<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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 NOVEMBER 10, 2000
------------------------------ ---------------------
COMMON STOCK - $0.01 PAR VALUE 29,009,650
<PAGE>
LEAPNET, INC.
FORM 10-Q
FOR THE PERIOD ENDED
SEPTEMBER 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS --
SEPTEMBER 30, 2000 (UNAUDITED)
AND JANUARY 31, 2000
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS --
THREE MONTHS ENDED AND EIGHT MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS --
EIGHT MONTHS ENDED
SEPTEMBER 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
3
<PAGE>
Leapnet, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, January 31,
2000 2000
------------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,997 $ 15,652
Accounts receivable, net of allowance for bad debts of $1,426 at
September 30, 2000 and $637 at January 31, 2000 20,392 6,717
Marketable securities 39,223 386
Building held for sale - 580
Other 1,254 737
-------- --------
Total current assets 71,866 24,072
-------- --------
Property and equipment, net 10,339 6,068
Goodwill, net 31,419 -
Other 125 196
-------- --------
Total assets $113,749 $ 30,336
======== ========
Liabilities And Stockholders' Equity
Current liabilities:
Accounts payable 2,932 $ 3,448
Payroll and other accrued expenses 7,299 1,612
Current portion of long-term debt - 722
-------- --------
Total current liabilities 10,231 5,782
-------- --------
Commitments and Contingencies (Note 4)
Note payable 13,617 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, 290 148
28,983,789 and 14,807,883 shares issued and
28,933,789 and 14,757,883 outstanding at
September 30, 2000 and January 31, 2000, respectively
Unrealized gain (loss) on marketable securities (189) 60
Additional paid-in capital 127,955 39,162
Accumulated deficit (41,087) (23,380)
Treasury stock - at cost, 50,000 shares (151) (151)
-------- --------
Total stockholders' equity 86,818 15,839
-------- --------
Total liabilities and stockholders' equity $113,749 $ 30,336
======== ========
</TABLE>
See Notes to unaudited condensed consolidated financial statements.
4
<PAGE>
Leapnet, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Three months Eight months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 16,060 $ 9,457 $ 35,112 $ 23,117
Cost of services 13,389 5,432 30,188 15,451
------------ ----------- ------------ -----------
Gross profit 2,671 4,025 4,924 7,666
------------ ----------- ------------ -----------
Other expenses:
General and administrative 7,865 2,979 19,001 7,281
Amortization of goodwill 3,041 -- 5,068 --
------------ ----------- ------------ -----------
Total other expenses 10,906 2,979 24,069 7,281
------------ ----------- ------------ -----------
Operating loss (8,235) 1,046 (19,145) 385
------------ ----------- ------------ -----------
Gain on sale of building -- -- 585 --
Interest income, net 528 49 853 294
------------ ----------- ------------ -----------
Loss before income taxes (7,707) 1,095 (17,707) 679
Provision (benefit) for income taxes -- -- -- --
------------ ----------- ------------ -----------
Net loss $ (7,707) $ 1,095 $ (17,707) $ 679
============ =========== ============ ===========
Net income (loss) per share:
Basic $ (0.27) $ 0.08 $ (0.75) $ 0.05
Diluted $ (0.27) $ 0.08 $ (0.75) $ 0.05
Weighted average number of shares outstanding:
Basic 28,927,794 14,102,062 23,692,384 14,091,882
Diluted 28,927,794 14,165,471 23,692,384 14,166,031
</TABLE>
See Notes to unaudited condensed consolidated financial statements, including
note 3 which indicates that the results of SPR are included beginning May 1,
2000.
