presented to a filing officer for filing pursuant to the
Uniform Commercial Code.
- --------------------------------------------------------------------------------
Debtor(s) (Last Name First) and address(es)
Tadpole Productions, Inc. an
Illinois corporation
- --------------------------------------------------------------------------------
Secured Party(ies) and address(es)
Manufacturers Bank
1200 N. Ashland Ave.
Chicago, IL 60622-2298
- --------------------------------------------------------------------------------
For Filing Officer
(Date, Time, Number, and Filing Office)
- --------------------------------------------------------------------------------
1. This financing statement covers the following types (or items) of property:
See Exhibit "A" attached hereto and made a part hereof.
2. [X] Products of Collateral are also covered.
- --------------------------------------------------------------------------------
ASSIGNEE OF SECURED PARTY
- --------------------------------------------------------------------------------
_____ Additional sheets presented.
X Filed with Office of Secretary of State of Illinois.
_____
_____ Debtor is a transmitting utility as defined in UCC (S) 9-105.
TADPOLE PRODUCTIONS, INC.
By:_____________________________________________________________________________
Signature of (Debtor)
(Secured Party)*
*Signature of Debtor Required in Most Cases:
Signature of Secured Party in Cases Covered by UCC (S)9-402(2)
FILING OFFICER - ALPHABETICAL
STANDARD FORM - UNIFORM COMMERCIAL CODE - FORM UCC-1 - REV.1 - 75
This form of financing statement is approved by the Secretary of State.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT "A"
-----------
All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles;
whether any of the foregoing is owned now or acquired later; all accessories,
additions, replacements, and substitutions relating to any of the foregoing; all
records of any kind relating to any of the foregoing; all proceeds relating to
any of the foregoing (including insurance, general intangibles and other
accounts proceeds).
<PAGE>
NATIONAL FINANCING STATEMENT (FORM UCC1) (TRANS) (REV. 12/18/95)
IMPORTANT - READ INSTRUCTIONS ON BACK BEFORE FILLING OUT FORM -
DO NOT DETACH STUB 83977
THIS SPACE FOR USE OF FILING OFFICER
FINANCING STATEMENT - FOLLOW INSTRUCTIONS CAREFULLY
This Financing Statement is presented for filing pursuant to the Uniform
Commercial Code and will remain effective, with certain exceptions, for 5 years
from the date of filing.
A. NAME & TEL. # OF CONTACT AT FILER (optional)
B. FILING OFFICE ACCT. # (optional)
C. RETURN COPY TO: (Name and Mailing Address)
Michael Weininger, Esq.
KATZ, RANDALL & WEINBERG
333 West Wacker Drive
Suite 1800
Chicago, IL 60606
D. OPTIONAL DESIGNATION (If applicable):
[_] LESSOR/LESSEE
[_] CONSIGNOR/CONSIGNEE
[_] NON-UCC FILING
================================================================================
1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b)
----------------------------------------------------------------------------
1a. ENTITY'S NAME
YAR COMMUNICATIONS, INC., a New York corporation
OR ----------------------------------------------------------------------------
1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- --------------------------------------------------------------------------------
1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
220 5th Avenue, 11th Floor New York NY USA 10001
----------------------------------------------------------------------------
1d. S.S. OR TAX I.D.# OPTIONAL ADD'NL INFO RE ENTITY DEBTOR
----------------------------------------------------------------------------
1e. TYPE OF ENTITY
----------------------------------------------------------------------------
1f. ENTITY'S STATE OR COUNTRY OF ORGANIZATION
----------------------------------------------------------------------------
1g. ENTITY'S ORGANIZATIONAL I.D. #, If any [_] NONE
================================================================================
2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name
(2a or 2b)
----------------------------------------------------------------------------
2a. ENTITY'S NAME
OR ----------------------------------------------------------------------------
2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
----------------------------------------------------------------------------
2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
----------------------------------------------------------------------------
2d. S.S. OR TAX I.D.# OPTIONAL ADD'NL INFO RE ENTITY DEBTOR
----------------------------------------------------------------------------
2e. TYPE OF ENTITY
----------------------------------------------------------------------------
2f. ENTITY'S STATE OR COUNTRY OF ORGANIZATION
----------------------------------------------------------------------------
2g. ENTITY'S ORGANIZATIONAL I.D. #, If any [_] NONE
================================================================================
3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL
NAME - insert only one secured party name (3a or 3b)
----------------------------------------------------------------------------
3a. ENTITY'S NAME
MANUFACTURERS BANK
OR ----------------------------------------------------------------------------
3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
----------------------------------------------------------------------------
3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
1200 N. Ashland Avenue Chicago IL USA 60622-2298
================================================================================
4. This FINANCING STATEMENT covers the following types or items of property:
See Exhibit "A" attached hereto and made a part hereof.
