<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-20835
LEAPNET, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4079500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22 West Hubbard Street, Chicago, Illinois 60610, (312) 494-0300
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
N/A
---
(Former Name, Former Address & Former Fiscal Year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO_____
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Outstanding Shares at
Class November 30, 1999
---------------------------------- ------------------------------
Common Stock - $0.01 par value 14,212,895
<PAGE>
LEAPNET, INC.
FORM 10-Q
FOR THE PERIOD ENDED
OCTOBER 31, 1999
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Consolidated Balance Sheets --
October 31, 1999 (Unaudited)
and January 31, 1999 3
Consolidated Statements of Operations --
Three Months Ended and Nine Months Ended
October 31, 1999 and 1998 (Unaudited) 5
Consolidated Statements of Cash Flows --
Nine Months Ended
October 31, 1999 and 1998 (Unaudited) 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures about Market
Risks 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
LEAPNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
----------- -----------
1999 1999
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents........................................... $12,673,844 $14,076,379
Short-term investments (Note 4)..................................... 307,640 -
Accounts receivable (net of allowance of
$756,579 and $470,750, respectively)......................... 6,529,265 6,433,214
Costs in excess of billings (net of allowance of
$47,000 and $10,374, respectively)........................... 994,799 339,907
Prepaid expenses.................................................... 254,896 262,970
----------- -----------
Total current assets........................................... 20,760,444 21,112,470
Property and Equipment
Land................................................................ 878,921 158,921
Building and building improvements (Note 6)......................... 2,066,754 493,473
Leasehold improvements.............................................. 745,161 716,656
Computer equipment.................................................. 1,617,974 1,172,305
Furniture and equipment............................................. 1,078,733 853,517
----------- -----------
6,387,543 3,394,872
Less accumulated depreciation....................................... (1,627,733) (910,811)
----------- -----------
Net property and equipment..................................... 4,759,810 2,484,061
Other Assets............................................................. 643,051 136,839
----------- -----------
Total Assets............................................................. $26,163,305 $23,733,370
=========== ===========
</TABLE>
3
<PAGE>
LEAPNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
---------- ----------
1999 1999
---- ----
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable..................................................... $ 2,616,128 $ 2,652,819
Accrued expenses..................................................... 1,041,143 1,120,724
Billings in excess of costs.......................................... 685,851 1,331,279
Notes payable........................................................ 5,117,892 4,073,000
Current portion of long-term liabilities............................. 155,753 373,611
----------- -----------
Total current liabilities....................................... 9,616,767 9,551,433
Long-Term Liabilities
Long-term mortgage payable........................................... 2,062,214 640,445
Capital lease obligations............................................ - 52,908
----------- -----------
Total long-term liabilities..................................... 2,062,214 693,353
Total Liabilities......................................................... $11,678,981 $10,244,786
Commitments and Contingencies (Notes 6 and 8)
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,
14,156,562 and 14,131,785 shares issued and outstanding as of
October 31, 1999 and January 31, 1999, respectively............... 141,566 141,318
Unrealized loss on marketable securities (Note 4).................... (18,440) 0
Additional paid in capital........................................... 36,615,714 36,566,638
Retained earnings.................................................... (22,103,386) (23,068,242)
less cost of 50,000 shares of common stock held in treasury.......... (151,130) (151,130)
----------- -----------
Total Stockholders' Equity...................................... $14,484,324 $13,488,584
----------- -----------
Total Liabilities and Stockholders' Equity................................ $26,163,305 $23,733,370
=========== ===========
</TABLE>
The accompanying notes to the financial statements are an
integral part of these statements.
4
<PAGE>
LEAPNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
October 31, October 31,
----------- -----------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues......................................... $ 9,514,069 $ 8,410,295 $ 27,248,175 $ 27,776,301
Operating expenses:
Direct costs and related expenses............ 2,764,625 2,805,781 9,925,294 9,140,830
Salaries and related expenses................ 4,302,304 4,550,978 11,227,834 14,288,614
General and administrative expenses.......... 1,861,980 2,533,471 5,434,319 6,695,381
Impairment of long-term assets............... - 9,239,814 - 9,239,814
Restructuring expenses....................... - 738,494 - 738,494
------------ ------------ ------------ ------------
Total operating expenses................ 8,928,909 19,868,538 26,587,447 40,103,133
------------ ------------ ------------ ------------
Operating income / (loss) ....................... 585,160 (11,458,243) 660,728 (12,326,832)
Loss on divestiture........................ - (1,802,306) - (1,802,306)
Gain on sale of building................... - - - 1,154,588
Interest income / (expense), net........... 15,055 (27,074) 304,127 (146,125)
------------ ------------ ------------ ------------
Income / (Loss) before income taxes..... 600,215 (13,287,623) 964,855 (13,120,675)
Income tax provision............................. - (3,306,988) - (3,385,056)
------------ ------------ ------------ ------------
Net income /(loss)............................... $ 600,215 $(16,594,611) $ 964,855 $(16,505,731)
============ ============ ============ ============
Per share data:
Net income / loss per share:
Basic................................... $ 0.04 $ (1.22) $ 0.07 $ (1.21)
============ ============ ============ ============
Diluted .....................
$ 0.04 $ (1.22) $ 0.07 $ (1.21)
============ ============ ============ ============
Weighted average number of shares used in
Basic per share computation............. 14,154,229 13,648,866 14,145,772 13,646,199
Diluted per share computation........... 14,846,918 13,648,866 14,838,461 13,646,199
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
5
<PAGE>
LEAPNET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
October 31,
-----------
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income / (loss).......................................................... $ 964,855 ($ 16,505,731)
Adjustments to reconcile net income / (loss) to
Net cash used in operating activities:
Depreciation and amortization........................................... 792,888 2,743,424
Deferred income taxes................................................... - 2,960,061
Loss on divestiture..................................................... - 1,802,306
Restructuring reserves.................................................. - 738,494
Gain on sale of building................................................ - (1,154,588)
Impairment of long-term assets.......................................... - 9,239,814
Changes in operating assets and liabilities:
Accounts receivable................................................... (422,131) (805,638)
Costs in excess of billings........................................... (654,892) (295,036)
Prepaid expenses...................................................... 8,074 (98,372)
Other assets.......................................................... (90,003) (76,172)
Accounts payable...................................................... (36,691) (2,876,255)
Accrued expenses...................................................... (79,580) 744,209
Billings in excess of costs........................................... (645,428) (390,900)
------------ ------------
Net cash used in operating activities........................................ (162,908) (3,974,384)
------------ ------------
Cash flows from investing activities:
Capital expenditures......................................................... (3,127,675) (1,009,185)
Capitalized software development costs....................................... (357,171) (119,283)
Business divestiture......................................................... - 5,300,000
Issuance of notes receivable................................................. - 1,819,770
Proceeds from sale of building............................................... - 3,476,277
Release of escrow monies in connection
with YAR acquisition, net of expenses................................... - 2,725,186
------------ ------------
Net cash (used in) / provided by investing activities........................ (3,484,846) 12,192,765
------------ ------------
Cash flows from financing activities:
Net outlays related to common stock issuance................................. 49,324 80,002
Net borrowings/(repayments) on:
Notes payable........................................................... 1,044,892 (2,884,292)
Mortgage payable........................................................ 1,430,363 0
Repayment of capital lease financing.................................... (279,360) (281,975)
------------ ------------
Net cash provided by / (used in) financing activities........................ 2,245,219 (3,086,265)
------------ ------------
Net (decrease) / increase in cash and cash equivalents.......................... (1,402,535) 5,132,116
Cash and cash equivalents, at beginning of period............................... 14,076,379 7,214,261
------------ ------------
Cash and cash equivalents, at end of period..................................... $ 12,673,844 $ 12,346,377
============ ============
Supplementary disclosure of cash paid during the period:
Interest paid................................................................ $ 266,343 $ 432,571
Taxes paid................................................................... $ 4,518 $ 299,418
Supplementary disclosure of noncash investing and financing activities:
Securities received from client for services rendered,
stated at fair market value (Note 4)......................................... $ 307,640 $ -
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
6
<PAGE>
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- Basis of Presentation
The accompanying unaudited consolidated financial statements and related notes
to the consolidated financial statements include the results of Leapnet, Inc.
