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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------
FORM 10-QSB
[x] Quarterly Report Under to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2000
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
-------------------------
Commission file number 0-5667
Le@P Technology, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 65-0769296
(State of Incorporation) (IRS Employer ID No.)
5601 N. Dixie Highway, Suite 411, Fort Lauderdale, FL 33334
(Address of principal executive offices)
(954) 771-1772
(Registrant's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (X) No ( )
Class A Common Stock, par value $0.20 per share, 33,019,299 shares
outstanding as of July 31, 2000
Class B Common Stock, par value $0.20 per share, 25,000 shares
outstanding as of July 31, 2000
Transitional Small Business Disclosure Format (check one): Yes ( ) No (X)
<PAGE>
LE@P TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-QSB
INDEX
Page Number
PART I. FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements..................................................3
Consolidated Balance Sheets - June 30, 2000 (unaudited) and
December 31, 1999....................................................3
Consolidated Statements of Operations (unaudited) - Three
and Six Month Periods Ended June 30, 2000 and 1999..................5
Consolidated Statements of Cash Flows (unaudited) - Six
Months Ended June 30, 2000 and 1999..................................6
Notes to Consolidated Financial Statements...............................7
Item 2. Management's Discussion and Analysis or Plan of Operation............13
PART II. OTHER INFORMATION...................................................20
Item 1. Legal Proceedings....................................................20
Item 2. Changes in Securities................................................20
Item 4. Submission of Matters to a Vote of Security Holders..................21
Item 6. Exhibits and Reports on Form 8-K.....................................22
SIGNATURE....................................................................23
2
<PAGE>
PART I...FINANCIAL INFORMATION
Item 1. Financial Statements
Le@P Technology, Inc. and Subsidiaries
Consolidated Balance Sheets - June 30, 2000 (unaudited) and
December 31, 1999
June 30, December 31,
2000 1999
------------- ------------
Assets (Unaudited)
Current assets
Cash $143,273 $ 462,802
Prepaid expenses and other current assets 96,680 47,878
------------ ------------
Total current assets 239,953 510,680
Investment in Healthology, Inc. 3,174,960 --
Investment in Camber Companies, LLC 1,845,245 1,845,245
Property and equipment, net 119,408 169,198
Other assets 13,691 8,852
------------ ------------
Total assets $5,393,257 $2,533,975
============ ============
See notes to consolidated financial statements
3
<PAGE>
Le@P Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
(continued)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable $ 150,802 $ 111,222
Accrued professional fees 186,361 162,225
Accrued compensation and related liabilities 160,717 290,794
Note payable 27,988 --
Other liabilities 52,603 15,000
------------ ------------
Total current liabilities 578,471 579,241
Commitments and contingencies
Shareholders' equity:
Subscribed Class A common stock -- 550,000
Preferred stock, $0.001 par value per share. Authorized 25,000,000
shares. Issued and outstanding 2,170 shares at June 30, 2000
and December 31, 1999 2,170,000 2,170,000
Class A common stock, $0.20 par value per share. Authorized
99,975,000 shares. Issued 33,104,149 and 32,001,769 shares,
and outstanding 33,019,299 and 31,916,919 shares,
at June 30, 2000 and December 31, 1999, respectively 6,620,830 6,400,354
Class B common stock, $0.20 par value per share. Authorized,
issued and outstanding 25,000 shares at June 30, 2000
and December 31, 1999 5,000 5,000
Additional paid-in capital 23,059,294 18,249,770
Accumulated deficit (26,990,878) (25,370,930)
Treasury stock, at cost, 84,850 shares at June 30, 2000
and December 31, 1999 (49,460) (49,460)
------------ ------------
Total shareholders' equity 4,814,786 1,954,734
------------ ------------
Total liabilities and shareholders' equity $ 5,393,257 $ 2,533,975
============ ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
Le@P Technology, Inc. and Subsidiaries
Consolidated Statements of Operations (unaudited) - Three and Six Month Periods
Ended June 30, 2000 and 1999
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Interest Income $1,789 $ - $2,983 $ -
---------------- ---------------- ---------------- ----------------
1,789 - 2,983 -
Expenses:
Salaries and benefits 260,443 - 609,937 -
Professional fees 171,444 - 435,902 -
General and administrative 108,999 - 209,058 -
---------------- ---------------- ---------------- ----------------
Total expenses 540,886 - 1,254,897 -