5. Check Box [_] (If Applicable) This FINANCING STATEMENT is signed by the
Secured Party instead of the Debtor to perfect a security interest (a) in
collateral already subject to a security interest in another jurisdiction when
it was brought into this state, or when the debtor's location was changed to
this state, or (b) in accordance with other statutory provisions (additional
data may be required)
================================================================================
6. REQUIRED SIGNATURE (S)
YAR COMMUNICATIONS, INC.
================================================================================
7. If filed in Florida (Check one)
[_] Documentary stamp tax paid
[_] Documentary stamp tax not applicable
================================================================================
8. [_] This FINANCING STATEMENT is to be filed (for record) (or recorded) in
the REAL ESTATE RECORDS
Attach Addendum (If applicable)
================================================================================
<PAGE>
EXHIBIT "A"
-----------
All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles;
whether any of the foregoing is owned now or acquired later; all accessories,
additions, replacements, and substitutions relating to any of the foregoing; all
records of any kind relating to any of the foregoing; all proceeds relating to
any of the foregoing (including insurance, general intangibles and other
accounts proceeds).
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
STATE OF ILLINOIS
UNIFORM COMMERCIAL CODE
STATEMENTS OF CONTINUATION, PARTIAL RELEASE, ASSIGNMENT, ETC.--FORM UCC-3
INSTRUCTIONS:
1. PLEASE TYPE this form. Fold only along perforation for mailing.
2. Remove Secured Party and Debtor copies and send other 3 copies with interleaved
carbon paper to the filing officer.
3. Enclose filing fee.
4. If the space provided for any item(s) on the form is inadequate the item(s)
should be continued on additional sheets, preferably 5" x 8" or 8" x 10".
5. At the time of filing, filing officer will return third copy as an acknowledgement.
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
This STATEMENT is presented to THE FILING OFFICER | For Filing Officer (Data,
for filing pursuant to the Uniform Commercial Code. | Time Number, and Filing
| Office)
- ------------------------------------------------------------------|
Debtor(s) (Last Name First) | Secured Party(ies) |
and address(es) | and address(es) |
| |
The Leap Partnership, Inc. | Alliance Banking Company |
P.O. Box 549 | 500 W. Buffalo Street |
New Buffalo, MI 49117 | P.O. Box 808 |
36-3911479 | New Buffalo, MI 49117 |
- ------------------------------------------------------------------|
This Statement refers to original Financing Statement No. 3217345 |
Date filed: February 1, 1994 Filed with IL Secretary of State |
- --------------------------------------------------------------------------------------------------------|
A. [_] CONTINUATION....The original financing statement between the foregoing Debtor and Secured |
Party, bearing the file number shown above, is still effective. |
B. [_] PARTIAL RELEASE.From the collateral described in the financing statement bearing the file |
number shown above, the Secured Party releases the property indicated below. |
C. [_] ASSIGNMENT......The Secured Party certifies that the Secured Party has assigned to the Assignee |
whose name and address is shown below. Secured Party's rights under the financing|
statement bearing the file number shown above in the property indicated below. |
D. [X] TERMINATION.....The Secured Party certifies that the Secured Party no longer claims a security |
interest under the financing statement bearing the file number shown above. |
E. [_] AMENDMENT.......The financing statement bearing the above file number is amended. |
[_] To show the Secured Party's new address as indicated below; |
[_] To show the Debtor's new address as indicated below; |
[_] As set forth below: |
- --------------------------------------------------------------------------------------------------------|
|
- --------------------------------------------------------------------------------------------------------|
ALLIANCE BANKING COMPANY (Secured |
- -----------------------------------------(Debtor) ------------------------------------------ Party) |
(Signature of Debtor, if required) |
|
Dated: ----------------------------------, 19----- By: --------------------------------------------- |
(Signature of Secured Party) |
|
(1) FILING OFFICER COPY - ALPHABETICAL |
|
This form of Financing Statement is approved by the Illinois Secretary of State. |
|
STANDARD FORM--UNIFORM COMMERCIAL CODE--FORM UCC-3 REV. |
|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
STATE OF ILLINOIS
UNIFORM COMMERCIAL CODE
STATEMENTS OF CONTINUATION, PARTIAL RELEASE, ASSIGNMENT, ETC.--FORM UCC-3
INSTRUCTIONS:
1. PLEASE TYPE this form. Fold only along perforation for mailing.
2. Remove Secured Party and Debtor copies and send other 3 copies with interleaved
carbon paper to the filing officer.
