<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from May 1, 2000 to June 30, 2000
----------- -------------
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.)
420 West Huron Street, Chicago, Illinois 60610, (312) 528-2400
(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 August 4, 2000
------------------------------ -------------------------
Common Stock - $0.01 par value 28,924,288
<PAGE>
Leapnet, Inc.
Form 10-Q
for the period ended
June 30, 2000
Index
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets --
June 30, 2000 (Unaudited)
and January 31, 2000
Condensed Consolidated Statements of Operations --
Two Months Ended and Five Months Ended
June 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows --
Five Months Ended
June 30, 2000 and 1999 (Unaudited)
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Securities Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Leapnet, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, January 31,
2000 2000
-------------- --------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 15,431 $ 15,652
Accounts receivable, net 19,637 6,717
Marketable securities 38,276 386
Building held for sale -- 580
Other 732 737
-------- --------
Total current assets 74,076 24,072
-------- --------
Property and equipment, net 9,838 5,584
Goodwill, net 34,459 --
Other 759 680
-------- --------
Total assets $119,132 $ 30,336
======== ========
Liabilities And Stockholders' Equity
Current liabilities:
Accounts payable $ 4,753 $ 3,448
Payroll and other accrued expenses 5,379 1,612
Current portion of long term debt -- 722
-------- --------
Total current liabilities 10,132 5,782
-------- --------
Note payable 11,577 7,313
Mortgage payable 3,083 1,402
Stockholders' equity:
Preferred stock, $0.01 par value, 20,000,000 shares
authorized, no shares issued or outstanding
Common stock $0.01 par, 100,000,000 authorized, 289 148
28,974,288 and 14,807,883 shares issued and
28,924,288 and 14,757,883 outstanding at
June 30, 2000 and January 31, 2000, respectively
Unrealized gain (loss) on marketable securities (216) 60
Additional paid-in capital 127,798 39,162
Accumulated deficit (33,380) (23,380)
Treasury stock - at cost, 50,000 shares (151) (151)
-------- --------
Total stockholders' equity 94,340 15,839
-------- --------
Total liabilities and stockholders' equity $119,132 $ 30,336
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
Leapnet, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Two months Five months
Ended June 30, Ended June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $12,083 $5,811 $ 19,012 $13,696
Cost of services 10,939 4,302 17,323 9,593
----------------------- -----------------------
Gross profit 1,144 1,509 1,689 4,103
----------------------- -----------------------
Other expenses:
General and administrative 5,944 1,779 10,606 4,765
Amortization of goodwill 2,027 2,027
----------------------- -----------------------
Total other expenses 7,971 1,779 12,633 4,765
----------------------- -----------------------
Operating loss (6,827) (270) (10,944) (662)
----------------------- -----------------------
Gain on sale of building 585
Interest income, net 345 66 359 246
----------------------- -----------------------
Loss before income taxes (6,482) (204) (10,000) (416)
Provision (benefit) for income taxes - - - -
----------------------- -----------------------
Net loss $(6,482) $ (204) $(10,000) $ (416)
======================= =======================
Net income (loss) per share:
Basic $ (0.22) $(0.01) $ (0.49) $ (0.03)
Weighted average number of shares
outstanding:
Basic 28,852,793 14,088,785 20,503,704 14,085,638
</TABLE>
See notes to unaudited condensed consolidated financial statements, including
Note 3 which indicates that the results of SPR Inc., are included beginning May
1, 2000.