---------------- ---------------- ---------------- ----------------
Operating loss (539,097) (1,251,914)
Equity in loss of Healthology, Inc. (368,034) (368,034)
---------------- ---------------- ---------------- ----------------
Loss from continuing operations (907,131) - (1,619,948) -
Loss from discontinued operations - (5,478,647) - (9,816,787)
---------------- ---------------- ---------------- ----------------
Net loss $(907,131) $(5,478,647) $ (1,619,948) $ (9,816,787)
================ ================ ================ ================
Net loss attributable to
common stockholders $(961,381) $(5,478,647) $ (1,728,448) $ (9,816,787)
================ ================ ================ ================
Basic and diluted loss per share:
Loss from continuing operations $(0.03) - $(0.05) -
Loss from discontinued operations - (0.37) - (0.78)
---------------- ---------------- ---------------- ----------------
Net loss $(0.03) $(0.37) $(0.05) $(0.78)
================ ================ ================ ================
Basic and diluted shares outstanding 32,736,516 14,975,283 32,401,717 12,646,852
================ ================ ================ ================
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Le@P Technology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited) - Six Months Ended
June 30, 2000 and 1999
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
2000 1999
------ ------
<S> <C> <C>
Operating activities:
Net loss $ (1,619,948) $ (9,816,787)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 22,802 --
Issuance of stock for services 30,000 --
Loss on leasehold improvements written off 30,168
Equity in loss of Healthology, Inc. 368,034 --
Net loss from discontinued operations -- 9,816,787
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (48,802) --
Other assets (4,839) --
Accounts payable 39,580 --
Accrued compensation and related liabilities (130,077) --
Accrued professional fees 24,136 --
Other liabilities 37,603 --
------------ ------------
Net cash used in operating activities (1,251,343) --
Investing activities:
Purchases of property and equipment (3,180) --
Investment in Healthology, Inc. (3,542,994) --
------------ ------------
Net cash used in investing activity (3,546,174) --
Financing activities:
Proceeds from note payable 61,816 --
Repayment of note payable (33,828) --
Issuance of Class A common stock 4,450,000 --
------------ ------------
Net cash provided by financing activities 4,477,988 --
Discontinued operations:
Operating activities -- (9,173,531)
Investing activities -- (2,086,847)
Financing activities -- 11,260,378
------------ ------------
Net cash used by discontinued operations -- --
Net change in cash (319,529) --
Cash at beginning of period 462,802 --
------------ ------------
Cash at end of period $ 143,273 $ --
============ ============
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
Le@P Technology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
1. The Company
Le@P Technology, Inc. ("Le@P" or the "Company") is a holding company whose
operating strategy is to acquire or make strategic investments in companies
(referred to herein as "Partner Companies") that provide services in healthcare
and life sciences, with particular interest in information technology companies
with Internet applications. Consistent with this business focus, on July 5,
2000, the Company's Shareholders approved the change in the Company's name to
Le@P Technology, Inc. from Seal Holdings Corporation.
During March 2000, the Company purchased an approximate 21% interest in
Healthology, Inc. ("Healthology"), a privately held, online media company. Such
interest was reduced to approximately 13.3% in August 2000 after Healthology
secured additional equity financing. See Note 3, "Investment in Healthology."
The Company also has an approximate 6% interest in Camber Companies, LLC
("Camber"), a company specializing in multidisciplinary, musculoskeletal care.
Discontinued Operations
On September 30, 1999, the Company's wholly-owned subsidiary, OH, Inc. ("OHI")
was acquired by a third party. The activities of OHI constituted the only active
business of the Company during 1999. The activities of OHI prior to October 1,
1999 are shown as discontinued operations in the accompanying consolidated
financial statements. Revenue from discontinued operations was $2,561,269 and
$4,439,482 for the three and six-month periods ended June 30, 1999, respectively
and is included as part of the loss from discontinued operations in the
accompanying consolidated statements of operations.
Operating Losses and Cash Flow Deficiencies
The Company has incurred losses and will continue to require additional funding
as it carries out its acquisition and investment strategy. Until such time as
the Company's operations generate positive cash flow, or another source of
funding is established, the Company will remain dependent upon external sources
of capital.