3. Enclose filing fee.
4. If the space provided for any item(s) on the form is inadequate the item(s)
should be continued on additional sheets, preferably 5" x 8" or 8" x 10".
5. At the time of filing, filing officer will return third copy as an acknowledgement.
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
This STATEMENT is presented to THE FILING OFFICER | For Filing Officer (Data,
for filing pursuant to the Uniform Commercial Code. | Time Number, and Filing
| Office)
- ------------------------------------------------------------------|
Debtor(s) (Last Name First) | Secured Party(ies) |
and address(es) | and address(es) |
| |
The Leap Partnership, Inc. | Alliance Banking Company |
P.O. Box 549 | 500 W. Buffalo Street |
New Buffalo, MI 49117 | P.O. Box 808 |
36-3911479 | New Buffalo, MI 49117 |
- ------------------------------------------------------------------|
This Statement refers to original Financing Statement No. 3217867 |
Date filed: February 2, 1994 Filed with IL Secretary of State |
- --------------------------------------------------------------------------------------------------------|
A. [_] CONTINUATION....The original financing statement between the foregoing Debtor and Secured |
Party, bearing the file number shown above, is still effective. |
B. [_] PARTIAL RELEASE.From the collateral described in the financing statement bearing the file |
number shown above, the Secured Party releases the property indicated below. |
C. [_] ASSIGNMENT......The Secured Party certifies that the Secured Party has assigned to the Assignee |
whose name and address is shown below. Secured Party's rights under the financing|
statement bearing the file number shown above in the property indicated below. |
D. [X] TERMINATION.....The Secured Party certifies that the Secured Party no longer claims a security |
interest under the financing statement bearing the file number shown above. |
E. [_] AMENDMENT.......The financing statement bearing the above file number is amended. |
[_] To show the Secured Party's new address as indicated below; |
[_] To show the Debtor's new address as indicated below; |
[_] As set forth below: |
- --------------------------------------------------------------------------------------------------------|
|
- --------------------------------------------------------------------------------------------------------|
ALLIANCE BANKING COMPANY (Secured |
- -----------------------------------------(Debtor) ------------------------------------------ Party) |
(Signature of Debtor, if required) |
|
Dated: ----------------------------------, 19----- By: --------------------------------------------- |
(Signature of Secured Party) |
|
(1) FILING OFFICER COPY - ALPHABETICAL |
|
This form of Financing Statement is approved by the Illinois Secretary of State. |
|
STANDARD FORM--UNIFORM COMMERCIAL CODE--FORM UCC-3 REV. |
|
</TABLE>
<PAGE>
PLEDGE AGREEMENT
PLEDGE AGREEMENT made as of the 30th day of January, 1998, by THE LEAP
GROUP, INC., a Delaware corporation (called "Pledgor") and ONE WORLD
COMMUNICATIONS, INC., for the limited purpose set forth in its Joinder, to and
in favor of MANUFACTURERS BANK, an Illinois banking corporation, 12OO N. Ashland
Ave., Chicago, Illinois ("Secured Party").
R E C I T A L S:
A. Secured Party has extended credit to Pledgor and THE LEAP PARTNERSHIP,
INC., an Illinois corporation (hereinafter referred to as "Partnership"),
QUANTUM LEAP COMMUNICATIONS, INC., an Illinois corporation (hereinafter referred
to as "Quantum"), LILYPAD SERVICES, INC., an Illinois corporation (hereinafter
referred to as "Lilypad"), BAR TV, INC., a Delaware corporation (hereinafter
referred to as "Bar"), TADPOLE PRODUCTIONS, INC., an Illinois corporation
(hereinafter referred to as "Tadpole"), and YAR COMMUNICATIONS, INC., a Delaware
corporation (hereinafter referred to as "Yar") (Partnership, Quantum, Lilypad,
Bar, Tadpole, Yar and Pledgor collectively, "Debtor"), under certain terms and
conditions set forth in, among other documents, a Business Loan Agreement and a
Promissory Note dated February 18, 1997 executed and delivered to Secured Party
by Pledgor as thereafter modified by Modification Agreement dated October 31,
1997; and
B. Debtor has requested Secured Party to enter into a Second Loan
Modification Agreement which, among other things, will extend the Maturity Date
of the Note; and
C. Secured Party is unwilling to enter into the Second Modification
Agreement in the absence of additional collateral for the Note; and
D. As an inducement to Secured Party to enter into the Second Modification
Agreement and, among other things, extend the Maturity Date of the Note, Pledgor
has agreed as follows.