5
<PAGE>
Leapnet, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Eight Months
Ended September 30,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) for the period $(17,707) $ 679
Adjustments to reconcile to net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 6,497 683
Provision for impairment loss on capitalized software 496 --
Gain from sale of building (585) --
(Increase) decrease in accounts receivable, net (5,050) (232)
(Increase) decrease in prepaids and other assets 71 (279)
Increase (decrease) in accounts payable (2,305) (190)
Increase (decrease) in payroll and other accrued expenses 1,905 (1,138)
-------- --------
Net cash (used in) operating activities (16,678) (477)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,225) (1,415)
Capitalized software development costs -- (297)
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 (8,380) --
Sales/maturity of marketable securities 13,413 --
-------- --------
Net cash (used in) provided by investing activities 3,925 (1,712)
-------- --------
Cash flows from financing activities:
Net proceeds from bank borrowings:
Notes payable 6,304 745
Mortgages payable:
Bank borrowings 1,642 400
Repayment (639) (8)
Capital lease obligation (44) (250)
Proceeds from employee stock purchase and option plans 835 40
-------- --------
Net cash provided by financing activities 8,098 927
-------- --------
NET (DECREASE) IN CASH (4,655) (1,262)
Cash and cash equivalents, beginning of period 15,652 14,076
-------- --------
Cash and cash equivalents, end of period $ 10,997 $ 12,814
======== ========
Supplemental disclosure of cash payments made for:
Interest $ 547 $ 258
Income taxes $ -- $ --
Supplemental disclosure of noncash investing and financing activities:
Securities received from client for services rendered,
stated at fair market value $ - $ 326
Stock acquisition of SPR - Issuance of common stock in acquisition of SPR $ 89,054 --
</TABLE>
See Notes to unaudited condensed consolidated financial statements, including
note 3 which indicates that the results of SPR are included beginning May 1,
2000.
6
<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 interim 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 three and eight months ended September 30, 2000 and 1999,
respectively, have been presented to conform with the financial presentation
of companies within the Internet services industry. Additionally, certain
other amounts as previously reported have been reclassified to conform with
current year classifications. The results of operations for the three and
eight months ended September 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 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. The Company is reporting a
transition report for the eight-month period from February 1, through September
30, 2000.
Note 3. Acquisitions
On May 1, 2000, Leapnet completed the 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 the three and
eight-month periods ended September 30, 2000, is $3.0 million and $5.1 million,
respectively. 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 three and eight-month periods ended September 30, 2000 and
1999, as if the acquisition of SPR had occurred at the beginning of each period.
7
<PAGE>
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Three months ended September 30, Eight months ended September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $16,060 $ 23,775 $ 42,153 $65,350
Net income (loss) $(7,707) $ (2,284) $(26,818) $(8,320)
Net income (loss) per share $ (0.27) $ (0.08) $ (0.93) $ (0.29)
</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 of 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. With the
participation and approval of The Leap Partnership's insurance carrier, this
matter has been settled and the claims against The Leap Partnership and the
other defendants have been dismissed. The Leap Partnership filed cross-claims
against Andy Milburn doing business as "Tomandandy" and POW, Inc. doing
business as "Tomandandy". All the cross-claims asserted by the defendants
have been settled and dismissed.
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 case has been settled and dismissed with prejudice. 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. The
case has been settled and dismissed with prejudice.
There are no other active claims or lawsuits against the Company that
management believes are material.
NOTE 5. MARKETABLE SECURITIES
The Company invests in investment-grade marketable securities with varying
maturities. These securities include municipal bonds, corporate bonds and one
equity security received as reimbursement for services performed. The Company
accounts for its investments using Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"). Management determines the classification of investments under
SFAS No. 115 at the time of purchase and reevaluates such classifications as of
each balance sheet date.
8
<PAGE>
The carrying amounts and fair values of the Company's marketable securities are
as follows:
<TABLE>
<CAPTION>
(in thousands)
Period Ended
-----------------------------------------------------------
September 30, 2000 January 31, 2000
--------------------------- -------------------------
Amortized Aggregate Amortized Aggregate
Cost Basis Fair Value Cost Basis Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. corporate notes maturing within 10 years $23,627 $23,646 $ -- $ --
U.S. corporate notes maturing after 10 years 5,959 5,940 -- --
Corporate equity security 326 137 326 386
Municipal obligations maturing after 10 years 9,500 9,500 -- --
------- ------- ---- ----
Total short-term investments $39,412 $39,223 $326 $386
======= ======= ==== ====
</TABLE>
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 September 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 September 30, 2000, the
interest rate was 6.9%. The outstanding balance on this line of credit was $13.6
million and $7.3 million as of September 30, 2000 and January 31, 2000,
respectively.
On October 9, 2000, the Company replaced the line of credit described
above with an $18 million line of credit with American National Bank. The new
line of credit matures on September 30, 2002, and bears interest at a variable
rate of 1.25% 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. Borrowings are collateralized by substantially all the assets of the
Company. The debt covenants require that the Company must maintain deposits at
the bank equal to the greater of $6.0 million plus borrowings or 150% of
borrowings.