7
<PAGE>
Le@P Technology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
June 30, 2000
(Unaudited)
On September 30, 1999, the Company's Chairman and majority stockholder agreed to
provide Le@P, directly or through his affiliates (collectively, the "Majority
Stockholder"), funding of up to $10,000,000 to be used to fund working capital
requirements and future acquisitions, as approved by the Company's Board of
Directors (the "Funding Commitment"). See Note 4, "Funding Commitment." Through
June 30, 2000, the Company had received $5,000,000 of the Funding Commitment.
Management is considering alternatives to enable the Company to continue meeting
its current and projected cash requirements, or will attempt to further reduce
those requirements to a manageable level.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Le@P Technology, Inc. annual report on Form
10-KSB for the year ended December 31, 1999.
Reclassifications
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.
8
<PAGE>
Le@P Technology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
June 30, 2000
(Unaudited)
Consolidation
The accompanying financial statements include the accounts of Le@P Technology,
Inc. and its wholly owned subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation. Investments in Partner
Companies in which Le@P owns 50% or less of the outstanding voting securities,
and in which significant influence is exercised, are accounted for under the
equity method. Significant influence is presumed at a 20% ownership level;
however, in the future, Le@P may apply the equity method for certain investments
in which it acquires less than 20% of the voting interest if it then exerts
significant influence through representation on a Partner Company's Board of
Directors and other means. All other investments for which the Company does not
have the ability to exercise significant influence are accounted for on the cost
method. Such investments are stated at the lower of cost or net realizable
value. Through June 30, 2000, the Company has accounted for its investment in
Healthology under the equity method and its investment in Camber under the cost
method.
Partner Company Investments
Under the equity method, the Company's proportionate share of Partner Company
net income or loss is included in the Company's Consolidated Statements of
Operations. The amount by which the Company's carrying value exceeds its share
of the underlying net assets of a Partner Company accounted for under the equity
method is amortized on a straight-line basis over five years as an adjustment to
the Company's share of the Partner Company's net income or loss.
The Company periodically evaluates investments in Partner Companies for
indications of impairment based on one or more factors, such as the market value
of each investment relative to cost, financial condition, near-term prospects of
the investment, and other relevant factors. The fair value of the Company's
ownership interests in privately held Partner Companies, if available, is
generally determined based on the value at which independent third parties have
or have committed to invest in its Partner Companies.
Pursuant to SEC Staff Accounting Bulletin No. 84, at the time a Partner Company
accounted for under the equity method of accounting sells its common stock at a
price different from the Partner Company's book value per share, the Company's
share of the Partner Company's net equity changes. If, at that time, the Partner
Company is not a newly-formed, non-operating entity, nor a research and
development, start-up or development stage company, nor is there question as to
its ability to continue in existence, the Company will record the change in its
share of the Partner Company's net equity as a gain or loss in its Consolidated
Statement of Operations.
9
<PAGE>
Le@P Technology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
June 30, 2000
(Unaudited)
Income Taxes
No provision for income taxes has been recorded due to losses to date. The
Company has recorded a valuation allowance for any deferred tax assets that have
resulted from its operating losses.
3. Investment in Healthology
On March 27, 2000, the Company completed the purchase of an approximate 21%
interest in the issued shares of Healthology (such interests have been computed
on an as-converted basis). Healthology is a privately held, online health media
company based in New York, NY that produces and distributes original healthcare
content generated by health professionals.
The Company acquired approximately 3.1 million shares of Healthology Series A
Convertible Voting Preferred Stock ("Healthology Preferred Shares") at a total
cost of approximately $3.5 million. The Company obtained the funds for the
Healthology acquisition through a capital contribution from its majority
stockholder pursuant to the Funding Commitment as described in Note 4 herein.
Following the Healthology acquisition, Healthology's Board of Directors includes
two representatives selected by the Company. The Preferred Shares are
convertible at any time, at the option of the Company, into shares of common
stock of Healthology, initially on a one for one basis, subject to adjustment
under certain circumstances. The Preferred Shares are automatically convertible
into common stock of Healthology upon the consummation by Healthology of a
qualified public offering of its common stock.