4
<PAGE>
Leapnet, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Five Months
Ended June 30,
------------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) for the period $(10,000) $ (416)
Adjustments to reconcile to net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 2,699 441
Provision for impairment loss on capitalized software 496 -
Gain from sale of building (585) -
(Increase) decrease in accounts receivable, net (4,295) 1,937
(Increase) decrease in prepaids and other assets 421 (868)
Increase (decrease) in accounts payable (484) 177
Increase (decrease) in payroll and other accrued expenses (15) (557)
-------- -------
Net cash (used) in provided by operating activities (11,763) 714
-------- -------
Cash flows from investing activities:
Purchases of property and equipment (1,429) (175)
Capitalized software development costs - (265)
Net proceeds from sale of building 1,165 -
Payments for merger costs associated with SPR acquisition (955) -
Cash received in merger with SPR 907 -
Purchases of marketable securities (1,162) -
Sales/maturity of marketable securities 7,116 -
-------- -------
Net cash (used in) provided by investing activities 5,642 (440)
-------- -------
Cash flows from financing activities:
Net proceeds from bank borrowings:
Notes payable 4,264 20
Mortgages payable:
Bank borrowings 1,642 393
Repayment (639) (5)
Capital lease obligation (44) (155)
Proceeds from employee stock purchase and option plans 677 13
-------- -------
Net cash provided by financing activities 5,900 266
-------- -------
Net increase (decrease) in cash (221) 540
Cash and cash equivalents, beginning of period 15,652 14,076
-------- -------
Cash and cash equivalents, end of period $ 15,431 $14,616
======== =======
Supplemental disclosure of cash payments made for:
Interest $ 347 $ 94
Income taxes $ - $ -
Supplemental disclosure of noncash investing and financing activities:
Securities received from client for services rendered,
stated at fair market value $ 110 $ 504
Stock acquisition of SPR
Issuance of common stock in acquisition of SPR $ 89,054 -
Net book value of SPR $ 52,568 -
Goodwill $ 36,486 -
</TABLE>
See notes to unaudited condensed financial statements, including Note 3 which
indicates that the results of SPR Inc. are included beginning May 1, 2000.
5
<PAGE>
LEAPNET, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Interim Financial Statements
The accompanying unaudited interim condensed consolidated financial
statements of Leapnet, Inc. (the "Company" or "Leapnet") have been prepared by
the Company in accordance with generally accepted accounting principles for
interim financial information and in conjunction with the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements have been condensed
or omitted pursuant to those rules and regulations. However, the Company
believes that the disclosures contained herein are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the Company's audited financial statements and notes thereto
for the year ended January 31, 2000 in the Company's annual report on Form 10-K.
The unaudited condensed consolidated financial statements reflect, in
the opinion of management, all material adjustments (which include only normal
recurring adjustments) necessary to present fairly the Company's financial
position and results of operations. The statements of operations for the two and
five months ended June 30, 2000 and 1999, respectively, have been reclassified
to conform with the financial presentation of companies within the Internet
services industry. Such reclassifications primarily included allocating the
Company's salaries and related expenses into either costs of services for
billable employees or to general and administrative expenses for non-billable
employees. Additionally, certain other amounts as previously reported have been
reclassified to conform with current year classifications. The results of
operations for the two and five months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the full year.
Note 2. Change in Fiscal Year
Effective May 1, 2000, the Company changed its fiscal year from a
January 31 to December 31. As such, the new fiscal quarters for the Company will
end on March 31, June 30, September 30, and December 31. Because the change was
made within this quarter, the Company is reporting a transition report for the
two month period from May 1 through June 30, 2000.
Note 3. Acquisitions
On May 1, 2000, Leapnet completed its acquisition of SPR Inc. ("SPR"),
a company that provides project-based IT consulting services. Pursuant to this
merger, each share of SPR common stock was converted into approximately 1.085
shares of Leapnet common stock, resulting in the issuance of 13,915,401 shares
valued at approximately $81.7 million. The total purchase price for SPR was
valued at approximately $89.1 million, including $6.4 million related to the
exchange of SPR stock options for Leapnet stock options and $1.0 million of
acquisition costs. The merger was effected as a tax-free transaction for
stockholders.
The acquisition has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based upon the fair values at the date of
acquisition. The purchase price is based on preliminary estimates of the fair
values, and, accordingly, the allocation may be revised at a later date.
Goodwill related to the acquisition, totaling $36.5 million, was recorded and is
being amortized on a straight-line basis over a three-year period. The amount of
goodwill amortization reflected in the statement of operations for both the two
and five-month periods ended June 30, 2000, is $2.0 million. SPR is included in
Leapnet's consolidated financial statements beginning May 1, 2000.
The following summary reflects unaudited selected pro forma financial
information for the two and five-month periods ended June 30, 2000 and 1999, as
if the acquisition of SPR had occurred at the beginning of each period.
