<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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 000-20835
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 June 10, 1999
------------- ----------------------
Common Stock - $0.01 par value 14,139,785
<PAGE>
<TABLE>
<CAPTION>
LEAPNET, INC.
FORM 10-Q
FOR THE PERIOD ENDED
APRIL 30, 1999
INDEX
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets --
April 30, 1999 (Unaudited)
and January 31, 1999 3
Consolidated Statements of Operations --
Three Months Ended
April 30, 1999 and 1998 (Unaudited) 5
Consolidated Statements of Cash Flows --
Three Months Ended
April 30, 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 10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
LEAPNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
-------------- ---------------
1999 1999
-------------- ---------------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents...................................................... $14,047,155 $14,076,379
Shortterm investments.......................................................... 718,210 0
Accounts receivable (net of allowance of
$776,578 and $470,750, respectively)......................................... 5,778,942 6,433,214
Costs in excess of billings (net of allowance of
$47,000 and $10,374, respectively)........................................... 453,695 339,907
Prepaid expenses............................................................... 311,696 262,970
----------- -----------
Total current assets........................................................ 21,309,698 21,112,470
Property and Equipment
Land........................................................................... 158,921 158,921
Building and building improvements............................................. 493,473 493,473
Leasehold improvements......................................................... 716,656 716,656
Computer equipment............................................................. 1,276,344 1,172,305
Furniture and equipment........................................................ 858,277 853,517
----------- -----------
3,503,671 3,394,872
Less accumulated depreciation.................................................. (1,120,797) (910,811)
----------- -----------
Net property and equipment.................................................. 2,382,874 2,484,061
Other Assets..................................................................... 302,579 136,839
----------- -----------
Total Assets..................................................................... $23,995,151 $23,733,370
=========== ===========
</TABLE>
3
<PAGE>
LEAPNET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
----------------- ------------------
1999 1999
----------------- ------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable.............................................................. $ 2,611,487 $ 2,652,819
Accrued expenses.............................................................. 808,745 886,346
Accrued restructuring......................................................... 0 234,378
Billings in excess of costs................................................... 1,829,725 1,331,279
Notes payable................................................................. 4,092,892 4,073,000
Current portion of long-term liabilities...................................... 332,978 374,611
------------ ------------
Total current liabilities.................................................. 9,675,827 9,552,433
Long-Term Liabilities
Long-term mortgage payable.................................................... 637,015 640,445
Capital lease obligations..................................................... 0 52,908
------------ ------------
Total long-term liabilities................................................ 637,015 693,353
Total Liabilities............................................................... $ 10,312,842 $ 10,244,786
------------ ------------
Commitments and Contingencies (Note 8)
Stockholders' Equity
Preferred stock, $.01 par value, 20,000,000 shares authorized,
no shares issued or outstanding............................................. 0 0
Common stock, $.01 par value; 100,000,000 shares authorized,
14,139,785 and 14,131,785 shares issued and outstanding as of
April 30, 1999 and January 31, 1999, respectively........................... 141,398 141,318
Unrealized gain on marketable securities...................................... 392,131 0
Additional paid in capital.................................................... 36,579,838 36,566,638
Retained earnings (accumulated deficit)....................................... (23,279,928) (23,068,242)
less cost of 50,000 shares of common stock held in treasury................... (151,130) (151,130)
------------ ------------
Total Stockholders' Equity................................................. $ 13,682,309 $ 13,488,584
------------ ------------
Total Liabilities and Stockholders' Equity...................................... $ 23,995,151 $ 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
------------------
April 30,
-----------------------------------
1999 1998
---------------- ----------------
(Unaudited)
<S> <C> <C>
Revenues..................................................................... $ 7,909,262 $10,375,063
Operating expenses:
Direct costs and related expenses...................................... 3,095,994 3,142,620
Salaries and related expenses.......................................... 3,277,002 5,017,718
General and administrative expenses.................................... 1,927,373 2,085,635
----------- -----------
Total operating expenses......................................... 8,300,369 10,245,973
----------- -----------
Operating income/(loss)...................................................... (391,107) 129,090
Net interest income/(expense)........................................ 179,421 (96,958)
----------- -----------
Income/(loss) before income taxes............................................ (211,686) 32,132
Income tax benefit/(expense)......................................... 0 (17,146)