Presented below is unaudited selected pro forma financial information for the
six-month periods ended June 30, 2000 and 1999 as if the acquisition of
Healthology had occurred at the beginning of each period. The unaudited pro
forma financial information is provided for informational purposes only and
should not be construed to be indicative of the Company's consolidated results
of operations had the acquisition been consummated on the dates assumed and do
not project the Company's results of operations for any future period:
10
<PAGE>
Le@P Technology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
June 30, 2000
(Unaudited)
Six-Months Ended June 30,
------------------------------------
Pro-Forma: 2000 1999
------ ------
Net revenues $ 2,983 $ -
============== ==============
Loss from continuing operations $(1,730,115) $ (174,661)
============== ==============
Net loss $(1,730,115) $(9,991,448)
============== ==============
Basic and diluted loss per share $ (0.06) $ (0.79)
============== ==============
Presented below is unaudited selected financial information for Healthology for
the three and six-month periods ended June 30, 2000 and 1999.
Three-Months Ended Six-Months Ended
June 30, June 30,
------------------------- ------------------------
Healthology, Inc.: 2000 1999 2000 1999
------ ------ ------ ------
Net revenues $ 291,553 $ 181,167 $ 485,899 $ 230,948
========================= ========================
Gross profit (loss) $ (298,231) $ 63,813 $ (413,933) $ 64,261
========================= ========================
Net loss $(1,081,911) $ (19,936) $(1,611,309) $(152,683)
========================== ========================
At June 30, 2000, the carrying value of the Company's investment in Healthology
exceeded the Company's equity in the underlying net assets of Healthology by
approximately $2.7 million. Pursuant to the equity method of accounting,
effective for the three month period ended June 30, 2000, the Company's
consolidated results of operations include its proportionate share of
Healthology's net loss of $225,146 and amortization of the Company's net excess
investment over its equity in Healthology of $142,888. The aggregate of these
amounts, $368,034, is included on the accompanying Statements of Operations as
Equity in Loss of Healthology.
During August 2000, Healthology received an additional equity investment of $6.0
million from a strategic, third party investor. Such investment was in the form
of preferred stock with terms similar to those held by Le@P. Following this new
investment, the Company's interest in the equity of Healthology declined to
approximately 13.3%.
A Company director is a principal in an investment-banking firm that provided
services to the Company relating to the Healthology acquisition and subsequently
advised Healthology on the additional equity investment by a third party.
11
<PAGE>
Le@P Technology, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
June 30, 2000
(Unaudited)
4. Funding Commitment
In connection with the Funding Commitment, through June 30, 2000, the Majority
Stockholder contributed $5,000,000 to the Company. Of this amount, approximately
$3,544,000 was to fund the investment in Healthology and related transaction
expenses, and $1,456,000 was to fund operating expenses. In consideration of
these contributions, the Company has issued 952,380 shares of the Company's
Class A Common Stock at a purchase price of $5.25 per share. Such shares were
issued during the three-month period ended June 30, 2000.
As of June 30, 2000, an additional $5.0 million (the "Additional Funds") was
available to the Company pursuant to the Funding Commitment. The Board of
Directors of the Company and the Majority Stockholder agreed that such
Additional Funds represent a subscription for additional shares of the Company's
Class A Common Stock at $5.25 per share (an aggregate of 952,380 shares when the
remaining $5.0 million is contributed).
5. Contingencies
The Company is involved in litigation relating to the offshore supply business
conducted prior to August 14, 1996 by certain inactive subsidiaries of Le@P. The
cases are maritime asbestos claims against certain of the Company's inactive
subsidiaries. On May 1, 1996, the asbestos claims were administratively
dismissed subject to reinstatement on motion of plaintiff's counsel. It is
expected that all of these cases will be reinstated in the future. The Company
is presently unable to determine what, if any, impact these cases could have
upon the Company.
The Company is also involved from time to time in various other claims and
lawsuits in the ordinary course of its current or prior business, none of which
the Company anticipates would have a material adverse effect on its financial
condition.
6. Loss Per Share
In February 2000, the Company granted 1.2 million options to employees pursuant
to its 1999 Long-Term Incentive Plan. Options were not included in the
computation of loss per share for the three and six-month periods ended June 30,
2000 and 1999 because their effect would have been anti-dilutive.