(the "Company") and its wholly-owned subsidiaries.
On October 22, 1998, the Company sold various assets of its wholly-owned
subsidiary, One World Communications, Inc. ("One World"), as described further
in Note 3. As such, the historical operating results of One World are included
within the financial statements for the three and nine months ended October 31,
1998, but are not included for the three and nine months ended October 31, 1999.
The unaudited consolidated financial statements for the nine month periods ended
October 31, 1999 and 1998 reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
interim periods.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on April 30, 1999.
The results of operations for the three and nine month periods ended October 31,
1999 are not necessarily indicative of the results of operations to be expected
for the entire fiscal year ending January 31, 2000.
Certain amounts previously reported have been reclassified to conform to current
year classifications.
NOTE 2 -- Net Income Per Share
The Company computes earnings per share in accordance with SFAS No. 128,
Earnings Per Share. Under SFAS 128, the weighted average number of common shares
used in determining basic and diluted earnings per share attributable to common
stockholders for the three and nine months ended October 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
----------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common shares outstanding--Basic 14,154,229 13,648,866 14,145,772 13,646,199
Common stock equivalents 692,689 0 692,689 0
---------- ---------- ---------- ----------
Common shares outstanding--Diluted 14,846,918 13,648,866 14,838,461 13,646,199
</TABLE>
NOTE 3 -- Divestitures
On October 22, 1998, the Company closed on the sale to Young and Rubicam, Inc.
of various assets of its One World subsidiary and the transfer of the AT&T
account of YAR Communications, Inc. ("YAR"). As consideration for the sale, the
Company received $5.3 million on October 22, 1998, and an additional $1.1
million in April 1999.
NOTE 4 -- Short Term Investments
The Company accounts for equity investments using SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Under SFAS No. 115,
management determines the proper classifications of investments at the time of
receipt and reevaluates such designations as of each balance sheet date. At
October 31, 1999, all securities covered by SFAS No. 115 were designated as
available for sale. Accordingly, these equity securities are stated at fair
value of $307,640 on the balance sheet with comprehensive income resulting from
an unrealized loss of $18,440 which is reported as a separate component of
stockholder's equity.
7
<PAGE>
NOTE 5 -- Line of Credit
The Company obtained a $10 million secured revolving line of credit from
American National Bank which replaced an existing $5 million line of credit. The
line of credit is due February 24, 2000, and is renewable each year and will
bear interest at a rate of 1.5% above the bank's highest CD rate. Borrowings are
collateralized by substantially all the assets of the Company, and the line of
credit agreement requires the Company to maintain certain minimum levels of
working capital and net worth. At October 31, 1999, the interest rate was 7% and
the outstanding balance on the line was $5.1 million (See Note 10).
NOTE 6 -Purchase of Real Estate and Mortgage
On July 2, 1999, Quantum Leap Communications, Inc. ("QLC"), a wholly-owned
subsidiary of the Company, entered into contracts to purchase a 35,000 square
foot building for $2.8 million. The purchase of the building is scheduled to
occur in three phases. As of October 31, 1999, the first and second portions of
the building were purchased for $1.8 million, of which, 20% was paid in cash and
80% was financed as described below. The final phase of the purchase is
scheduled to occur no later than October 2000, when the remaining portion of the
building is expected to be purchased for $1.0 million.
On June 29, 1999, the Company obtained a five-year $2.24 million multi-draw
mortgage which is secured by substantially all the assets of the Company and the
mortgage is cross-collateralized with the line of credit that is described in
Note 5. The interest rate on the loan is a fixed 8.5% and the loan is calculated
over a 20 year amortization period. At October 31, 1999, the outstanding balance
on this loan was $1.44 million.
QLC has leased the portion of the building that it does not presently own. On
September 28, 1999, QLC entered into a contract to remodel the building. The
remodeling cost is approximately $2 million.
NOTE 7 -- Income Taxes
As of January 31, 1999 and October 31, 1999, respectively, the Company had
deferred tax assets of approximately $8.6 million and $7.6 million.
Approximately $4.1 million of the deferred tax asset as of October 31, 1999,
relates to operating loss carryforwards for federal and state income tax
purposes which begin to expire in fiscal year 2011. The most significant of the
other deferred tax assets is approximately $3.1 million related to goodwill,
which was written off for financial reporting purposes during the quarter ended
October 31, 1998. This goodwill continues to have tax basis and the Company will
continue to amortize the goodwill for tax purposes.
The Company has provided a full valuation reserve against the net deferred tax
asset due to its limited operating history, recent operating losses, the
difficulty and significant judgment in projecting future operating results, the
volatility of the industry, and the transfer of the AT&T account, which had
previously provided substantial taxable income (See Note 3). Consequently, as
the Company achieves future taxable income, no income tax provision will be
recorded until the deferred taxes related to the operating loss carryforwards
have been fully utilized.
NOTE 8 -- Litigation
In November 1998, the Company filed a complaint in the Supreme court of the
State of New York against Finkle, Ross & Rost, LLP ("Finkle"), the former
accountants for Yurianna, Inc., the company from which the Company acquired
various assets of YAR, alleging breach of contract and accountant malpractice.
The action seeks damages believed to exceed $13,500,000 and such other relief as
the court deems just and equitable. In December 1998, Finkle filed a complaint
in the Supreme Court of the State of New York against the Company for $28,750
for accounting services rendered. The amount was reduced to $11,250 by Finkle.
Although Finkle had performed services for the Company, the Company intends to
vigorously oppose this claim due to the quality of services provided.
8
<PAGE>
In October 1999, The Crystal Juke Box, Inc., Wixen Music Publishing, Inc.,
Charles McCormick, Charles Love, Willis Draffen, Jr., Harry Williams,
individually and doing business as the group Bloodstone, a recording and
performing group, (collectively, the "Plaintiffs") filed a lawsuit against a
subsidiary of the Company, The Leap Partnership, Inc. ("Leap"), Anheuser-Busch
Corporation, and Andy Milburn, an individual and doing business as Tomandandy,
(collectively, the "Defendants") in the United States District Court, for the
Central District of California. The complaint alleges copyright infringement,
statutory and common law violation of the right of publicity, violation of
section 43 of the Lanham Act, unfair competition, and misappropriation stemming
from the airing of a television commercial created by Leap for a client. The
suit has been referred to the Company's insurance carrier and legal counsel.
Leap intends to vigorously defend its position and to pursue all remedies
available to it. It is difficult to ascertain the ultimate outcome of this
litigation. An adverse determination and an award of damages not covered by
insurance or by a co-defendant could have a material adverse effect on Leap's
results of operations.