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 September 30, 2000, $3.1 million
9
<PAGE>
was outstanding on the new mortgage payable. On October 9, 2000, the Company
purchased the final phase of the building and financed an additional $0.8
million under this loan. The monthly principal and interest payment is
approximately $35,000 and is payable monthly through the maturity date of May
31, 2004.
Note 8. Comprehensive Income
In September 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 three months ended September 30, 2000 and 1999, the components of
comprehensive income are as follows:
<TABLE>
<CAPTION>
(in thousands)
Three months ended September 30,
2000 1999
------- ------
<S> <C> <C>
Net (loss) income $(7,707) $1,095
Unrealized (loss)/gain on short term investments 27 (206)
------- ------
Comprehensive (loss)/income $(7,680) $ 889
======= ======
</TABLE>
Note 9. Business Segments
In September 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 three and eight months ended
September 30, 2000 and 1999, are shown in the table below:
<TABLE>
<CAPTION>
(in thousands)
Three months ended September 30, Eight months ended September 30,
------------------------------------------ ---------------------------------------
2000 1999 2000 1999
-------------------- ------------------ ----------------- -------------------
Revenues % Revenues % Revenues % Revenues %
-------- - -------- - -------- - -------- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
E-business $ 9,951 62.0% $ 3,111 32.9% $21,267 60.6% $ 5,634 24.4%
General IT consulting 3,059 19.0% -- 0.0% 5,410 15.4% -- 0.0%
Globalization 1,652 10.3% 2,921 30.9% 4,886 13.9% 6,170 26.7%
Advertising 1,398 8.7% 3,425 36.2% 3,549 10.1% 11,313 48.9%
------- -------- ------- -------
Total $16,060 $ 9,457 $35,112 $23,117
======= ======= ======= =======
</TABLE>
NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS 137 and
SFAS 138. SFAS 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as
other hedging activities, and is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company does not expect that
the adoption of this standard will have a material impact on our financial
position and results of operations.
10
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." In addition, the SEC released, in October 2000, interpretative
guidance on SAB 101 in the form of frequently asked questions and responses
thereto. SAB 101 and the frequently asked questions and responses provide
guidance for revenue recognition under certain circumstances. We are currently
evaluating the impact of SAB 101 on our financial statements and related
disclosures, but do not expect that such impact, if any, will be material. The
accounting and disclosures prescribed by SAB 101 will be effective for our
fiscal year ending December 31, 2000.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN44),
"Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25" ("Interpretation"). The Interpretation is
intended to clarify certain problems that have arisen in practice since the
issuance of APB 25. The Interpretation provides guidance, some of which is a
significant departure from current industry practice. The Interpretation
generally provides for prospective application for grants or modifications to
existing stock options or awards made after June 30, 2000. However, for certain
transactions the guidance is effective after December 15, 1998 and January 12,
2000. The adoption of this pronouncement did not have an effect on the current
or historical financial statements, but may impact our future accounting
regarding stock option transactions.
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 March 30, 2000.
The statements of operations of Leapnet, Inc. for the three and eight
month periods ended September 30, 2000 and 1999 have been presented 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 three and eight month periods ended
September 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
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Revenues increased to $16.1 million for the three months ended
September 30, 2000 from $9.5 million for the three months ended September 30,
1999, an increase of approximately $6.6 million or 70%. The $6.6 million
increase in revenue was primarily due to the acquisition of SPR. Revenues for
SPR were $ 8.2 million during this period. Excluding revenues related to the SPR
acquisition, revenues increased by $0.2 million after excluding $1.8 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
$10.0 million for the three months ended September 30, 2000 from $3.1 million
for the three months ended September 30, 1999, an increase of 223%.
COST OF SERVICES
11
<PAGE>
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 $13.4 million for the
three months ended September 30, 2000 from $ 5.4 million for the three months
ended September 30, 1999, an increase of approximately $8.0 million or 146%. The
$8.0 million increase was primarily due to the acquisition of SPR. Cost of
services for SPR were $7.1 million for the three months ended September 30,
2000. Cost of services excluding the costs related to the SPR acquisition,
increased by $0.9 million. This increase is primarily attributable to increased
production costs incurred for client projects and salary and related benefits.