----------- -----------
Net income................................................................... ($211,686) $ 14,986
=========== ===========
Per share data:
Net loss per share: basic & diluted.................................. ($0.01) $0.00
=========== ===========
Weighted average number of shares
used in basic per share computation......................... 14,134,000 13,641,000
used in diluted per share computation....................... 14,134,000 13,861,000
</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>
Three Months Ended
-----------------------------------------
April 30,
-----------------------------------------
1999 1998
------------------- -------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. ($211,686) $ 14,986
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization...................... 228,571 520,845
Deferred income taxes.............................. 0 17,146
Changes in operating assets and liabilities:
Accounts receivable.............................. 328,193 795,502
Costs in excess of billings...................... (113,788) (696,953)
Prepaid expenses................................. (48,726) (17,731)
Other assets..................................... 2,000 4,095
Accounts payable................................. (41,332) (1,201,988)
Accrued expenses................................. (77,601) (552,151)
Accrued restructuring costs...................... (234,378) (454,690)
Billings in excess of costs...................... 498,446 408,345
----------- -----------
Net cash provided by/(used in) operating activities.... 329,699 (1,162,594)
Cash flows from investing activities:
Release of Escrow Monies in connection
with YAR Acquisition........................... 0 3,000,000
Capital expenditures............................. (108,799) 96,053
Capitalized software costs....................... (186,325) (115,127)
Note receivable.................................. 0 61,277
----------- -----------
Net cash (used in)/provided by investing activities.... (295,124) 3,042,203
Cash flows from financing activities:
Net proceeds from common stock issuance.......... 13,280 36,000
Net proceeds from bank borrowings................ 16,591 406,487
Capital lease obligations........................ (93,670) (91,841)
----------- -----------
Net cash (used in)/provided by financing activities.... (63,799) 350,646
Net (decrease)/increase in cash and cash equivalents.... (29,224) 2,230,255
Cash and cash equivalents, at beginning of period....... 14,076,379 7,214,261
----------- -----------
Cash and cash equivalents, at end of period............. $14,047,155 $ 9,444,516
=========== ===========
Supplementary disclosure of cash paid during the period:
Interest paid.......................................... $ 93,782 $143,344
Taxes paid............................................. $ 0 $155,400
Supplementary disclosure of noncash investing and financing activities:
Securities received from client for services rendered,
stated at fair market value (Note 5)................... $718,210 $ 0
</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 one of its wholly-owned subsidiaries, 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 months ended April 30, 1998, but are not
included for the three months ended April 30, 1999.
The unaudited consolidated financial statements for the three month periods
ended April 30, 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 month period ended April 30, 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 quarters ended April 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
April 30, 1999 April 30, 1998
----------------- --------------------
<S> <C> <C>
Common shares outstanding--Basic 14,134,000 13,641,000
Common stock equivalents 0 220,000
---------- ----------
Common shares outstanding--Diluted 14,134,000 13,861,000
</TABLE>
The effect of the outstanding common stock equivalents is not considered for the
quarter ended April 30, 1999 as such effect would be antidilutive due to the
Company's net loss.
NOTE 3 -- Divestitures
On October 22, 1998, the Company closed on the sale to Young & 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 -- Restructuring Plan
In fiscal 1999, the Company implemented a plan to restructure the operations of
YAR as a result of losses due to the transfer of the account of its largest
client, AT&T. During the quarter ended October 31, 1998, the Company recorded
pretax restructuring charges of $738,000, including costs for lease termination
costs, severance, asset write-downs, and other related costs that have been or
are anticipated to be incurred as a direct result of the plan. The cost of the
plan has been accounted for in
7
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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). As of
April 30, 1999, the restructuring efforts have been completed and all
restructuring costs have been paid out.
NOTE 5 -- 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
April 30, 1999, all securities covered by SFAS No. 115 were designated as
available for sale. Accordingly, these equity securities are stated at fair
value of $718,000 on the balance sheet with comprehensive income resulting from
an unrealized gain of $392,000 which is reported as a separate component of
shareholder's equity.
NOTE 6 -- Line of Credits
On February 24, 1999, the Company obtained a new $10 million secured revolving
line of credit. The new line of credit 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 April 30, 1999, the interest rate was 7% and
the outstanding balance on the line was $4,093,000.
NOTE 7 -- Income Taxes
As of April 30, 1999 and January 31, 1999, the Company has deferred tax assets
of approximately $8.7 million and $8.6 million, respectively. As of April 30,
1999, approximately $4.6 million of the deferred tax asset 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 $3.3 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 Notes 3 and 4).
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 has performed services for the Company, the Company intends to
vigorously oppose this claim due to the quality of services provided.