<TABLE>
<CAPTION>
Two months ended June 30, Five months ended June 30,
------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 12,083 $ 17,222 $ 26,093 $ 41,575
Net income (loss) $ (6,482) $ (1,471) $(19,111) $ (6,036)
Net income (loss) per share $ (0.22) $ (0.05) $ (0.66) $ (0.21)
</TABLE>
The pro forma results are not necessarily indicative of what would
have occurred if the acquisition had been in effect for the period presented. In
addition, they are not intended to be a projection of future results nor do they
incorporate or assume any benefits from cost savings or synergies that the
combined company may realize after the merger.
Note 4. Legal Proceedings
In August 2000, the Company received a copy of a Demand for
Arbitration filed with the American Arbitration association ("AAA") whereby
claimants Eliot Kang Productions, Inc. and Eliot Kang and Associates Inc. are
seeking $1 million for an alleged breach of contract. In November 1997, the
Company and a subsidiary the Company entered into an Asset Purchase Agreement
with the claimants, who were then operating under different names. The Company
has not yet received a copy of any materials from the AAA. It is impossible to
ascertain the ultimate outcome of this matter. The Company intends to vigorously
defend its position and pursue all remedies available to it. An adverse
determination could have a material adverse effect on the Company's results of
operations and financial position.
In November 1999, POW, Inc., doing business as "Tomandandy," filed a
lawsuit against The Leap Partnership, Inc. 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. In March 2000, The
Leap Partnership paid $285,228 to POW, Inc. and the lawsuit was dismissed with
prejudice.
In October 1999, The Crystal Lake Juke Box, Inc., Wixen Music
Publishing, Inc., Charles McCormick, Charles Love, Willis Draffen, Jr., Harry
Williams, individually and doing business as a group "Bloodstone," a recording
and performing group filed a lawsuit against a subsidiary of Leapnet, The Leap
Partnership, Anheuser-Busch Corporation, and Andy Milburn, an individual and
doing business as "Tomandandy," 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 The Leap Partnership for a
client. The Leap Partnership has filed cross-claims against Andy Milburn doing
business as "Tomandandy" and POW, Inc. doing business as "Tomandandy" for
negligence, indemnity, contribution and breach of contract. The parties are
currently undergoing discovery. The suit has been referred to The Leap
Partnership's insurance carrier and legal counsel. The Leap Partnership is
vigorously defending its position and pursuing all remedies available to it. It
is difficult to ascertain the ultimate outcome of this litigation.
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., 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 $13.5 million and such other relief
as the court deems just and equitable. Discovery is being conducted. In December
1998, Finkle, Ross & Rost, LLP filed a complaint in the Supreme Court of the
State of New York against the Company for $28,750 for accounting services
rendered. The complaint was subsequently reduced to $11,250 by Finkle, Ross &
Rost, L.L.P.
There are no other active claims or lawsuits against the Company that
management believes are material.
Note 5. Marketable Securities
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 June 30, 2000, all securities covered by SFAS No. 115 were designated as
available for sale. Accordingly, these equity securities are stated at fair
value of $38,276 on the balance sheet with comprehensive income resulting from
an unrealized loss of $216 that is reported as a separate component of
shareholder's equity.
Note 6. Sale of Building Held for Sale
On March 3, 2000, the Company sold a building located at 22 W. Hubbard
Street, Chicago, IL. for $1.2 million. As of March 3, 2000, the building had a
carrying value of approximately $580,000 and an outstanding mortgage payable of
approximately $640,000. The mortgage was paid off with the proceeds from the
sale of the building and a net gain after closing costs of approximately
$585,000 was recorded during the quarter ended April 30, 2000.
Note 7. Borrowings
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 secured one-year revolving line of credit. 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. The
debt covenants require certain minimum levels of working capital, net worth and
liquidity. At June 30, 2000 the Company is in compliance with, or has obtained
waivers for the covenants. Borrowings are collateralized by substantially all
the assets of the Company. As of June 30, 2000, the interest rate was 6.9% and
the outstanding balance on this line of credit was $11.6 million and $7.3
million as of January 31, 2000.