In November 1999, POW, Inc., doing business as Tomandandy, filed a lawsuit
against Leap in the United States District Court, Southern District of New York
seeking damages in the amount of $285,228 plus interest for failure to pay for
work performed by POW, Inc. Leap intends to vigorously defend its position and
to pursue all remedies available to it.
See Item 3 of the 10-K for the fiscal year ended January 31, 1999 for additional
disclosures regarding pending litigation matters.
NOTE 9 -- Acquisitions
After discussions with Nine Dots Corporation and after conducting due diligence,
both parties intend not to proceed with a potential acquisition.
NOTE 10 -- Subsequent Events
Line of Credit
- --------------
On November 10, 1999, the Company obtained a new $15 million secured two year
revolving line of credit from American National Bank which replaced an existing
$10 million revolving line of credit that matures on February 24, 2000. The new
line of credit matures on November 10, 2001, and bears interest at a variable
rate of 1.5% above the Bank's highest CD rate. In addition, there is an unused
facility fee of ten basis points per year on the average amount of the unused
facility.
Significant Client Account
- --------------------------
On November 23, 1999, The Leap Partnership, Inc. was informed by Hardee's Food
Systems, Inc. that it was terminating its National Advertising Agency Agreement
effective February 22, 2000. For the three months and the nine months ended
October 31, 1999, this client accounted for 24% and 34% of consolidated
revenues, respectively.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's consolidated financial statements, accompanying
notes thereto and other financial information appearing in the Company's Annual
Report on Form 10-K which was filed with the Securities and Exchange Commission
on April 30, 1999.
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.
On October 22, 1998, the Company sold various assets of its wholly-owned
subsidiary, One World Communications, Inc. ("One World") and the AT&T account of
YAR Communications, Inc. ("YAR"), as further described in Note 3 to the
Consolidated Financial Statements. As such, the historical operating results of
One World are included within the results of operations for the three and nine
months ended October 31, 1998, but are not included within the three and nine
months ended October 31, 1999.
9
<PAGE>
Results of Operations
THREE MONTHS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 1998
Revenues
- --------
Revenues increased to $9.5 million for the three months ended October 31, 1999
from $8.4 million for the three months ended October 31, 1998, an increase of
approximately $1.1 million or 13%. This increase was primarily due to
approximately $4.4 million in increased work with new and existing clients as
the Company continues to expand its business and clients. This increase was
partly offset by approximately $3.3 million loss in revenue due to the October
1998 sale of One World and the AT&T account of YAR.
Direct Costs and Related Expenses
- ---------------------------------
Direct Costs and Related Expenses generally consist of production costs which
include services such as filming, animation, editing, special effects,
photography and illustrations, artwork, computer design and various related
production services which are generally outsourced, along with contracted talent
and other costs related to creative executions which may include traditional
media as well as new technologies and multimedia. Direct Costs and Related
Expenses decreased slightly for the three months ended October 31, 1999 from the
three months ended October 31, 1998. An increase in production for both new and
existing clients during 1999 was offset by the absence of expenses related to
One World.
Salaries and Related Expenses
- -----------------------------
Salaries and Related Expenses consist primarily of salaries and wages for
employees, related payroll tax expenses, group medical and dental coverages,
freelance and contract labors, and recruiting expenses. Salaries and Related
Expenses decreased to $4.3 million for the three months ended October 31, 1999
from $4.5 million for the three months ended October 31, 1998, a decrease of
approximately $0.2 million or 5%. The decrease was primarily due to the sale of
One World and restructuring efforts at YAR which together resulted in decreased
Salaries and Related Expenses of approximately $1.6 million from the prior year
quarter. This decrease was offset in part by approximately $1.4 million in
salary increases primarily related to new hires at the Company. As a percentage
of revenue, Salaries and Related Expenses decreased to approximately 45% for the
three months ended October 31, 1999, from approximately 54% for the three months
ended October 31, 1998.
General and Administrative Expenses
- -----------------------------------
General and Administrative Expenses include space and facilities expenses,
corporate expenses, depreciation, insurance, legal and accounting fees and
management information system expenses. General and Administrative Expenses
decreased to $1.8 million for the three months ended October 31, 1999, from $2.5
million for the three months ended October 31, 1998, a decrease of approximately
$0.7 million or 26%. The decrease was primarily due to the sale of One World and
restructuring efforts at YAR which together resulted in a decrease of
approximately $0.9 million from the prior year quarter. As a percentage of
revenue, General and Administrative Expenses decreased to approximately 20% for
the three months ended October 31, 1999, from approximately 30% for the prior
year quarter.
Other Income and Expense
- ------------------------
Interest income totaled $155,357 and $68,640 for the three months ended October
31, 1999 and 1998, respectively, and was generated from short-term US Treasury
Notes, certificates of deposit, money market account and short-term Eurodollar
currency investments. Interest income was offset in part by interest expense of
$140,302 and $95,714, respectively, resulting in net interest income of $15,055
and net interest expense of $27,074 for the three months ended October 31, 1999
and 1998, respectively. The Company incurred interest expense on debt that
totaled approximately $7.3 million as of October 31, 1999, and approximately
$5.2 million as of October 31, 1998.
10
<PAGE>
Income Taxes
- ------------
The Company's combined federal and state effective income tax rates were 0% and
24.9% for the three months ended October 31, 1999 and 1998, respectively. The 0%
effective rate for the three months ended October 31, 1999 is due to the
Company's use of previously reserved tax assets resulting from net operating
losses.
As of October 31, 1999, the Company has a deferred tax asset of approximately
$7.6 million which begins to expire in fiscal year 2011. The Company had
provided a full valuation reserve against the net deferred tax asset due to its
limited operating history, recent operating losses, the difficulty and
significant judgment involved in projecting future operating results, the
volatility of the industry, and the transfer of YAR's AT&T Account. To the
extent that the Company achieves future taxable income, no provision will be
recorded until the operating losses have been fully utilized.
NINE MONTHS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 1998
Revenues
- --------
For the nine months ended October 31, 1999, revenues were $27.2 million,
compared to $27.8 million for the nine months ended October 31, 1998, a decrease
of approximately $0.6 million or 2%. This net decrease is primarily due to the
October 1998 sale of One World and the AT&T account of YAR which resulted in
decreased revenue for the nine months ended October 31, 1999 of approximately
$12.1 million. This decrease is offset in part by increases in revenue from new
and existing accounts at the Company of approximately $11.5 million. During the
nine months ended October 31, 1999, YAR's non-AT&T related revenue remained
substantially unchanged, as compared with the nine months ended October 31,
1998.
Direct Costs and Related Expenses
- ---------------------------------
Direct Costs and Related Expenses increased to $9.9 million for the nine months
ended October 31, 1999 from $9.1 million for the nine months ended October 31,
1998, an increase of approximately $0.8 million or 9%. The net increase was
primarily attributable to the increased production with new and existing
accounts.
Salaries and Related Expenses
- -----------------------------
Salaries and Related Expenses decreased to $11.2 million for the nine months
ended October 31, 1999, from $14.3 million for the nine months ended October 31,
1998, a decrease of approximately $3.1 million or 21%. This decrease was
primarily due to the sale of One World and restructuring efforts at YAR which
together resulted in a decrease of approximately $6.0 million in Salaries and
Related Expenses from the prior year nine months. This decrease was offset in
part by approximately $2.9 million in salary increases primarily related to new
hires at the Company. As a percentage of revenue, Salaries and Related Expenses
decreased to approximately 41% for the nine months ended October 31, 1999, from
approximately 51% for the prior year nine months.