8
<PAGE>
On June 6, 1999, the Company settled its disputes with Yuri and Anna Radzievsky
and Greg Fomin. See the third, fourth, and fifth paragraphs of Item 3 of the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1999
for information concerning these disputes. The matters involving the
Radzievskys and Mr. Fomin have been settled and mutual releases exchanged. The
matters have been dismissed with prejudice, with each party paying its own costs
and expenses. Pursuant to the settlement, the non-competition agreement
between the Radzievskys and the Company have been modified and will be effective
until October 31, 1999. In addition, options to purchase 300,000 shares of the
Company's Common Stock which were previously granted to each of the Radzievskys
have been reinstated. Such options are exercisable at a price of $4.263 per
share and expire on April 15, 2007.
See Item 3 of the 10-K for the fiscal year ended January 31, 1999 for additional
disclosures regarding pending matters.
NOTE 9 -- Subsequent Events
Acquisition
- -----------
On June 5, 1999, the Company signed a letter of intent to acquire Nine Dots
Corporation. Nine Dots is an interactive marketing services firm specializing
in digital branding, online advertising and promotion, strategic consulting and
Web site development. The Company anticipates closing on the acquisition during
the third quarter of the current fiscal year. The proposed purchase price is
equal to the greater of $5,000,000 or 1.5 times Nine Dots' revenue for the
twelve months prior to the closing, subject to the achievement of certain
minimum revenue and earnings amounts, plus additional earnout provisions if Nine
Dots exceeds certain negotiated revenue and earnings amounts over the next two
years.
9
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's consolidated financial statements, accompanying
notes thereto and other financial information appearing in the Company's Annual
Report of Form 10-K which was filed with the Securities and Exchange Commission
on April 30, 1999.
In reviewing the discussion of the Results of Operations that appears below, the
following should be taken into consideration:
On October 22, 1998, the Company sold one of its wholly-owned subidiaries, One
World Communications, Inc. ("One World") and the AT&T account of YAR
Communications, Inc. ("YAR") as further described in Notes 3 and 4 to the
Consolidated Financial Statements. As such, the historical operating results of
One World are included within the results of operations for the three months
ended April 30, 1998, but are not included within the three months ended April
30, 1999.
Results of Operations
Revenues
- --------
Revenues decreased to $7.9 million for the three months ended April 30, 1999
from $10.4 million for the three months ended April 30, 1998, a decrease of
approximately $2.5 million or 24%. The $2.5 million decrease in revenue was
primarily due to the October 1998 sale of One World and the AT&T account of YAR
which resulted in decreased revenue during the three months ended April 30, 1999
of approximately $2.3 million and $2.5 million, respectively. These decreases
were offset in part by increases in revenue from new and existing accounts at
The Leap Partnership and Quantum Leap Communications of $2.3 million.
Direct Costs and Related Expenses
- ---------------------------------
Direct costs and related expenses generally consist of production costs which
include services such as filming, animation, editing, special effects,
photography and illustrations, artwork, computer design and various related
production services which are generally outsourced, along with contract labor
talent and other costs related to creative executions which may included
traditional media as well as new technologies and multimedia. Direct costs and
related expenses were approximately $3.1 million for the three months ended
April 30, 1999 and April 30, 1998. Decreases in direct expense of $1.2 million
resulting from the sale of One World and the YAR AT&T account were offset by
increases in production expenses at The Leap Partnership and Quantum Leap
Communications of $1.3 million. As a percentage of revenue, direct expenses grew
from 30% for the three months ended April 30, 1998, to 39% during the current
year quarter related to the increased production.
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 $3.3 million for the three months ended April 30, 1999
from $5.0 million for the three months ended April 30, 1998, a decrease of $1.7
million or 34%. The decrease was primarily due to the sale of One World and
restructuring efforts at YAR which together resulted in a decrease of $2.2
million from the prior year quarter. This decrease was offset in part by
$509,000 in salary increases primarily related to new hires at Quantum Leap
Communications. As a percentage of revenue, salaries and related expenses
decreased from 48% for the three months ended April 30, 1998, to 41% for the
current year quarter.
10
<PAGE>
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 $1.9 million for the three months ended April 30, 1999 from $2.1
million for the three months ended April 30, 1998, a decrease of $0.2 million or
10%. The decrease was primarily due to the sale of One World and restructuring
efforts at YAR which together resulted in a decrease of $809,000 from the prior
year quarter. The decreases were offset by $651,000 of increases at the
remaining subsidiaries as a result of increased legal costs and increased
reserves for accounts receivable and unbilled work in progress. As such, as a
percentage of revenue, general and administrative expenses increased to 24% for
the three months ended April 30, 1999, from 20% for the prior year quarter.