Mortgage Payable
On April 26, 2000, the Company refinanced the mortgage on the 420 W. Huron
building by securing a $3.9 million multi-draw loan that covers both the
purchase price and build-out associated with the building. The 4-year balloon
note bears interest at 9.2% and replaces a prior $2.2 million multi-draw
mortgage. As of June 30, 2000, $3.1 million was outstanding on the new mortgage
payable. The Company plans to finance an additional $0.8 million under this loan
no later than October 2000. The monthly principal and interest payment will
increase to approximately $35,000 at that time and will be payable monthly
through the maturity date of May 31, 2004.
Note 8. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". The standard requires the reporting and
display of comprehensive income, which includes all changes in stockholders'
equity with the exception of investments by, or distributions to, stockholders.
During the two months ended June 30, 2000 and 1999, the components of
comprehensive income are as follows:
<TABLE>
<CAPTION>
(in thousands)
June 30, 2000 June 30, 1999
<S> <C> <C>
Net loss ($ 6,482 ($ 204)
Unrealized (loss)/gain or short term investments ( 216) ( 67)
Comprehensive (loss)/income ($ 6,696) ($ 271)
</TABLE>
Note 9. Business Segments
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). The Company has no
separately reportable segments in accordance with this standard. Under the
enterprise-wide disclosure requirements of SFAS No. 131, the Company reports
revenues by service lines. Amounts for the two and five months ended June 30,
2000 and 1999, are shown in the table below:
<TABLE>
<CAPTION>
Two months ended June 30, Five months ended June 30,
------------------------------------------ ------------------------------------------
2000 1999 2000 1999
------------------- -------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues % Revenues % Revenues % Revenues %
-------- --- -------- --- -------- --- -------- ---
E-business $ 7,283 60.3% $ 936 16.1% $ 11,272 59.3% $ 2,559 18.7%
General IT Consulting 2,351 19.5% - 0.0% 2,351 12.4% - 0.0%
Globalization 1,428 11.8% 1,026 17.7% 3,234 17.0% 3,249 23.7%
Advertising 1,021 8.4% 3,849 66.2% 2,155 11.3% 7,888 57.6%
-------- -------- -------- --------
Total $ 12,083 $ 5,811 $ 19,012 $ 13,696
======== ======== ======== ========
</TABLE>
<PAGE>
Note 10. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement is effective for all quarters of fiscal years
beginning after June 15, 1999. In July 1999, the FASB issues SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB No. 133," which amends SFAS No. 133 to be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company does not expect the adoption of this standard to have a material effect
on the Company's results of consolidated operations, financial position, or cash
flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
Interpretations and practices followed by the SEC. SAB 101 was effective the
first fiscal quarter of fiscal years beginning after December 15, 1999 and
required companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
Accounting Principles Board Opinion 20, "Accounting Changes". In June 2000, the
SEC issued SAB 101B, "Second Amendment: Revenue Recognition in Financial
Statements," which delayed implementation of SAB 101 until Leapnet's fourth
fiscal quarter of 2000. Leapnet will adopt SAB 101 and is currently in the
process of evaluating the impact, if any, SAB 101 will have on its financial
position or results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The impact of
the application of FIN 44 had no material impact on the Company's financial
position or results of operations.
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,
7
<PAGE>
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 March 30, 2000.
The statements of operations of the Leapnet, Inc. for the two and five
month periods ended June 30, 2000 and 1999 have been reclassified to conform
with the financial presentation of companies within the Internet services
industry. Such classifications primarily included allocating the Company's
salaries and related expenses into either cost of services for billable
employees or to general and administrative expenses for non-billable employees.
Additionally, certain amounts as previously reported have been reclassified to
conform to current year classifications.
On May 1, 2000 Leapnet, Inc. acquired SPR Inc., an information technology
services provider. The acquisition was accounted for as a purchase, with the
$36.5 million excess of the acquisition cost over the fair market value of the
net assets acquired being assigned to goodwill and amortized over three years.
Results of operations of SPR are included in the consolidated financial
statements commencing May 1, 2000.
The results of operations for the two and five month periods ended June 30,
2000 are not necessarily indicative of the results of operations to be expected
for the entire year ended December 31, 2000.