11
<PAGE>
General and Administrative Expenses
- -----------------------------------
General and Administrative expenses decreased to $5.4 million for the nine
months ended October 31, 1999 from $6.7 million for the nine months ended
October 31, 1998, a decrease of approximately $1.3 million or 19%. This decrease
was primarily due to the sale of One World and restructuring efforts at YAR
which together resulted in a decrease of approximately $2.4 million in General
and Administrative Expenses from the prior year nine months. This decrease was
offset by increases in General and Administrative Expenses of approximately $1.1
million for the Company for the nine months ended October 31, 1999, which
consist of additional professional services, costs associated with the Company's
annual report and meeting, legal and accounting services, and depreciation and
amortization, including goodwill amortization, and increased facilities costs.
As a percentage of revenue, General and Administrative Expenses decreased to
approximately 20% for the nine months ended October 31, 1999, from approximately
24% for the prior year nine months.
Other Income and Expense
- ------------------------
On July 17, 1998, the Company sold a building which housed the Los Angeles
office of The Leap Partnership, Inc., a wholly-owned subsidiary of the Company.
The building was sold for $3.48 million which resulted in a $1.15 million
pre-tax gain as reported.
Interest income totaled $610,200 and $296,538 for the nine months ended October
31, 1999 and 1998, respectively, and, was generated from short-term US Treasury
Notes, certificates of deposit, money market account and short-term Eurodollar
currency investments. Interest income was offset in part by interest expense of
approximately $306,073 and $442,663, respectively, resulting in net interest
income of $304,127 and net interest expense of $146,125, for the nine months
ended October 31, 1999 and 1998, respectively. The Company incurred interest
expense on debt that totaled approximately $7.3 million and $5.2 million as of
October 31, 1999 and 1998, respectively.
Income Taxes
- ------------
Combined federal and state income tax rates were 0.0% and 24.9% for the nine
months ended October 31, 1999 and 1998, respectively. The 0% effective rate for
the nine months ended October 31, 1999 is due to the Company's use of previously
reserved tax assets resulting from net operating losses.
As of October 31, 1999, the Company has a deferred tax asset of approximately
$7.6 million which begins to expire in fiscal year 2011. The Company has
provided a full valuation reserve against the net deferred tax asset due to its
limited operating history, recent operating losses, the difficulty and
significant judgment involved in projecting future operating results, the
volatility of the industry, and the transfer of YAR's AT&T Account. To the
extent that the Company achieves future taxable income, no provision will be
recorded until the operating losses have been fully utilized.
Liquidity and Capital Resources
Since its inception, the Company has primarily financed its operations and
investments in property and equipment through cash generated from bank
borrowings and equipment leases, proceeds from its initial public offering,
loans from a former officer of the Company and cash generated from operations.
At October 31, 1999, the Company had $11.1 million of working capital, inclusive
of approximately $12.7 million in cash and cash equivalents. Cash and cash
equivalents decreased $1.4 million for the nine months ended October 31, 1999.
This decrease resulted primarily from investments of approximately $3.5 million
in capital expenditures and software development, offset by $2.2 million in cash
provided by financing activities.
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<PAGE>
On November 10, 1999, the Company obtained a new $15 million secured two year
revolving line of credit from American National Bank which replaced an existing
$10 million revolving line of credit that matures on February 24, 2000. The new
line of credit matures on November 10, 2001, and bears interest at a variable
rate of 1.5% above the Bank's highest CD rate. In addition, there is an unused
facility fee of ten basis points per year on the average amount of the unused
facility.
On July 2, 1999, Quantum Leap Communications, Inc. ("QLC"), a wholly-owned
subsidiary of the Company, entered into contracts to purchase a 35,000 square
foot building for $2.8 million. The purchase of the building is scheduled to
occur in three phases. As of October 31, 1999, the first and second portions of
the building were purchased for $1.8 million, of which, 20% was paid in cash and
80% was financed as described below. The final phase of the purchase is
scheduled to occur no later than October 2000, when the remaining portion of the
building is expected to be purchased for $1.0 million.
On June 29, 1999, the Company obtained a five-year $2.24 million multi-draw
mortgage which is secured by substantially all the assets of the Company as the
mortgage is cross-collateralized with the line of credit that is described in
Note 5. The interest rate on the loan is a fixed 8.5% and is calculated over a
20 year amortization period. At October 31, 1999, the outstanding balance on
this loan was $1.44 million.
QLC has leased the portions of the building that it does not presently own. On
September 28, 1999, QLC entered into a contract to remodel the building. The
remodeling cost is approximately $2 million.
On February 24, 1999, the Company obtained a $10 million secured revolving line
of credit from American National Bank which replaced an existing $5 million line
of credit. The line of credit is due February 24, 2000, and is renewable each
year and will bear interest at a rate of 1.5% above the bank's highest CD rate.
Borrowings are collateralized by substantially all the assets of the Company,
and the line of credit agreement requires the Company to maintain certain
minimum levels of working capital and net worth. At October 31, 1999, the
interest rate was 7% and the outstanding balance on the line was $5.1 million.
On October 22, 1998, the Company received $5.3 million in cash from the sale of
various assets of One World and the transfer of the YAR AT&T account. (See Note
3). Additional consideration of $1.1 million in cash was received on April 13,
1999.
On April 30,1998, in connection with the YAR acquisition, the Company received
$3 million in cash before related expenses, due to the release of escrowed
funds. The funds reduced the purchase price of the acquisition and the amount of
recorded goodwill.
On February 2, 1998, the Company received proceeds from a $665,000 bank loan.
The three-year balloon note bears interest at the rate of 9%, and is payable in
monthly principal and interest installments of $5,992 through January 27, 2001,
with a balloon payment of approximately $626,563 due in January 2001. 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.
The Company believes that the existing and future credit facilities, funds from
capital markets, funds from operations, and the cash received as discussed above
will be sufficient to meet the Company's cash requirements for at least the next
twelve months. The Company's capital requirements will depend on numerous
factors, including the rates at which the Company grows, expands its personnel
and infrastructure to accommodate growth and invests in new technologies. The
Company has various ongoing needs for capital, including working capital for
operations, project development costs and capital expenditures to maintain and
expand its operations. In addition, as part of its strategy, the Company
evaluates potential acquisitions of, or alliances with, businesses that extend
or complement the Company's business. The Company may in the future consummate
acquisitions or alliances which may require the Company to make additional
capital expenditures, and such expenditures may be significant. Future
acquisitions and alliances may be funded with available cash from seller
financing, institutional financing, issuance of common stock of the Company
and/or additional equity or debt offerings. There can be no assurance that the
Company will be able to raise any additional required capital on favorable
terms, or at all.
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<PAGE>
Seasonality
Depending upon its client mix at any time, the Company could experience
seasonality in its business. Such seasonality arises from the timing of product
introductions and business cycles of the Company's clients and could be material
to the Company's interim results. Such cycles vary from client to client, and
the overall impact on the Company's results of operations cannot be reasonably
predicted. In addition, the advertising industry as a whole exhibits
seasonality. Typically, advertising expenditures are highest in the fourth
calendar quarter and lowest in the first calendar quarter, particularly in
January. Although the Company has too limited an operating history to exhibit
any discernible seasonal trend, as the Company matures, Management believes that
the business and results of operations could be affected by the overall
seasonality of the industry.
Dependence on Key Clients and Projects
An important part of the Company's strategy is to develop in-depth, long-term
relationships with a select group of clients in a variety of industries.