The net loss attributable to common stockholders from continuing operations and
from discontinued operations for the three and six-month periods ended June 30,
2000 includes undeclared dividends on cumulative preferred stock of $54,250 and
$108,500 respectively. There were no such dividends for the three and six-month
periods ended June 30, 1999.
12
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Business Strategy
Le@P Technology, Inc. ("Le@P" or the "Company") seeks to expand its
participation in Internet, business-to-business ("B2B") e-commerce, while
maintaining a focus on the healthcare industry. Le@P's operating strategy is to
acquire or make strategic investments in companies that provide services in
healthcare and life sciences, with particular interest in information technology
companies with Internet applications. The Company intends to utilize the
substantial healthcare skills, experience and industry contacts of its
management and Board of Directors in the development of a network of investment
and acquisition candidates (referred to herein as "Partner Companies"). Le@P
further intends to foster innovation and growth among its Partner Companies by
providing the opportunity for the exchange of ideas among those companies and
encouraging collaborative ventures among them.
Although the Company's focus is on Internet and B2B e-commerce companies, the
Company may also consider acquisitions of, or investments in, non-Internet
companies, primarily in healthcare related fields.
Partner Company Strategy
The Company is aggressively pursuing acquisitions and investments in Internet
and B2B e-commerce companies, with a focus on the healthcare industry.
Typically, the Company receives business plans from early stage companies
seeking equity financing. Information received is evaluated to determine if the
potential Partner Company's business is within Le@P's investment parameters. The
Company will generally consider investment in Partner Companies with a clearly
defined product or service, experienced and financially committed management,
and some operational history.
The Company uses an informal network of business contacts, media coverage, and
attendance at industry and venture conferences to identify suitable Partner
Company prospects. Le@P believes that the healthcare industry knowledge of its
management and Board provide a competitive advantage in the evaluation of
investment targets. The Company also believes that potential Partner Companies
will look favorably on Le@P's healthcare experience when deciding among
investors.
Healthology Acquisition
Le@P's first Internet, B2B investment was completed in March 2000, with the
purchase of a 21% interest in Healthology, Inc. ("Healthology"), a privately
held, online health media company. Le@P purchased approximately 3.2 million
shares of the Series A Convertible Voting Preferred Stock ("Healthology
Preferred Stock") of Healthology (the "Healthology Transaction") for $3.2
million in cash, representing an approximate 21% interest in the issued shares
of Healthology. Healthology produces and distributes original Healthcare
Internet content generated by health professionals. Healthology's content is
in-depth, topic-focused and event-driven and is delivered in various formats,
including text articles and live audio/video webcast programs (streaming media).
Healthology delivers its proprietary content to consumers on the Internet via
the web sites of various distribution partners and portal customers, as well as
websites it has developed.
13
<PAGE>
As described in Note 3 of the Company's June 30, 2000 financial statements
included in Part I, Item 1 of this Form 10-QSB, on August 3, 2000, Healthology
received additional equity financing on terms similar to those afforded Le@P in
the amount of $6.0 million from Communicade Inc., a wholly owned subsidiary of
Omnicom Group, Inc. (collectively, "Omnicom") (NYSE:OMC). According to Omnicom's
December 31, 1999 Annual Report on Form 10-K, Omnicom was ranked as the largest
advertising agency group worldwide based on unaudited industry-wide figures
published in 1999 by the trade journal ADVERTISING AGE. As a result of such
additional financing, the Company's equity interest was reduced to approximately
13.3% of the issued shares of Healthology.
Based on discussion with Healthology management, the Company believes that
Omnicom will provide Healthology access to a larger base of potential
advertisers and sponsors for its on-line health content. Omnicom provides
corporate communications services to clients worldwide on a global,
pan-regional, national and local basis. The corporate communications services
offered by Omnicom include advertising in various media such as television,
radio, newspaper, magazines, outdoor and the internet, as well as public
relations, specialty advertising, direct response and promotional marketing,
strategic media planning and buying, and internet and digital media development.
In connection with Omnicom's investment in Healthology, the Company granted
Healthology a put option which, if exercised, would require Le@P to purchase
800,000 shares of Healthology common stock at $1.25 per share, for aggregate
consideration of $1.0 million (the "Put Option"). The purchase price of $1.25
represents a premium over the current market value of Healthology equity
securities. The term of the option is from January 1 to December 31, 2001,
subject to earlier termination under certain circumstances.