Interest Income and Expense
- ---------------------------
Interest income totaled $273,203 and $103,200 for the three months ended April
30, 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. The interest income was offset in part by interest expense
of $93,782 and $200,157, resulting in net interest income of $179,421 and net
interest expense of $96,957, for the three months ended April 30, 1999 and 1998,
respectively. The Company incurred interest expense on debt that totaled
approximately $5 million as of April 30, 1999, and $8 million as of April 30,
1998.
Income Taxes
- ------------
The Company's combined federal and state effective income tax rates were 0% and
53.4% for the three months ended April 30, 1999 and 1998, respectively. The 0%
effective rate for the three months ended April 30, 1999 is due to the Company
providing a valuation allowance against its deferred tax asset as discussed
below.
As of April 30, 1999, the Company has a deferred tax asset of approximately $8.7
million. Approximately $4.7 million of the deferred tax asset relates to
operating loss carryforwards for federal and state income tax purposes which
begin 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.
As of April 30, 1998, the higher effective tax rate was primarily due to higher
state and local tax rates applied to a higher level of taxable income in those
tax jurisdictions.
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 the IPO, loans from a former
officer of the Company and cash generated from operations.
At April 30, 1999, the Company had $11.6 million of working capital, inclusive
of approximately $14 million in cash and cash equivalents. Cash and cash
equivalents decreased $29,000 the three months ended April 30, 1999. The $29,000
decrease resulted primarily from approximately $295,000 of investments in
software development and other capital expenditures and approximately $64,000 of
net debt retirements, offset by cash generated from operations of $330,000.
During the three months ended April 30, 1998, cash and cash equivalents
increased approximately $2.2 million primarily due to the receipt of $3 million
related to the resolution of the YAR acquisition escrow settlement in April 1998
and $406,000 of bank borrowings, offset by $1.2 million of cash used in
operating activities.
On February 24, 1999, the Company obtained a new $10 million secured revolving
line of credit from American National Bank which replaced an existing $5 million
line of credit. On April 30, 1999, approximately $4.1 million was outstanding
under the facility. The new line of credit is renewable each year and bears
interest at a variable
11
<PAGE>
rate of 1.5% above the bank's highest CD rate. On April 30, 1999, the interest
rate was 7%. Borrowings are collateralized by substantially all the assets of
the Company, and the line of credit agreement requires the Company to maintain
specified minimum levels of working capital and net worth.
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. As of April 30, 1999, $649,979 was outstanding on this note.
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.
12
<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. For the quarter ended April 30, 1999,
one client, Hardees, accounted for 38% of consolidated revenues.
Due to the nature of the advertising business, any of the Company's clients
could at any time in the future, and for any reason, reduce its marketing
budget, 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, which will be remedied at little cost before September 30, 1999.
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.
13
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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 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 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 1999, 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 significantly through April 30,
1999 (See Note 5 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.
14
<PAGE>
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 has performed services for the
Company, the Company intends to vigorously oppose this claim due to
the quality of services provided.
On June 6, 1999, the Company settled its disputes with Yuri and Anna
Radzievsky and Greg Fomin. See the third, fourth, and fifth paragraphs
of Item 3 of the Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 1999 for information concerning these disputes.
The matters involving the Radzievskys and Mr. Fomin have been settled
and mutual releases exchanged. The matters have been dismissed with
prejudice, with each party paying its own costs and expenses. Pursuant
to the settlement, the non-competition agreement between the
Radzievskys and the Company have been modified and will be effective
until October 31, 1999. In addition, options to purchase 300,000
shares of the Company's Common Stock which were previously granted to
each of the Radzievskys have been reinstated. Such options are
exercisable at a price of $4.263 per share and expire on April 15,
2007.
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.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Promissory Note, dated February 24, 1999, issued by the
Company (formerly known as The Leap Group, Inc.) to American
National Bank and Trust Company of Chicago ("ANB").
10.2 Agreement Containing Financial Covenants, dated February 24,
1999, between the Company and ANB.
10.3 Continuing Pledge Agreement, dated February 24, 1999,
between the Company and ANB.
11. Statement Regarding Computation of Per-Share Earnings
27. Financial Data Schedule
b. Reports on Form 8-K
Form 8-K, dated April 8, 1999, and filed with the Commission on
April 22, 1999, which announces the name change of the Company
from The Leap Group, Inc. to Leapnet, Inc.
Items 2, 3, 4 And 5 Are Not Applicable And Have Been Omitted.