Consistent with such a strategy, a large portion of the Company's revenues has
been, and is expected to continue to be, concentrated among a relatively limited
number of nationally recognized clients. On November 23, 1999, The Leap
Partnership, Inc. was informed by Hardee's Food Systems, Inc., a client
accounting for 24% of consolidated revenue for the three months ended October
31, 1999, that it was terminating its National Advertising Agency Agreement
effective February 22, 2000.
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, diversify
through acquisitions, 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.
Management believes that the loss of other key clients and varying effects of
seasonality, as described above, could also have an adverse impact on the
Company's business, results of operations and financial condition, particularly
in the short term.
Year 2000
The Company's Year 2000 Task Force has completed an inventory of the hardware
and software used in its operations and has assessed its Year 2000 readiness.
Based on this effort, the Company has identified only non-material Year 2000
issues and has remedied them at little cost.
Additionally, the Company has been communicating with significant vendors and
other critical service providers to determine if such parties are Year 2000
compliant or have effective plans in place to address the Year 2000 issue and to
determine the extent of the Company's vulnerability to the failure of such
parties to remediate such issues. Based upon the responses that the Company has
received from these third parties, no material Year 2000 issues have been
identified.
The Company does not expect the impact of the Year 2000 to have a material
adverse impact on the Company's business or results of operations. However, no
assurances can be given that any unanticipated or undiscovered Year 2000
compliance problems, will not have a material adverse effect on the Company's
business and results of operations. In addition, there can be no assurance that
Year 2000 non-compliance by any of the Company's clients or significant
suppliers or vendors will not have a material adverse effect on the Company's
business or results of operations.
14
<PAGE>
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, words such as "anticipates,"
"believes," "continues," "estimates," "expects," "goal," "may," "opportunity,"
"plans," "potential," "projects," "will," and similar expressions as they relate
to the Company or its Management are intended to identify such forward-looking
statements. A number of important factors could cause the Company's actual
results, performance or achievements for fiscal 2000 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 also include, without
limitation, material changes in economic conditions in the markets served by the
Company's clients; changes in government regulation and legal uncertainties;
competition in the Company's industry; uncertainties relating to the developing
market for new media; changing technologies and Year 2000 compliance issues; any
inability to meet expectations in the performance of services which could lead
to claims or liabilities; seasonality; costs and uncertainties relating to
establishing new offices and bringing new or existing offices to profitability;
any inability of the Company to raise additional financing in the future on
favorable terms, or at all; potential adverse effects of litigation; the
Company's dependence on key personnel and vendors; the Company's dependence on
key clients and projects (as discussed further above under "Dependence on Key
Clients and Projects"); and possible continued volatility and wide fluctuations
in the price of the Company's stock. While the Company reduced certain expenses
in fiscal 2000, as the Company works to grow and expand the business, management
will need to increase expenses to expand operations. Management will continue to
assess its overall cost structure in relation to existing and anticipated
revenues. Due to the nature of client contracts, which are difficult to forecast
precisely or for any extended period of time, if, the Company experiences
declines in client demand, or if significant expenses precede or are not
immediately followed by increased revenues, the results of operations and
financial condition may suffer.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
The Company's market risk exposures are set forth in its Annual Report on Form
10-K for the year ended January 31, 1999, and have not changed significantly,
except as follows.
In March 1999, one of the Company's subsidiaries received stock from a client in
exchange for services. The stock has appreciated through October 31, 1999 (See
Note 4 to the Consolidated Financial Statements). However, the value of the
equity securities may fluctuate based on the volatility of the client's stock
price and other general market conditions. To mitigate the market risk on the
equity securities, the stock has been classified as `available for sale' as
management anticipates selling the stock within the next year and at a time when
a gain may be recorded.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In November 1998, the Company filed a complaint in the Supreme
Court of the State of New York against Finkle, Ross & Rost,
L.L.P.("Finkle"), the former accountants for Yurianna, Inc., the
company from which the Company acquired various assets of YAR,
alleging breach of contract and accountant malpractice. The action
seeks damages believed to exceed $13,500,000 and such other relief
as the court deems just and equitable. In December 1998, Finkle
filed a complaint in the Supreme Court of the State of New York
against the Company for $28,750 for accounting services rendered.
The amount was reduced to $11,250 by Finkle. Although Finkle had
performed services for the Company, the Company intends to
vigorously oppose this claim due to the quality of services
provided.
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In October, 1999, The Crystal Juke Box, Inc., Wixen Music
Publishing, Inc., Charles McCormick, Charles Love, Willis Draffen,
Jr., Harry Williams, individually and doing business as the group
Bloodstone, a recording and performing group, (collectively, the
"Plaintiffs") filed a lawsuit against a subsidiary of the Company,
The Leap Partnership, Inc. ("Leap"), Anheuser-Busch Corporation,
and Andy Milburn, an individual and doing business as Tomandandy,
(collectively, the "Defendants") in the United States District
Court, for the Central District of California. The complaint
alleges copyright infringement, statutory and common law violation
of the right of publicity, violation of section 43 of the Lanham
Act, unfair competition, and misappropriation stemming from the
airing of a television commercial created by Leap for a client.
The suit has been referred to the Company's insurance carrier and
legal counsel. Leap intends to vigorously defend its position and
to pursue all remedies available to it. It is difficult to
ascertain the ultimate outcome of this litigation. An adverse
determination and an award of damages not covered by insurance or
by a co-defendant could have a material adverse effect on Leap's
results of operations.
In November, 1999, POW, Inc., doing business as Tomandandy, filed
a lawsuit against Leap, in the United States District Court,
Southern District of New York seeking damages in the amount of
$285,228 plus interest for failure to pay for work performed by
POW, Inc. Leap intends to vigorously defend its position and to
pursue all remedies available to it.
See Note 8 of the Notes to the Consolidated Financial Statements
and Item 3 of the 10-K for the fiscal year ended January 31, 1999
for additional disclosures regarding pending matters.
There are no other significant claims or lawsuits against the
Company.
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<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Promissory Note Agreement, dated November 10, 1999,
issued by Quantum Leap Communications, Inc. ("QLC"), a
wholly-owned subsidiary of the Company, to American
National Bank and Trust Company of Chicago ("ANB").
10.2 Cross-Collateralization and Cross-Default, dated
November 10, 1999, between QLC and ANB.
11. Statement Regarding Computation of Per-Share Earnings.
27. Financial Data Schedule.
b. Reports on Form 8-K
None.
Items 2, 3, 4 And 5 Are Not Applicable And Have Been Omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEAPNET, INC.
-------------
(Registrant)
Date: December 14, 1999 By: /s/ FREDERICK A. SMITH
------------------------------------------
Frederick A. Smith
Chairman and Chief Executive Officer
(principal executive, financial and
accounting officer)
17
<PAGE>
LEAPNET, INC.
EXHIBIT INDEX
Exhibit
Number Exhibits
------ --------
10.1 Promissory Note, dated November 10, 1999, issued by
Quantum Leap Communications, Inc. ("QLC"), a wholly
owned subsidiary of the Company to American
National Bank and Trust Company of Chicago ("ANB").
10.2 Cross-Collateralization and Cross-Default
Agreement, dated November 10, 1999, between QLC and
ANB.
11. Statement Regarding Computation of Per-Share
Earnings.