As part of the Omnicom investment, the Company entered into certain amended and
restated agreements with Healthology relating to its investment. Copies of such
amended and restated agreements are included as Exhibits to this 10-QSB and the
discussion herein is qualified in its entirety by reference to such agreements.
Pursuant to the terms of the amended agreements, the shares of Healthology
Preferred Stock have certain super-majority voting rights for the election of
directors. In general, so long as the Put Option is in effect, the Company is
entitled to voting rights equal to the number of shares of Healthology common
stock as will guarantee that the Company, solely for the purposes of electing
directors, has no less than 26% of the voting power of the outstanding capital
stock of Healthology and will be the single largest such voting stockholder (the
"Super-Voting Right"). In order to maintain the Super-Voting Right, the Company
must also exercise its preemptive rights on future issuances of securities by
Healthology. In addition, the Company or its permitted transferees must retain
its current stock in Healthology.
Additionally, following the Omnicom investment, Healthology's Board of Directors
continues to include two representatives selected by Le@P, and the Company has
certain anti-dilution rights, registration rights, tag-along rights and
preemptive rights, and are subject to certain drag-along rights.
14
<PAGE>
For further discussion of the Healthology Transaction, please refer to Note 3 of
the Company's June 30, 2000 financial statements included in Part I, Item 1 of
this Form 10-QSB and to the Company's Form 8-K dated March 1, 2000.
Investment Company Act Considerations
Since September 30, 1999, when the Company sold its last operating business in
the medical field, the Company has been relying on a temporary one-year
exclusion from investment company status under the Investment Company Act of
1940 (the "1940 Act"). A company that owns investment securities having a value
exceeding 40% of the value of its total assets is subject to registration and
regulation as an investment company unless it qualifies for a statutory or
regulatory exclusion or exemption from investment company status. The term
"investment securities" does not include securities of other companies
controlled primarily by the Company. The Company believes that based upon its
current asset mix, it will not be treated as an investment company. The Company
believes that its investment in Healthology will not be considered an
"investment security" so long as the Super-Voting Right remains in effect. As a
consequence of the amendments to the Healthology Transaction in August 2000, the
Company's Super-Voting Right is scheduled to terminate on December 31, 2001 and
may terminate prior to such time. If at the time the Company loses the
Super-Voting Right, its relative asset values have not changed to include more
assets controlled primarily by the Company, and the Company does not qualify for
any other exclusion or exemption afforded by the 1940 Act, it may be required
either to register as an investment company or take significant business actions
that are contrary to its business objectives in order to avoid being required to
register as an investment company. For example, the Company might be compelled
to acquire additional assets that it might not otherwise have acquired, be
forced to forgo opportunities to acquire interests in companies or other assets
or be forced to sell or refrain from selling such interests or assets. In
addition, the Company might need to sell certain assets which are considered to
be investment securities. There may be little or no market for the sale of such
assets.
Company Liquidity and Cash Requirements
Due to the nature of the Company's Partner Company investments, no positive
operating cash flows are expected to be realized in the foreseeable future.
Generally, Internet start-ups have employed a strategy of rapidly building
infrastructure and introducing products and services in advance of firm
commitments for sales. The Company believes that this strategy continues to be
widely followed as new and existing firms strive to establish market penetration
in anticipation of significant opportunities for future revenue growth.
15
<PAGE>
The Company expects that its Partner Companies, including Le@P's first such
Partner Company, Healthology, will require one or more rounds of additional
equity capital before they can be expected to generate positive cash flow. The
investment by Omnicom in Healthology is an example of such additional financing.
The Company's investment evaluations anticipate such additional rounds of future
financing, at successively higher valuations, such that while the Company's
ownership interest may decline, the value of its interest may increase based on
the amount paid by later stage investors. The Omnicom investment in Healthology,
however, was completed at the same valuation per share as the investment by the
Company.
The Company believes that it could realize the value of its Partner
Company investments through the sale of the Partner Company to a larger
competitor, through the sale of some or all of its interest after an initial
public offering by a Partner Company, or by selling some or all of its interest
to venture capital or other firms. There can be no assurance, however, that the
Partner Companies will successfully execute their business plans, or that, if
successful, a suitable buyer for Le@P's interest will be found. In addition,
there can be no assurance that any Partner Company would be able to raise
additional financing or that any such financing would be at a valuation higher
than that paid by the Company. The Company's investments and acquisitions are
illiquid in nature and cannot be readily sold.