15
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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: June 10, 1999 By: /s/ FREDERICK A. SMITH
-----------------------------
Frederick A. Smith
Chairman and Chief Executive Officer
(principal executive, financial and accounting officer)
16
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LEAPNET, INC.
EXHIBIT INDEX
Exhibit
Number Exhibits
------ --------
10.1 Promissory Note, dated February 24, 1999, issued by the
Company (formerly known as The Leap Group, Inc.) to
American National Bank and Trust Company of Chicago
("ANB").
10.2 Agreement Containing Financial Covenants, dated February
24, 1999, between the Company and ANB.
10.3 Continuing Pledge Agreement, dated February 24, 1999,
between the Company and ANB.
11. Statement Regarding Computation of Per-Share Earnings
27. Financial Data Schedules
17
<PAGE>
EXHIBIT 10.1
LEAPNET, INC.
LINE OF CREDIT AGREEMENTS, DATED FEBRUARY 24, 1999,
BETWEEN THE COMPANY (E.G. FORMERLY, THE LEAP GROUP, INC.)
AND AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO
American National Bank
and Trust Company of Chicago
PROMISSORY NOTE (SECURED)
$10,000,000.00
Chicago, Illinois February 24, 1999
Due February 24, 2000
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 TEN MILLION AND NO/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 February 24, 2000. Notwithstanding the foregoing, the bank's
obligation to lend is limited to 100% of the value of the Collateral (as defined
herein) as defined by Bank.
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 at a daily rate
equal to the daily rate equivalent of one hundred fifty (150) basis points per
annum (computed on the basis of a 360-day year and actual days elapsed) in
excess of the highest rate of interest then charged of any Certificates of
Deposit pledged to support the loan (the "CD Rate") pursuant to that Continuing
Pledge Agreement of even date herewith executed by Borrower ("Continuing Pledge
Agreement"); 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%.
Accrued interest shall be payable by Borrower to Bank on the same day of each
month, and at maturity, commencing with the LAST day of MARCH, 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 payable on demand.
18
<PAGE>
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 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) any
and all right title and interest in investment property held in American
National Bank of Chicago Safekeeping Account, in the name of The Leap Group,
Inc., a Delaware corporation, pursuant to Continuing Pledge Agreement of even
date herewith, as amended from time to time, by and between Borrower and Bank;
and (c) 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); (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; (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
19
<PAGE>
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 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.
20
<PAGE>
Exhibit 10.2
AGREEMENT CONTAINING FINANCIAL COVENANTS
----------------------------------------
This Agreement is effective as of this 24th day of February, 1999, between The
Leap Group, Inc., a Delaware corporation (hereinafter referred to as "Borrower")
and American National Bank and Trust Company of Chicago (hereinafter referred to
as "Lender").
WHEREAS, on February 24, 1999, Borrower executed a Promissory Note (Secured)
in the amount of TEN MILLION AND NO/100 DOLLARS ($10,000,000.00) (hereinafter
referred to as the "Loan"); and
WHEREAS, the parties hereto have agreed upon certain financial covenants to be
maintained by the Borrower for the term of the Loans, and any extensions,
modifications, amendments or renewals thereof, as herein set forth;
NOW THEREFORE, in consideration of the premises and mutual promises and
agreements hereinafter made by and between the parties hereto, the said parties
do hereby mutually agree as follows:
Until all of Borrower's Loans are paid in full, Borrower agrees that unless at
any time Lender shall otherwise expressly consent in writing, it will comply
with the following financial covenants:
A. Leverage Ratio. Not permit the Leverage Ratio to be more than 1.20 to
--------------
1.00, measured on Borrower's fiscal quarterly basis. "Leverage Ratio" is
defined as the ratio of total indebtedness (excluding subordinated debt) to
Tangible Net Worth. Tangible Net Worth is defined as shareholder's equity,
less any intangibles, prepaid expenses, notes receivable, and accounts
receivable from a related party.
B. Cash Flow Coverage Quotient. Not permit the ratio of Borrower's
---------------------------
earnings before interest, taxes, depreciation and amortization expense,
less non-financed capital expenditures ("Cash Flow") to total interest
expense (including interest on subordinated obligations), required income
taxes and required principal payments ("Fixed Charges") to be less than
1.25 to 1.00. This covenant will be measured on Borrower's fiscal quarterly
basis beginning with the fiscal year ending January 31, 2000.
C. Current Ratio. Not permit the Current Ratio to be less than 1.10 to
-------------
1.00, measured on Borrower's fiscal quarterly basis. "Current Ratio" is
defined as the ratio of Current Assets (disregarding any of the Borrower's
intangible assets as described in the definition of "Tangible Net Worth")
divided by Current Liabilities.