Results of Operations
TWO MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues
--------
Revenues increased to $12.1 million for the two months ended June 30, 2000
from $5.8 million for the two months ended June 30, 1999, an increase of
approximately $6.3 million or 108%. The $6.3 million increase in revenue was
primarily due to the acquisition of SPR. Revenues for SPR were $6.1 million
during this period. Excluding revenues related to the SPR acquisition, revenues
increased by $2.2 million after excluding $2.0 million in the 1999 period for
the Hardee's account which terminated services with the Company in February
2000. Revenues for the e-business service line increased to $7.3 million for the
two months ended June 30, 2000 an increase of 678%.
Cost of Services
----------------
Cost of services consist of direct costs of servicing clients, including
direct labor and related benefits and taxes, solution center facility costs, and
direct production costs. Direct production costs include costs 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. Cost of services increased to $10.9 million for the two months ended
June 30, 2000 from $4.3 million for the two months ended June 30, 1999, an
increase of approximately $6.6 million or 154%. The $6.6 million increase was
primarily due to the acquisition of SPR. Cost of services for SPR were $5.2
million for the two months ended June 30, 2000. Cost of services excluding the
costs related to the SPR acquisition, increased by $1.4 million. This increase
is primarily attributable to increased production costs incurred for client
projects and salary and related benefits for the two months ended June 30, 2000.
General and Administrative Expenses
-----------------------------------
General and Administrative Expenses include salaries and benefits of
management and support staff, space and facilities expenses, depreciation,
insurance, outside professional fees, and other corporate costs. General and
administrative expenses increased to $5.9 million for the two months ended June
30, 2000 from $1.8 million for the two months ended June 30, 1999, an increase
of approximately $4.1 million. The $4.1 million increase in general and
administrative expenses was partially due to the acquisition of SPR. General and
administrative expenses for SPR were $2.7 million during the two months ended
June 30, 2000. General and administrative expenses for the rest of the
Company increased by $1.4 million. This increase was primarily due to increased
costs in the Internet related subsidiaries as the Company has expanded its
resources and facilities to support this service line.
Amortization of Goodwill
------------------------
8
<PAGE>
Amortization of goodwill was $2.0 million for the two months ended June 30,
2000 and represents the goodwill resulting from the purchase of SPR Inc. on May
1, 2000. Goodwill amortization will approximate $1.0 million per month for 36
months.
Interest Income, Net
--------------------
Interest income totaled $0.5 million and $0.1 million for the two months
ended June 30, 2000 and 1999, respectively and represents interest earned on
investments in marketable securities. Interest expense totaled $0.2 million and
$0.1 million for the two months ended June 30, 2000 and 1999, respectively on
debt that totaled approximately $14.7 million and $5.4 million at June 30, 2000
and 1999, respectively.
FIVE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues
--------
Revenues increased to $19.0 million for the five months ended June 30, 2000
from $13.7 million for the five months ended June 30, 1999, an increase of
approximately $5.3 million or 39%. The $5.3 million increase in revenue was
primarily due to the acquisition of SPR on May 1, 2000. Revenues for SPR were
only included after the acquisition date and were $6.1 million the five months
ended June 30, 2000. Revenues, excluding revenues related to the SPR acquisition
increased by $5.3 million after excluding $6.1 million in the 1999 period for
the Hardee's account that terminated services with the Company in February 2000.
Revenues for the e-business service line increased 265% to $11.3 million for the
five months ended June 30, 2000 from $2.6 million for the five months ended June
30, 1999, an increase of 340%.
Cost of Services
----------------
Cost of services increased to $17.3 million for the five months ended June
30, 2000 from $9.6 million for the five months ended June 30, 1999, an increase
of approximately $7.7 million or 81%. The $7.7 million increase was primarily
due to the acquisition of SPR. Cost of services for SPR were $5.2 million during
this period. Cost of services for the rest of the Company, increased by $2.5
million. This increase is primarily attributable to increased production costs
incurred for client projects in the 2000 period and salary and related benefits
for the five months ended June 30, 2000.
General and Administrative Expenses
-----------------------------------
General and administrative expenses increased to $10.6 million for the five
months ended June 30, 2000 from $4.8 million for the five months ended June 30,
1999, an increase of approximately $5.8 million. The increase in general and
administrative expenses was partially due to the acquisition of SPR. General and
administrative expenses for SPR were $2.7 million during this period. General
and administrative expenses for the rest of the Company increased by $3.1
million, which were primarily due to increased costs in the Internet related
subsidiaries as the Company has expanded its resources and facilities to support
this line of the Company's business.