27. Financial Data Schedules
18
<PAGE>
Exhibit 10.1
American National Bank
[LOGO APPEARS HERE] and Trust Company of Chicago
================================================================================
PROMISSORY NOTE (SECURED)
================================================================================
$15,000,000.00 Chicago, Illinois November 10, 1999
Due: November 10, 2001
FOR VALUE RECEIVED, the undersigned (jointly and severally if more than
one) ("Borrower"), promises to pay to the order of AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO ("Bank"), at its principal place of business in
Chicago, Illinois or such other place as Bank may designate from time to time
hereafter, the principal sum of Fifteen Million and 00/100 Dollars, or such
lesser principal sum as may then be owed by Borrower to Bank hereunder, which
sum shall be due and payable on November 10, 2001.
This Note restates and replaces a Promissory Note (Secured) in the
principal amount of $10,000,000.00, dated June 25, 1999 executed by Borrower in
favor of Bank (the "Prior Note") and is not a repayment or novation of the Prior
Note.
Borrower's obligations and liabilities to Bank under this Note, and all
other obligations and liabilities of Borrower to Bank (including without
limitation all debts, claims and indebtedness) whether primary, secondary,
direct, contingent, fixed or otherwise, including those evidenced in rate
hedging agreements designed to protect the Borrower from the fluctuation of
interest rates, heretofore, now and/or from time to time hereafter owing, due or
payable, however evidenced, created, incurred, acquired or owing and however
arising, whether under this Note, any agreement, instrument or document
heretofore, now or from time to time hereafter executed and delivered to Bank by
or on behalf of Borrower, or by oral agreement or operation of law or otherwise
shall be defined and referred to herein as "Borrower's Liabilities".
The unpaid principal balance of Borrower's Liabilities due hereunder
shall bear interest from the date of disbursement until paid, computed as
follows at a daily rate equal to the daily rate equivalent of 1.50% per annum
(computed on the basis of a 360-day year and actual days elapsed) in excess of
the highest rate of interest then earned on any Certificates of Deposit in that
certain American National Bank and Trust Company of Chicago safekeeping account
no. 324375 of Leapnet, Inc. (the "Base Rate") pursuant to that Continuing Pledge
Agreement dated June 25, 1999; provided, however, that in the event that any of
Borrower's Liabilities are not paid when due, the unpaid amount of Borrower's
Liabilities shall bear interest after the due date until paid at a rate equal to
the sum of the rate that would otherwise be in effect plus 3%.
The rate of interest to be charged by Bank to Borrower shall fluctuate
hereafter from time to time concurrently with, and in an amount equal to, each
increase or decrease in the Base Rate, whichever is applicable.
Accrued interest shall be payable by Borrower to Bank on the same day
of each month, and at maturity, commencing with the 10th day of December, 1999,
or as billed by Bank to Borrower, at Bank's principal place of business, or at
such other place as Bank may designate from time to time hereafter. After
maturity, accrued interest on all of Borrower's Liabilities shall be due and
payable on demand.
Borrower jointly and severally will pay to Bank, on a calendar
quarterly basis in arrears, on the first day of each calendar quarter occurring
during the term of this Note, a fee (the "Unused Facility Fee") in an amount
equal to ten (10) basis points per year of the average monthly amount by which
Fifteen Million Dollars ($15,000,000.00) exceeds the outstanding principal
balance then due under this Note.
Borrower warrants and represents to Bank that Borrower shall use the
proceeds represented by this Note solely for proper business purposes and
consistently with all applicable laws and statutes.
To secure the prompt payment to Bank of Borrower's Liabilities and the
prompt, full and faithful performance by Borrower of all of the provisions to be
kept, observed or performed by Borrower under this Note and/or any other
agreement, instrument or document heretofore, now and/or from time to time
hereafter delivered by or on behalf of
19
<PAGE>
Borrower to Bank, Borrower grants to Bank a security interest in and to the
following property: (a) all of Borrower's now existing and/or owned and
hereafter arising or acquired monies, reserves, deposits, deposit accounts and
interest or dividends thereon, securities, cash, cash equivalents and other
property now or at any time or times hereafter in the possession or under the
control of Bank or its bailee for any purpose; (b) All business assets of
Borrower, pursuant to Security Agreement (General) dated June 25, 1999, as
amended from time to time, by and between Borrower and Bank; (c) all right,
title and interest in investment property held in that certain American National
Bank and Trust Company of Chicago safekeeping account No. 324375 pursuant to
that certain Continuing Pledge Agreement of Leapnet, Inc. dated June 25, 1999
and (d) all substitutions, renewals, improvements, accessions or additions
thereto, replacements, offspring, rents, issues, profits, returns, products and
proceeds thereof, including without limitation proceeds of insurance policies
insuring the foregoing collateral (all of the foregoing property is referred to
herein individually and collectively as "Collateral").
Regardless of the adequacy of the Collateral, any deposits or other
sums at any time credited by or payable or due from Bank to Borrower, or any
monies, cash, cash equivalents, securities, instruments, documents or other
assets of Borrower in the possession or control of Bank or its bailee for any
purpose, may be reduced to cash and applied by Bank to or setoff by Bank against
Borrower's Liabilities.
Borrower agrees to deliver to Bank immediately upon Bank's demand, such
additional collateral as Bank may request from time to time should the value of
the Collateral (in Bank's sole and exclusive opinion) decline, deteriorate,
depreciate or become impaired, or should Bank deem itself insecure for any
reason whatsoever, including without limitation a change in the financial
condition of Borrower or any party liable with respect to Borrower's
Liabilities, and does hereby grant to Bank a continuing security interest in
such other collateral, which shall be deemed to be a part of the Collateral.
Borrower shall execute and deliver to Bank, at any time upon Bank's demand, all
agreements, instruments, documents and other written matter that Bank may
request, in form and substance acceptable to Bank, to perfect and maintain
perfected Bank's security interest in the Collateral or any additional
collateral. Borrower agrees that a carbon, photographic or photostatic copy, or
other reproduction, of this Note or of any financing statement, shall be
sufficient as a financing statement.
Bank may take, and Borrower hereby waives notice of, any action from
time to time that Bank may deem necessary or appropriate to maintain or protect
the Collateral, and Bank's security interest therein, and in particular Bank may
at any time (i) transfer the whole or any part of the Collateral into the name
of the Bank or its nominee, (ii) collect any amounts due on Collateral directly
from persons obligated thereon, (iii) take control of any proceeds and products
of Collateral, and/or (iv) sue or make any compromise or settlement with respect
to any Collateral. Borrower hereby releases Bank from any and all causes of
action or claims which Borrower may now or hereafter have for any asserted loss
or damage to Borrower claimed to be caused by or arising from: (a) Bank's taking
any action permitted by this paragraph; (b) any failure of Bank to protect,
enforce or collect in whole or in part any of the Collateral; and/or (c) any
other act or omission to act on the part of Bank, its officers, agents or
employees, except for willful misconduct.