D. Financial Statements. Borrower will be required to submit quarterly,
---------------------
per book financial statements to Lender in addition to an audited annual
statement prepared by an accountant acceptable to Lender. The annual
statement must be delivered to Lender within ninety days of the close of
Borrower's fiscal year.
Failure to maintain the aforementioned financial covenants will constitute an
event of default under the Loans referenced hereinabove.
It is expressly understood and agreed by and between the parties hereto that
the covenants and agreements herein contained shall bind and inure to the
benefit of the respective heirs, executors, administrators, legal
representatives and assigns of the said parties hereto.
In witness whereof, the parties hereto have signed, sealed and delivered this
Agreement effective as of the date first written above.
"BORROWER"
The Leap Group, Inc.
a Delaware corporation
By: /s/ Fred Smith
-----------------------
Its: Chairman & CEO
"LENDER"
American National Bank and
Trust Company of Chicago
By: /s/ Charlene R. Brenda
-----------------------
Its: Vice President
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<PAGE>
Exhibit 10.3
American National Bank
and Trust Company of Chicago
CONTINUING PLEDGE AGREEMENT
PLEDGE: To induce AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a
national banking association (the "Bank"), of 120 South LaSalle Street, Chicago,
Illinois 60603 at its option, to make loans, extend or continue credit or some
other benefit, including guaranties, letters of credit and foreign exchange
contracts, present or future, direct or indirect, and whether several, joint or
joint and several (referred to collectively as "Liabilities"), to the
undersigned and its successors (the "Pledgor" and/or "Borrower"), and because
the Pledgor has determined that executing this Pledge is in its interest and to
its financial benefit, the Pledgor pledges and transfers to the Bank, and grants
the Bank a continuing security interest in the property listed below under the
heading "Schedule of Collateral" (the "Collateral"). If the Collateral consists
of securities, the grant includes any stock rights, stock dividends, liquidating
dividends, new securities and other property to which the Pledgor may become
entitled because it owns the Collateral. The Pledgor has transferred the
securities to the Bank. In the event the transfer is not complete, the Pledgor
will complete it within 10 days. This security interest shall secure all
Liabilities and includes principal, interest, expenses, reasonable attorneys'
fees, and all other costs of collection. The Pledgor agrees to hold the Bank
harmless from any liability caused by its reliance on this Pledge.
SCHEDULE OF COLLATERAL:
Any and all right, title and interest in Investment Property held in American
- -----------------------------------------------------------------------------
National Bank and Trust Company of Chicago Safekeeping Account No. 324375
- -------------------------------------------------------------------------
including substitutions, replacements, additions and proceeds. Any securities
or other property of the Pledgor at any time in the custody, possession or
control of the Bank shall also constitute Collateral unless the Bank holds such
property solely in a fiduciary capacity.
WARRANTIES AND COVENANTS: The Pledgor warrants it owns the Collateral free and
clear of any liens. The Pledgor will not attempt to sell or assign the
Collateral or create any lien or claim against it. The Pledgor agrees to
reimburse the Bank, on demand, for any amounts paid or advanced by the Bank for
the purpose of preserving all or any part of the Collateral. The Bank shall
exercise reasonable care in the custody and preservation of the Collateral to
the extent required by applicable statute. The Bank shall use its best efforts
to take any action the Pledgor may reasonably request in writing, but the
failure to do so shall not be construed as a failure to exercise reasonable
care.
REGISTRATION RIGHTS: If any of the collateral consists of securities not
registered under the Securities Act of 1933, and the issuer proposes to register
any of its securities, the Pledgor will give the Bank notice of that fact. In
addition, and at no cost to the Bank, the Pledgor will use its best efforts to
induce the issuer to register the pledged securities so that they may be
disposed of by public sale or other public disposition. Upon the completion of
registration, the Pledgor will deliver certificates without any restrictive
legend in exchange for the unregistered securities. The Pledgor indemnifies and
holds the Bank harmless against any loss, claim, damage or liability arising out
of the registration process, and will reimburse the Bank for any legal or other
expenses incurred by the Bank as a result.
INSTRUCTIONS REGARDING THE COLLATERAL: The Bank may act upon any instructions
given by the Pledgor whether in writing or not, with regard to additions or
substitutions or sale or other disposition of the Collateral and its proceeds.