1. The interest created by this Agreement secures the payment of all debts,
obligations and liabilities (collectively "Liabilities") of Debtor to Secured
Party under the Loan Agreement, the Note and all documents related thereto
(collectively, the "Loan Documents").
2. Pledgor hereby assigns, transfers and pledges with Secured Party as
security for the Liabilities the following Instruments, insurance policies,
documents, securities, chattel paper and intangibles (collectively
"Securities"), together with any stock rights, rights to subscribe, liquidating
dividends, stock dividends, dividends paid on and/or in stock (collectively
"Dividends"), new securities or other property which Pledgor is or may hereafter
become entitled to receive on account of the Securities, Dividends or other
property (collectively "Collateral") described more fully as follows:
53
<PAGE>
1000 shares of common stock of One World Communications, Inc., a Delaware
corporation ("One World"), which Pledgor warrants to be 100% of the issued
and outstanding stock of One World.
In addition, the word "Collateral" includes all property of Pledgor in the
possession of Secured Party (or in the possession of a third party subject to
the control of Secured Party), whether now or hereafter existing and whether
tangible or intangible in character, including without limitation each of the
following:
(a) All property to which Secured Party acquires title or documents of
title;
(b) All property assigned to Secured Party;
(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; and
(d) All records relating to any of the Collateral, whether in
the form of a writing, microfilm, microfiche, or electronic media.
3. Pledgor warrants that (i) all items of Collateral delivered hereunder
are genuine and free from all liens, adverse claims, default, defenses and
conditions precedent, not previously disclosed to Secured Party and (ii) One
World authorized the issuance of 10,000 shares of common stock.
4. At any time, without notice and at the expense of Pledgor, Secured
Party may, but shall not be obligated to, (a) notify any person or entity
obligated on any Collateral of its rights hereunder, (b) collect by any means
all Dividends, interest or other sums payable upon or on account of any
Collateral, (c) make any compromise or settlement with reference to any
Collateral that Secured Party, in its sole discretion, deems appropriate or
desirable, (d) cause any Collateral to be transferred to its own name or to that
of its nominee, (e) perform any obligation of Pledgor under any Collateral or
hereunder and (f) exercise, as to any Collateral, all rights, powers and
remedies or any owner including entering into any extension, reorganization,
deposit, merger or consolidation agreement or any other agreement affecting such
Collateral. Secured Party has no obligation with respect to redemption,
conversion, warrant, preemptive, or other rights or dates limiting the exercise
of such rights as to any Securities and no omission with respect to any such
matter(s) shall in any way impair or discharge any of the Liabilities of the
Debtor.
5. Secured Party may from time to time, without notice to Pledgor, and
without impairing or affecting the interest created hereunder, (a) acquire a
security interest in any property in addition to the Collateral, or release any
such interest so acquired, or permit any substitution or exchange for such
property or any part thereof, (b) acquire the primary or secondary liability of
any party or parties with respect to all or any of the Liabilities, or release,
modify or compromise the same or any part thereof, (c) modify, extend or renew
for any period
2
<PAGE>
any of the Liabilities or (d) resort to the Collateral for payment of the
Liabilities whether or not Secured Party shall have resorted to other collateral
or proceeded against any other party primarily or secondarily liable on the
Liabilities.
6. Pledgor waives any presentment, demand for performance, notice of
nonperformance, protest and notice of protest or dishonor in connection with any
Collateral.
7. Pledgor agrees to pay prior to delinquency all taxes, charges, liens
and assessments against any Collateral and upon the failure of the Pledgor to do
so, Secured Party, at its option, may pay all or any part thereof and shall be
the sole judge of the legality or validity thereof and the amount necessary to
discharge the same. Any expenditure by Secured Party under this paragraph shall
become part of the Liabilities secured hereby.
8. Pledgor agrees that it shall not and will not cause to be issued or
permit One World to issue any shares of One World common stock in excess of the
1,000 shares of such stock issued as of the date of this Agreement.
9. All advances, charges, costs and expenses (including reasonable
paralegal and attorneys' fees and expenses) paid by Secured Party in exercising
any right, power or remedy hereunder, or in the enforcement hereof shall become
a part of the Liabilities secured hereunder.
10. Upon the happening of any of the events of default set forth in the
Loan Documents, Secured Party may declare all Liabilities owed to it by Debtor
immediately due and payable and with respect to the Collateral shall have all
rights of a secured party under the Uniform Commercial Code, including holding a
public sale or private sale. At any such sale, Secured Party may, if it be the
highest bidder, purchase any or all of the Collateral so sold free from any
right of redemption which is hereby waived. In the event of a default hereunder,
Secured Party shall have the option to terminate the Pledgor's voting rights in
any Securities or Dividends and exercise said rights in its sole discretion.