Amortization of Goodwill
------------------------
Amortization of goodwill was $2.0 million for the five months ended June
30, 2000 and represents the goodwill resulting from the purchase of SPR Inc. on
May 1, 2000. Goodwill amortization will approximate $1.0 million per month for
36 months.
Interest Income, Net
--------------------
Interest income totaled $0.7 million and $0.4 million for the five months
ended June 30, 2000 and 1999, respectively and represents interest earned on
investments in marketable securities. Interest expense totaled $0.3 million and
$0.2 million for the five months ended June 30, 2000 and 1999, respectively on
debt that totaled approximately $14.7 million and $5.4 million at June 30, 2000
and 1999, respectively.
9
<PAGE>
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, equipment leases, proceeds from the IPO, exercise of stock options,
loans from a former officer of the Company, and from cash generated from
operations.
At June 30, 2000, the Company had $63.9 million of working capital. Cash
and cash equivalents decreased $0.2 million for the five months ended June 30,
2000. The $11.8 million of cash used in operations was primarily offset by the
net sale of marketable securities of approximately $60 million and borrowings on
the line of credit of approximately $6.0 million.
On April 26, 2000, the Company refinanced the mortgage on the 420 W. Huron
building by securing a $3.9 million multi-draw loan that covers both the
purchase price and build-out associated with the building. The 4-year balloon
note bears interest at 9.2% and replaces a prior $2.2 million multi-draw
mortgage. The refinancing generated approximately $1.7 million of additional
cash to the Company. As of June 30, 2000, 3.1 million was outstanding on the new
mortgage payable. The Company plans to finance an additional $0.8 million under
this loan at the time of the final phase of the purchase of the building, which
is scheduled to occur no later than October 2000. The monthly principal and
interest payment will increase to approximately $35,000 at that time and will be
payable monthly through the maturity date of May 31, 2004.
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 line of credit. 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. The line of credit agreement
requires the Company to maintain certain minimum levels of working capital, net
worth, and liquidity. Borrowings are collateralized by substantially all the
assets of the Company. At June 30, 2000, the Company is in compliance with, or
has obtained waivers for the covenants. Borrowings are collateralized by
substantially all the assets of the Company. As of June 30, 2000, the interest
rate was 6.9% and the outstanding balance on this line of credit was $11.6
million. Currently, the Company is renegotiating the line of credit.
The Company believes that the existing credit facilities and funds from
operations and from acquisitions 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 that 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.
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 the calendar year 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"); the Company's ability to mange growth effectively, 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
10
<PAGE>
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, 2000, and have not changed
significantly.
Part II. Other Information
Item 1. Legal Proceedings
In August 2000, the Company received a copy of a Demand for
Arbitration filed with the American Arbitration association (AAA")
whereby claimants Eliot Kang Productions, Inc. and Eliot Kang and
Associates Inc. are seeking $1 million for an alleged breach of
contract. In November 1997, the Company and a subsidiary the Company
entered into an Asset Purchase Agreement with the claimants, who were
then operating under different names. The Company has not yet received
a copy of any materials from the AAA. It is impossible to ascertain
the ultimate outcome of this matter. The Company intends to vigorously
defend its position and pursue all remedies available to it. An
adverse determination could have a material adverse effect on the
Company's results of operations and financial position.
In November 1999, POW, Inc., doing business as "Tomandandy," filed a
lawsuit against The Leap Partnership, Inc. 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. In March 2000, The Leap Partnership paid $285,228 to POW,
Inc. and the lawsuit was dismissed with prejudice.
In October 1999, The Crystal Lake Juke Box, Inc., Wixen Music
Publishing, Inc., Charles McCormick, Charles Love, Willis Draffen,
Jr., Harry Williams, individually and doing business as a group
"Bloodstone," a recording and performing group filed a lawsuit against
a subsidiary of Leapnet, The Leap Partnership, Anheuser-Busch
Corporation, and Andy Milburn, an individual and doing business as
"Tomandandy," 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 The Leap Partnership for a client. The Leap Partnership has
filed cross-claims against Andy Milburn doing business as "Tomandandy"
and POW, Inc. doing business as "Tomandandy" for negligence,
indemnity, contribution and breach of contract. The parties are
currently undergoing discovery. The suit has been referred to The Leap
Partnership's insurance carrier and legal counsel. The Leap
Partnership is vigorously defending its position and pursuing all
remedies available to it. It is difficult to ascertain the ultimate
outcome of this litigation.