The Pledgor agrees that any additions to, substitutions for or proceeds of the
Collateral that it receives will be held for the Bank's benefit and turned over
to the Bank. The Pledgor also gives the Bank permission to have the Collateral
or any part of it transferred to or registered in the Bank's name or in the name
of any other person or business entity with or without designation of the
capacity of that nominee, and will hold the bank harmless from any liability or
responsibility that might result. In furtherance of the Bank's rights under
this Pledge, the Pledgor irrevocably appoints the Bank as its attorney-in-fact,
with full power of substitution.
CONTINUED RELIANCE: The Bank may continue to make loans or extend credit to the
Borrower based on this Pledge until it receives written notice of termination
from the Pledgor. That notice shall be effective at the opening of the Bank for
business on the third business day after receipt of the notice. The termination
will not affect any of
23
<PAGE>
the rights given to the Bank in this Pledge with respect to any of the
Liabilities that were created, assumed or committed to prior to the effective
date of the termination, and all subsequent renewals, extensions, modifications
and amendments of the Liabilities. Upon receipt of the notice, the Bank does not
have to take any action against the Borrower or the Collateral in order to
maintain its rights. If this Pledge secures Liabilities of the Pledgor only,
this Pledge is not terminable.
LOAN-TO-VALUE RATIO: If the ratio of the unpaid balance of the Liabilities to
the then fair market value (as reasonably determined by the Bank) of any
securities constituting all or any portion of the Collateral shall exceed the
Bank's loan-to-value requirements for securities of the type pledged, the
Pledgor shall be in default under this Pledge and the Bank may sell all or any
portion of such securities and otherwise exercise any or all of the rights and
remedies set forth in this Pledge.
DEFAULT/REMEDIES: If the Pledgor fails to pay any of the Liabilities when due,
or otherwise defaults under the terms of any agreement related to any of the
Liabilities, or if the Pledgor fails to observe or perform any term of this
Pledge, or if any representation or warranty of the Pledgor contained in this
Pledge is untrue in any material respect, then the Bank shall have all of the
rights and remedies provided by any law to liquidate or foreclose on and sell
the Collateral, including but not limited to the rights and remedies of a
secured party under the Uniform Commercial Code. The Pledgor agrees and
acknowledges that because of applicable securities laws, the Bank may not be
able to effect a public sale of the Collateral, and sales at a private sale may
be on terms and at a price less favorable than if the securities were sold at a
public sale. The Pledgor agrees that all private sales made under these
circumstances shall be construed to have been made in a commercially reasonable
manner. These rights and remedies shall be cumulative and not exclusive. If
the Pledgor is entitled to notice, that requirement will be met if the Bank
sends notice at least seven (7) days prior to the date of sale, disposition or
other event requiring notice. The proceeds of any sale shall be applied first
to costs, then toward payment of the Liabilities, whether or not the Liabilities
have been declared to be due and owing; provided that, to the extent any
Liabilities consists of extensions of credit to the Borrower by the issuance of
letters of credit or other like obligations of the Bank to third parties which
have not been utilized, such proceeds shall be held by the Bank in a cash
collateral account as security for the Liabilities.
WAIVERS: The Pledgor waives any right it may have to receive notice of any of
the following matters before the Bank enforces any of its rights: (a) the
Bank's acceptance of this Pledge, (b) any credit that the Bank extends to the
Borrower, (c) the Borrower's default, (d) any demand, or (e) any action that the
Bank takes regarding anyone else, any collateral, or any Liability, which it
might be entitled to take by law or under any other agreement. No modification
or waiver of this Pledge is effective unless it is in writing and signed by the
party against whom it is being enforced. The Bank may waive or delay enforcing
any of its rights without losing them. Any waiver affects only the specific
terms and time period stated in the waiver. The Bank shall not be obligated to
take any action in connection with any conversion, call, redemption, retirement
or any other event relating to any of the Collateral.
REPRESENTATION BY PLEDGOR: Each Pledgor represents that: (a) the execution and
delivery of this Pledge and the performance of the obligations it imposes do not
violate any law, do not conflict with any agreement by which it is bound, or
require the consent or approval of any governmental authority or any third
party; (b) this Pledge is a valid and binding agreement, enforceable according
to its terms; and (c) all balance sheets, profit and loss statements, and other
financial statements furnished to the Bank are accurate and fairly reflect the
financial condition of the organizations and persons to which they apply on
their effective dates, including contingent liabilities of every type, which
financial condition has not changed materially and adversely since those dates.
Each Pledgor, other than a natural person, further represents that: (a) it is
duly organized, existing and in good standing under the laws where it is
organized: and (b) the execution and delivery of this Pledge and the performance
of the obligations it imposes (i) are within its powers and have been duly
authorized by all necessary action of its governing body; and (ii) do not
contravene the terms of its articles of incorporation or organization, its by-
laws, or any agreement governing its affairs.