11. This Agreement shall be governed by and construed in accordance with
the laws of the State of Illinois.
12. If any term or provision of this Agreement is held to be void or
unenforceable, such term or provision, at the option of the Secured Party, shall
be deemed omitted and this Agreement with such term or provision omitted shall
remain in full force and effect.
THE LEAP GROUP, INC., a Delaware
corporation
By: Robert C. Bramlette
---------------------------
Its: Secretary
--------------------
3
<PAGE>
JOINDER TO PLEDGE AGREEMENT
---------------------------
One World Communication, Inc., for good and valuable consideration, agrees
that it will not issue any authorized but previously unissued shares of its
stock nor authorize the issuance of any additional shares of its stock so long
as any Liabilities remain unpaid.
ONE WORLD COMMUNICATIONS, INC.
By: Robert C. Bramlette
--------------------------
Its: Secretary
-------------------
4
<PAGE>
EXHIBIT 11
The Leap Group, Inc.
STATEMENT REGARDING COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
Twelve Months Ended January 31, Three Months Ended January 31,
------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ($5,610,832) $ 1,305,931 $ 133,983 $ 613,454
Weighted average number of common
shares outstanding during period 13,615,295 10,933,333 13,615,295 13,600,000
Net shares issuable upon exercise of
dilutive outstanding stock options - 192,829 - 172,800
---------- ----------- ----------- -----------
Shares used in Diluted per share
calculation 13,615,295 11,126,162 13,615,295 13,772,800
Basic earnings per common share ($.41) $.12 $.01 $0.05
Diluted earnings per common share ($.41) $.12 $.01 $0.05
</TABLE>
<PAGE>
Exhibit 13.2
The Leap Group, Inc.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
-------------------------------------------------------
1998 1997 1996 1995 1994*
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues (000's) $30,660 $16,088 $8,210 $4,679 $373
Net Income/(Loss)(000's) ($5,611) $1,306 $700 ($1,065) ($76)
Earnings (Loss) Per Share ($0.41) $0.12 $0.07 ($0.11) ($0.01)
As of January 31,
-------------------------------------------------------
1998 1997 1996 1995 1994*
- ----------------------------------------------------------------------------------------
Total Assets (000's) $46,054 $39,860 $2,053 $2,538 $355
Long-Term Obligations (000's) $421 $366 $448 $420 $0
Working Capital (000's) $820 $34,630 ($973) ($1,515) ($145)
</TABLE>
* For the short period from business inception, September 20, 1993, through
January 31, 1994.
<PAGE>
EXHIBIT 21
The Leap Group, Inc.
SUBSIDIARIES OF THE REGISTRANT
THE LEAP PARTNERSHIP, INC., an Illinois corporation and a wholly-owned
subsidiary of the Registrant.
LILYPAD SERVICES, INC., an Illinois corporation and a wholly-owned subsidiary of
the Registrant.
TADPOLE PRODUCTIONS, INC., an Illinois corporation and a wholly-owned subsidiary
of the Registrant.
QUANTUM LEAP COMMUNICATIONS, INC., a Delaware corporation and a wholly-owned
subsidiary of the Registrant.
BAR TV, INC., a Delaware corporation and a wholly-owned subsidiary of the
Registrant.
YAR COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary of
the Registrant.
ONE WORLD COMMUNICATIONS, INC., a Delaware corporation and a wholly-owned
subsidiary of the Registrant.
<PAGE>
EXHIBIT 23
The Leap Group, Inc.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statement on Form S-8 (No. 333-24839).
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of January 31, 1998 and 1997, the Consolidated
Statements of Operations for each of the three years ended January 31, 1998,
1997 and 1996, and Consolidated Statements of Cash Flows for each of the three
years ended January 31, 1998, 1997 and 1996 and is qualified in its entirety
by reference to such financial statements.</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 7,214
<SECURITIES> 0
<RECEIVABLES> 7,208
<ALLOWANCES> 860
<INVENTORY> 0
<CURRENT-ASSETS> 15,613
<PP&E> 6,723
<DEPRECIATION> (1,529)
<TOTAL-ASSETS> 46,054
<CURRENT-LIABILITIES> 14,793
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 30,704
<TOTAL-LIABILITY-AND-EQUITY> 46,054
<SALES> 0
<TOTAL-REVENUES> 30,660
<CGS> 0
<TOTAL-COSTS> 11,452
<OTHER-EXPENSES> 28,599
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (269)
<INCOME-PRETAX> (9,121)
<INCOME-TAX> (3,510)
<INCOME-CONTINUING> (5,611)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,611)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