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 $7.9 million for the three months ended
September 30, 2000 from $3.0 million for the three months ended September 30,
1999, an increase of approximately $4.9 million, or 163%. The $4.9 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 three months ended September 30, 2000. General and
administrative expenses for the rest of the Company increased by $2.2
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
Amortization of goodwill was $3.0 million for the three months ended
September 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 $0.8 million and $0.2 million for the three
months ended September 30, 2000, and 1999, respectively and represents interest
earned on investments in marketable securities. Interest expense totaled $0.3
million and $0.1 million for the three months ended September 30, 2000 and 1999,
respectively on debt that totaled approximately $16.7 million and $5.8 million
at September 30, 2000 and 1999, respectively.
EIGHT MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Revenues increased to $35.1 million for the eight months ended
September 30, 2000 from $23.1 million for the eight months ended September
30, 1999, an increase of approximately $12.0 million or 52%. The $12.0
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 $14.6 million for the eight months ended September 30, 2000.
Revenues, excluding revenues related to the SPR acquisition, increased by
$5.4 million after excluding $8.0 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 to $21.3 million for the eight
months ended September 30, 2000 from $5.6 million for the eight months ended
September 30, 1999, an increase of 280%.
COST OF SERVICES
Cost of services increased to $30.2 million for the eight months ended
September 30, 2000 from $15.5 million for the eight months ended September 30,
1999, an increase of approximately $14.7 million or 95%. The $14.7 million
increase was primarily due to the acquisition of SPR. Cost of services for SPR
were $12.3 million during this period. Cost of services for the rest of the
Company, increased by $2.4 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 eight months ended September 30, 2000.
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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $19.0 million for
the eight months ended September 30, 2000 from $7.3 million for the eight
months ended September 30, 1999, an increase of approximately $11.7 million,
or 160%. The increase in general and administrative expenses was partially
due to the acquisition of SPR. General and administrative expenses for SPR
were $4.7 million during this period. General and administrative expenses for
the rest of the Company increased by $7.0 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 $5.1 million for the eight months ended
September 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 $1.5 million and $0.6 million for the eight
months ended September 30, 2000 and 1999, respectively and represents interest
earned on investments in marketable securities. Interest expense totaled $0.6
million and $0.3 million for the eight months ended September 30, 2000 and 1999,
respectively on debt that totaled approximately $16.7 million and $5.8 million
at September 30, 2000 and 1999, respectively.
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 September 30, 2000, the Company had $61.6 million of working
capital. Cash and cash equivalents decreased $4.7 million for the eight months
ended September 30, 2000.
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 September 30, 2000, $3.1 million was outstanding on
the new mortgage payable. On October 9, 2000, the Company financed an additional
$0.8 million under this loan with the final phase of the purchase of the
building. The monthly principal and interest payment increased to approximately
$35,000 is 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 September 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 September 30, 2000, the
interest rate was 6.9% and the outstanding balance on this line of credit was
$13.6 million.
On October 9, 2000, the Company replaced the line of credit described
above with an $18 million line of credit with American National Bank. The new
line of credit matures on September 30, 2002, and bears interest at a variable
rate of 1.25% 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. Borrowings are collateralized by substantially all the assets of the
Company. The debt covenants require that the Company must maintain deposits at
the bank equal to the greater of $6.0 million plus borrowings or 150% of
borrowings.
The Company believes that the existing credit facilities, sales of
marketable securities, and funds from operations will be sufficient to meet
the Company's cash requirements for at least the next twelve months. The
Company's capital
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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 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 of 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.
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. With the participation and approval of The Leap
Partnership's insurance carrier, this matter has been settled and
the claims against The Leap Partnership and the other defendants
have been dismissed. The Leap Partnership filed cross-claims against
Andy Milburn doing business as "Tomandandy" and POW, Inc. doing
business as "Tomandandy". All the cross-claims asserted by the
defendants have been settled and dismissed.
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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. This case has been settled and dismissed. 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. This case has been
settled and dismissed with prejudice.
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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit
27. Financial Data Schedule.
b. Reports on Form 8-K
None.
ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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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: November 14, 2000 BY: /s/ ROBERT M. FIGLIULO
------------------------------------------------
Robert M. Figliulo
Vice Chairman and Chief Executive Officer
Date: November 14, 2000 BY: /s/ STEPHEN J. TOBER
------------------------------------------------
Stephen J. Tober
President and Chief Operating Officer
Date: November 14, 2000 BY: /s/ STEPHEN T. GAMBILL
------------------------------------------------
Stephen T. Gambill
Vice President and Chief Financial Officer
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LEAPNET, INC.
EXHIBIT INDEX
Exhibit
Number Exhibits
------ --------
27. Financial Data Schedule
17