NOTICES: Notice from one party to another relating to this Pledge is effective
if made in writing (including telecommunications) and delivered to the
recipient's address, telex number or facsimile number set forth in this Pledge
by any of the following means: (a) hand delivery, (b) registered or certified
mail, postage prepaid, (c) first class or express mail postage prepaid, (d)
Federal Express or like overnight courier service, or (e) facsimile, telex or
24
<PAGE>
other wire transmission with request for assurance of receipt in a manner
typical with respect to communications of that type. Notice made in accordance
with this section shall be construed as delivered on receipt if delivered by
hand or wire transmission, on the third business day after mailing if mailed by
first class, registered or certified mail, or on the next business day after
mailing or deposit with an overnight courier service if delivered by express
mail or overnight courier. Notwithstanding the foregoing, notice of termination
of the Pledge is received only upon the receipt of actual written notice by the
Bank in accordance with the paragraph above labeled "Continued Reliance."
MISCELLANEOUS: The Pledgor consents to (a) any extension, postponement,
renewal, modification and amendment of any Liability, (b) the release or
discharge of all or any part of any security for the Liabilities and (c) the
release or discharge or suspension of any rights and remedies against any person
who may be liable for the Liabilities. The Bank does not have to look to any
other right, any other collateral, or any other person for payment before it
exercises its rights under this Pledge. The Pledgor's obligations to the Bank
under this Pledge are not subject to any condition, precedent or subsequent, and
shall not be released or affected by any change in the composition or structure
of the Pledgor, including a merger or consolidation with any other person or
entity. If this Pledge is signed by more than one person, all are jointly and
severally bound. This Pledge is binding on the Pledgor and its heirs,
successors and assigns, and is for the benefit of the Bank and its successors
and assigns. This Agreement is governed by Illinois law. The use of section
headings does not limit the provisions of this Pledge.
WAIVER OF JURY TRIAL: The Bank and the Pledgor, after consulting or having had
the opportunity to consult with counsel, knowingly, voluntarily and
intentionally waive any right either of them may have to a trial by jury in any
litigation based upon or arising out of this Pledge or any related instrument or
agreement, or any of the transactions contemplated by this Pledge, or any course
of conduct, dealing, statements (whether oral or written), or actions of either
of them. Neither the Bank nor the Pledgor shall seek to consolidate, by
counterclaim or otherwise, any action in which a jury trial has been waived with
any other action in which a jury trial cannot be or has not been waived. These
provisions shall not be deemed to have been modified in any respect or
relinquished by either the Bank or the Pledgor except by a written instrument
executed by both of them.
Dated: February 24, 1999 Pledgor:
Address: THE LEAP GROUP, INC.,
A Delaware corporation
22 West Hubbard
Chicago, Illinois 60610 By: /s/ Robert C. Bramlette
-----------------------------
Its: Chief Legal Officer
By: /s/ Fred Smith
-----------------------------
Its: Chief Executive Officer
25
<PAGE>
EXHIBIT 11
LEAPNET, INC.
STATEMENT REGARDING COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Net income (loss) ($211,686) $14,986
Weighted average number of common
shares outstanding as used in the basic
per share calculation 14,134,000 13,641,000
Net shares issuable upon exercise of
dilutive outstanding stock options 0 220,000
---------- ----------
Shares used in diluted per share
calculation 14,134,452 13,861,000
Basic earnings per common share ($0.01) $0.00
Diluted earnings per common share ($0.01) $0.00
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF APRIL 30, 1999 AND JANUARY 31, 1998, THE
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 1999
AND 1998, AND THE CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED APRIL 30, 1999 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 14,047
<SECURITIES> 718
<RECEIVABLES> 6,556
<ALLOWANCES> (777)
<INVENTORY> 0
<CURRENT-ASSETS> 21,110
<PP&E> 3,504
<DEPRECIATION> (1,121)
<TOTAL-ASSETS> 23,795
<CURRENT-LIABILITIES> 9,476
<BONDS> 0
0
0
<COMMON> 141
<OTHER-SE> 13,541
<TOTAL-LIABILITY-AND-EQUITY> 23,795
<SALES> 0
<TOTAL-REVENUES> 7,909
<CGS> 0
<TOTAL-COSTS> 8,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 284
<INTEREST-EXPENSE> (94)
<INCOME-PRETAX> (212)
<INCOME-TAX> 0
<INCOME-CONTINUING> (212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (212)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