The occurrence of any one of the following events shall constitute a
default by the Borrower ("Event of Default") under this Note: (a) if Borrower
fails to pay any of Borrower's Liabilities when due and payable or declared due
and payable (whether by scheduled maturity, required payment, acceleration,
demand or otherwise) and such failure to pay remains unremedied for a period of
seven (7) days; (b) if Borrower or any guarantor of any of Borrower's
Liabilities fails or neglects to perform, keep or observe any term, provision,
condition, covenant, warranty or representation contained in this Note and such
failure or neglect remains unremedied for a period of seven (7) days; (c)
occurrence of a default or event of default under any agreement, instrument or
document heretofore, now or at any time hereafter delivered by or on behalf of
Borrower to Bank; (d) occurrence of a default or an event of default under any
agreement, instrument or document heretofore, now or at any time hereafter
delivered to Bank by any guarantor of Borrower's Liabilities or by any person or
entity which has granted to Bank a security interest or lien in and to some or
all of such person's or entity's real or personal property to secure the payment
of Borrower's Liabilities; (e) if the Collateral or any other of Borrower's
assets are attached, seized, subjected to a writ, or are levied upon or become
subject to any lien or come within the possession of any receiver, trustee,
custodian or assignee for the benefit of creditors; (f) if a notice of lien,
levy or assessment is filed of record or given to Borrower with respect to all
or any of Borrower's assets by any federal, state or local department or agency;
(g) if Borrower or any guarantor of Borrower's Liabilities becomes insolvent or
generally fails to pay or admits in writing its inability to pay debts as they
become due, if a petition under Title 11 of the United States Code or any
similar law or regulation is filed by or against Borrower or any such guarantor,
if Borrower or any such guarantor shall make an assignment for the benefit of
creditors, if any case or proceeding is filed by or against Borrower or any such
guarantor for its dissolution or
20
<PAGE>
liquidation, or if Borrower or any such guarantor is enjoined, restrained or in
any way prevented by court order from conducting all or any material part of its
business affairs; (h) the death or incompetency of Borrower or any guarantor of
Borrower's Liabilities, or the appointment of a conservator for all or any
portion of Borrower's assets or the Collateral; (i) the revocation, termination
or cancellation of any guaranty of Borrower's Liabilities without written
consent of Bank; (j) if a contribution failure occurs with respect to any
pension plan maintained by Borrower or any corporation, trade or business that
is, along with Borrower, a member of a controlled group of corporations or a
controlled group of trades or businesses (as described in Sections 414(b) and
(c) of the Internal Revenue Code of 1986 or Section 4001 of the Employee
Retirement Income Security Act of 1974, as amended, "ERISA") sufficient to give
rise to a lien under Section 302(f) of ERISA; (k) if Borrower or any guarantor
of Borrower's Liabilities is in default in the payment of any obligations,
indebtedness or other liabilities to any third party and such default is
declared and is not cured within the time, if any, specified therefor in any
agreement governing the same; (l) if any material statement, report or
certificate made or delivered by Borrower, any of Borrower's partners, officers,
employees or agents or any guarantor of Borrower's Liabilities is not true and
correct; or (m) if Bank is reasonably insecure.
Upon the occurrence of an Event of Default, at Bank's option, without
notice by Bank to or demand by Bank of Borrower: (i) all of Borrower's
Liabilities shall be immediately due and payable; (ii) Bank may exercise any one
or more of the rights and remedies accruing to a secured party under the Uniform
Commercial Code of the relevant jurisdiction and any other applicable law upon
default by a debtor; (iii) Bank may enter, with or without process of law and
without breach of the peace, any premises where the Collateral is or may be
located, and may seize or remove the Collateral from said premises and/or remain
upon said premises and use the same for the purpose of collecting, preparing and
disposing of the Collateral; and/or (iv) Bank may sell or otherwise dispose of
the Collateral at public or private sale for cash or credit, provided, however,
that Borrower shall be credited with the net proceeds of any such sale only when
the same are actually received by Bank.
Upon an Event of Default, Borrower, immediately upon demand by Bank,
shall assemble the Collateral and make it available to Bank at a place or places
to be designated by Bank which is reasonably convenient to Bank and Borrower.
All of Bank's rights and remedies under this Note are cumulative and
non-exclusive. The acceptance by Bank of any partial payment made hereunder
after the time when any of Borrower's Liabilities become due and payable will
not establish a custom or waive any rights of Bank to enforce prompt payment
hereof. Bank's failure to require strict performance by Borrower of any
provision of this Note shall not waive, affect or diminish any right of Bank
thereafter to demand strict compliance and performance therewith. Any waiver of
an Event of Default hereunder shall not suspend, waive or affect any other Event
of Default hereunder. Borrower and every endorser waive presentment, demand and
protest and notice of presentment, protest, default, non-payment, maturity,
release, compromise, settlement, extension or renewal of this Note, and hereby
ratify and confirm whatever Bank may do in this regard. Borrower further waives
any and all notice or demand to which Borrower might be entitled with respect to
this Note by virtue of any applicable statute or law (to the extent permitted by
law).
Borrower agrees to pay, immediately upon demand by Bank, any and all
costs, fees and expenses (including reasonable attorneys' fees, costs and
expenses) incurred by Bank (i) in enforcing any of Bank's rights hereunder, and
(ii) in representing Bank in any litigation, contest, suit or dispute, or to
commence, defend or intervene or to take any action with respect to any
litigation, contest, suit or dispute (whether instituted by Bank, Borrower or
any other person) in any way relating to this Note, Borrower's Liabilities or
the Collateral, and to the extent not paid the same shall become part of
Borrower's Liabilities.
This Note shall be deemed to have been submitted by Borrower to Bank
and to have been made at Bank's principal place of business. This Note shall be
governed and controlled by the internal laws of the State of Illinois and not
the law of conflicts.
Advances under this Note may be made by Bank upon oral or written
request of any person authorized to make such requests on behalf of Borrower
("Authorized Person"). Borrower agrees that Bank may act on requests which Bank
in good faith believes to be made by an Authorized Person, regardless of whether
such requests are in fact made by an Authorized Person. Any such advance shall
be conclusively presumed to have been made by Bank to or for the benefit of
Borrower. Borrower does hereby irrevocably confirm, ratify and approve all such
advances by Bank and agrees to indemnify Bank against any and all losses and
expenses (including reasonable attorneys' fees) and shall hold Bank harmless
with respect thereto.
21
<PAGE>
TO INDUCE BANK TO ACCEPT THIS NOTE, BORROWER IRREVOCABLY AGREES THAT,
SUBJECT TO BANK'S SOLE AND ABSOLUTE ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY
WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS NOTE SHALL BE
LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS.
BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR
FEDERAL COURT LOCATED WITHIN SAID CITY AND STATE. BORROWER HEREBY WAIVES ANY
RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT
AGAINST BORROWER BY BANK IN ACCORDANCE WITH THIS PARAGRAPH.
BORROWER IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT, COUNTERCLAIM OR PROCEEDING (I) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN
CONNECTION WITH THIS NOTE OR ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT
DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR
(II) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO
THIS NOTE OR ANY SUCH AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT, AND AGREES
THAT ANY SUCH ACTION, SUIT, COUNTERCLAIM OR PROCEEDING SHALL BE TRIED BEFORE A
COURT AND NOT BEFORE A JURY.
<TABLE>
<S> <C>
Borrower:
Address: 22 West Hubbard Street LEAPNET, INC.
Chicago, Illinois 60610
Tax #: 36-4079500 By: /s/ ROBERT C. BRAMLETTE
--------------------------------------------------------------
ROBERT C. BRAMLETTE Chief Legal Officer
--------------------------------------------------------------
Printed Name Title
Address: 22 West Hubbard Street QUANTUM LEAP COMMUNICATIONS, INC.
Chicago, Illinois 60610
Tax #: 36-4134229 By: /s/ ROBERT C. BRAMLETTE
--------------------------------------------------------------
ROBERT C. BRAMLETTE Vice President
--------------------------------------------------------------
Printed Name Title
Address: 22 West Hubbard Street THE LEAP PARTNERSHIP, INC.