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., 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 $13.5 million and such other relief as the court deems just and
equitable. Discovery is being conducted. In December 1998, Finkle,
Ross & Rost, LLP filed a complaint in the Supreme Court of the State
of New York against the Company for $28,750 for accounting services
rendered. The complaint was subsequently reduced to $11,250 by Finkle,
Ross & Rost, L.L.P.
11
<PAGE>
There are no other active claims or lawsuits against the Company that
management believes are material.
Item 4. Submission Of Matters To A Vote Of Securities Holders
The Company held a Special Meeting of Stockholders (the "Meeting") on May
1, 2000 at the Company's offices at 420 West Huron Street, Chicago, Il.
Proxies were solicited for the Meeting. There were two matters proposed and
voted on at the Meeting. Both proposals were approved by a majority of the
vote. Of the 14,917,249 shares eligible to vote 9,778,870 were voted at the
Meeting.
The first proposal at was to approve the issuance of shares of Leapnet,
Inc. common stock to the stockholders of SPR Inc. in the merger of Brassie
Corporation, a wholly owned subsidiary of the Company, with and into SPR.
Under the merger agreement, each outstanding share of SPR common stock
would be converted into the right to receive 1.085 shares of Leapnet common
stock and SPR would become a subsidiary of Leapnet. Of the shares voted
9,688,857 votes were in favor of this proposal, 66,805 votes were voted
against the proposal, and 23,208 abstained from voting.
The second proposal was for the amendment of the Employee Incentive
Compensation Plan to increase the number of shares reserved under the plan
from 5 to 10 million shares. Of the shares voted, 7,958,197 were voted in
favor of this proposal, 1,797,602 were voted against the proposal, and
23,071 abstained from voting.
The Annual Meeting of Stockholders of the Company was held at 420 West Huron
Street, Chicago, Il. on July 11, 2000. There were 28,902,587 shares eligible
to vote. Three individuals were nominated and elected to serve as class I
directors until the 2003 Annual Meeting of Stockholders, or until their
respective successors shall have been elected and shall have qualified, by the
following votes:
<TABLE>
<CAPTION>
Director Shares For Shares Withheld
---------- ---------------
<S> <C> <C>
Fredrick A. Smith 26,686,489 484,879
Charles F. Moran 26,686,489 484,879
Stephen J. Tober 26,680,240 491,128
</TABLE>
In addition to the above election, the appointment of Arthur Andersen LLP
as the Company's independent auditors for the fiscal year ending December
31, 2000 was ratified and approved by the following vote:
<TABLE>
<CAPTION>
Shares For Shares Against Abstentions
---------- -------------- -----------
<S> <C> <C>
27,015,949 143,680 11,739
</TABLE>
No other matters were submitted for vote.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit
27. Financial Data Schedule.
b. Reports on Form 8-K
Form 8-K, filed on June 12, 2000, which reports the completion of
the Company's acquisition of SPR Inc.
Form 8-K, filed on June 12, 2000, which reports the Company's change
in fiscal reporting periods from a January 31 year-end to a
December 31 year-end.
Items 2, 3 And 5 Are Not Applicable And Have Been Omitted.
12
<PAGE>
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: August 15, 2000 By: /s/ ROBERT M. FIGLIULO
------------------------
Robert M. Figliulo
Vice Chairman and Chief Executive Officer
Date: August 15, 2000 By: /s/ STEPHEN J. TOBER
----------------------
Stephen J. Tober
President and Chief Operating Officer
Date: August 15, 2000 By: /s/ STEPHEN T. GAMBILL
------------------------
Stephen T. Gambill
Vice President and Chief Financial Officer
13
<PAGE>
Leapnet, Inc.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibits
------ --------
<S> <C>
27. Financial Data Schedule
</TABLE>
14