Chicago, Illinois 60610
Tax #: 36-3911479 By: /s/ ROBERT C. BRAMLETTE
--------------------------------------------------------------
ROBERT C. BRAMLETTE Chief Legal Officer
--------------------------------------------------------------
Printed Name Title
Address: 220 Fifth Avenue (11/th/ Floor) YAR COMMUNICATIONS, INC.
New York, New York 10001
Tax #: 13-3940454 /s/ ROBERT C. BRAMLETTE
--------------------------------------------------------------
ROBERT C. BRAMLETTE Vice President
--------------------------------------------------------------
Printed Name Title
</TABLE>
22
<PAGE>
Exhibit 10.2
CROSS-COLLATERALIZATION AND CROSS-DEFAULT AGREEMENT
This Cross-Collateralization and Cross-Default Agreement is made this 10th
day of November, 1999, by and among LEAPNET, INC., YAR COMMUNICATIONS, INC.,
QUANTUM LEAP COMMUNICATIONS, INC. and THE LEAP PARTNERSHIP, INC. (collectively
"Leapnet") and QUANTUM LEAP COMMUNICATIONS, INC. ("Quantum") (sometimes
collectively referred to as "Borrowers"), and American National Bank and Trust
Company of Chicago ("Bank").
WHEREAS, on November 10, 1999, Leapnet executed in favor of Bank that
certain Promissory Note (Secured) in the principal sum of FIFTEEN MILLION AND
NO/100 DOLLARS ($15,000,000.00) (including any and all amendments,
modifications, renewals, replacements and substitutions therefor). Such Note is
secured by all business assets of Leapnet, pursuant to Security Agreement
(General) dated June 25, 1999, as amended from time to time, by and between
Leapnet and Bank, and all right, title and interest in investment property held
in that certain American National Bank and Trust Company of Chicago safekeeping
account No. 324375 pursuant to that certain Continuing Pledge Agreement of
Leapnet, Inc. dated June 25, 1999; and
WHEREAS, on June 29, 1999, Quantum executed in favor of Bank that certain
Installment Note (Secured) in the principal sum of TWO MILLION TWO HUNDRED FORTY
THOUSAND AND NO/100 DOLLARS ($2,240,000.00) (including any and all amendments,
modifications, renewals, replacements and substitutions therefor). Such Note is
secured by Real Estate located at 420 West Huron Street, Chicago, Illinois, as
evidenced by that certain mortgage dated June 29, 1999, a Security Agreement
(General) dated June 29, 1999, as amended from time to time, by and between
Quantum and Bank; and
WHEREAS, each Borrower desires to induce Bank to extend financial
accommodation to the other Borrower named herein, and each Borrower represents
to Bank that it is engaged in the business as a corporate affiliate or
subsidiary of the other Borrower and/or is engaged in selling, marketing, using
or otherwise dealing goods supplied to by the other Borrower, or supplies the
other Borrower goods sold, marketed, used or otherwise disposed of by the other
Borrower, and/or expects to derive advantage to assist the other Borrower in
procuring financial assistance from the Bank; or is an individual or partnership
desiring to induce Bank at its option to extend financial accommodation to the
other Borrower; and
WHEREAS, it is and has been the intention of Leapnet and Quantum and Bank
to cross-collateralize and cross-default the loans and obligations of Leapnet
and Quantum owing to the Bank; and
23
<PAGE>
NOW, THEREFORE, in consideration of the foregoing premises and the promises
contained herein and for other good and valuable consideration, receipt of which
is hereby acknowledged, the parties mutually agree as follows:
1. All of the collateral granted to Bank by Leapnet, pursuant to that certain
Security Agreement (General) dated June 25, 1999, (and any modifications
thereto), and all right, title and interest in investment property held in
that certain American National Bank and Trust Company of Chicago
safekeeping account No. 324375 pursuant to that certain Continuing Pledge
Agreement of Leapnet, Inc. dated June 25, 1999 is hereby pledged to secure
all past, present and future obligations of Leapnet to Bank.
2. All of the collateral granted to Bank by Quantum, pursuant to that certain
Mortgage dated June 29, 1999, (and any amendments thereto) and a Security
Agreement (General) dated June 29, 1999 is hereby pledged to secure all
past, present and future obligations of Quantum to Bank.
3. Any default under the past, present and future obligations of Leapnet owed
to Bank shall constitute an Event of Default under all past, present and
future obligations of Quantum owed to Bank; and any default under the past,
present and future obligations of Quantum owed to Bank shall constitute an
Event of Default under all past, present and future obligations of Leapnet
owed to Bank.
4. The Borrowers agree that all provisions, stipulations powers and covenants
in the Notes and other agreements referenced above shall remain in full
force and effect.
5. This Agreement shall be construed in accordance with the internal laws of
the State of Illinois.
6. This Agreement shall inure to the benefit of the Bank's successors and
assigns, and shall be binding upon the Borrowers' successors and assigns.
24
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first written above.
"BORROWERS"
LEAPNET, INC.
BY: /s/ ROBERT C. BRAMLETTE
-----------------------
ITS: Chief Legal Officer
-------------------
YAR COMMUNICATIONS, INC.
BY: /s/ ROBERT C. BRAMLETTE
-----------------------
ITS: Vice President
--------------
THE LEAP PARTNERSHIP, INC.
BY: /s/ ROBERT C. BRAMLETTE
-----------------------
ITS: Chief Legal Officer
-------------------
QUANTUM LEAP COMMUNICATIONS, INC.
BY: /s/ ROBERT C. BRAMLETTE
-----------------------
ITS: Vice President
--------------
"BANK":
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
BY: /s/ Charlene R. Branda
----------------------
ITS: Vice President
--------------
25
<PAGE>
EXHIBIT 11
LEAPNET, INC.
STATEMENT REGARDING COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 600,215 $(16,594,611) $ 964,855 $(16,505,731)
Weighted average number of common
shares outstanding during period 14,154,229 13,648,866 14,145,772 13,646,199
Net shares issuable upon exercise of
dilutive outstanding stock options 692,689 0 692,689 0
----------- ------------ ----------- ------------
Shares used in Diluted per share
calculation 14,846,918 13,648,866 14,838,461 13,646,199
Basic earnings per common share $ 0.04 $ (1.22) $ 0.07 $ (1.21)
Diluted earnings per common share $ 0.04 $ (1.22) $ 0.07 $ (1.21)
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of October 31, 1999 and January 31, 1999, the
Consolidated Statements of Operations for the Nine Months ended October 31, 1999
and 1998, and the Consolidated Statements of Cash Flows for the Nine Months
ended October 31, 1999 and 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 12,674
<SECURITIES> 308
<RECEIVABLES> 7,286
<ALLOWANCES> (757)
<INVENTORY> 0
<CURRENT-ASSETS> 20,760
<PP&E> 6,388
<DEPRECIATION> (1,628)
<TOTAL-ASSETS> 26,163
<CURRENT-LIABILITIES> 9,617
<BONDS> 0
<COMMON> 141
0
0
<OTHER-SE> 14,343
<TOTAL-LIABILITY-AND-EQUITY> 26,163
<SALES> 0
<TOTAL-REVENUES> 27,248
<CGS> 0
<TOTAL-COSTS> 26,587
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 335
<INTEREST-EXPENSE> (306)
<INCOME-PRETAX> 965
<INCOME-TAX> 0
<INCOME-CONTINUING> 965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 965
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