Since the fourth quarter of 1999, the Company has funded its operations and the
Healthology acquisition through proceeds from the Funding Commitment described
in Note 4 of the Company's June 30, 2000 financial statements included in Part
I, Item 1 and in Part II Item 2 of this Form 10-QSB.
The Company anticipates that, at the current level, its operating expenses for
the twelve-month period ending June 30, 2001 will be between $1.6 and $1.9
million. As previously indicated, the Company has granted Healthology the Put
Option. In addition, under certain conditions, the Company is required to
participate in any future rounds of Healthology financing in order to maintain
its current ownership interest and its Super-Voting Right. The Company believes
that the balance of the funds available to it pursuant to the Funding Commitment
will allow it to meet these anticipated cash requirements and to make additional
Partner Company investments.
Nevertheless, because the Company does not anticipate receiving cash flow from
its Partner Companies, funding for operations and future Partner Company
investments once the Funding Commitment is exhausted will require that the
Company raise additional cash. Any such cash raised would likely be dependent on
the Company's ability to demonstrate a record of successfully identifying and
consummating investments or acquisitions in Partner Companies and the continued
expectation by investors that Internet-based e-commerce has the potential for
dramatic growth. The Company anticipates that it will begin to actively seek
additional funding in the second half of 2000 from third parties and from
affiliates of its majority stockholder. There can be no assurance that the
Company will be successful in such efforts, however. Any financing activities by
the Company could result in substantial dilution of existing equity positions
and increased interest expense. Transaction costs to the Company in connection
with any such activities may also be significant.
Management believes that the current level of operating expenses can support
additional Partner Company investments. Nevertheless, should the Company be
unable to attract additional funding, operations beyond the second quarter of
2001 would be materially curtailed.
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Investment in Camber
The Company's investment in Camber had a carrying value of $1.8 million at June
30, 2000, representing Le@P's historical cost basis. Camber, which began
operations in 1998, has incurred significant losses while developing its
business strategy. Camber operates 23 clinics in Florida and California
specializing in multidisciplinary, musculoskeletal care. Camber management
anticipates that they will reach cash flow break-even during 2000, and that its
current business plan will provide for significant profitability through the
acquisition of, and affiliation with, a significant number of additional
clinics. At this time, the Company is unable to determine whether the growth
through acquisitions contemplated by Camber can be made without substantial
dilution of the Company's interest. Should such acquisitions be made and funded
with additional equity financing by Camber, the Company's interest may be
diluted. Significant dilution of the Company's interest could result in the
impairment of the value of the Camber investment which would require a
write-down of some or all of said investment.
Changes in Financial Condition and Results of Operations
The discussion below relates to material changes in financial condition from
December 31, 1999 to June 30, 2000 and to material changes in results of
operations when comparing the second quarter of 2000 to the first quarter of
2000. The Company does not believe that it is meaningful to compare changes from
the corresponding interim periods in the preceding year due to the significant
change in the Company's operations when its only operating subsidiary, OH, Inc.
("OHI") was acquired by a third party on September 30, 1999. Please refer to the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999 for
information on the disposal of OHI. The operations of OHI are shown as
discontinued operations in the financial statements included in Part I, Item 1
of this Form 10-QSB. All amounts in the discussion below are approximate.
Financial Condition at June 30, 2000 compared to December 31, 1999 and to March
31, 2000.
Total assets increased during the six-months ended June 30, 2000 by $2.9 million
to $5.4 million due primarily to the increase in the Company's investment in
Healthology of $3.2 million. For the three-months ended June 30, 2000 total
assets decreased by $264,000 due primarily to a net decrease in the Investment
in Healthology. Such investment decreased as a result of the Company recording a
non-cash charge for its equity in the loss of Healthology for the three-months
ended June 30, 2000 of $368,000 (see further discussion below regarding such
charge).
17
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Results of Operations for the Three Months Ended June 30, 2000 Compared to the
Three Months Ended March 31, 2000.
The Company incurred a net loss of $907,000 for the second quarter of 2000 which
represents an increase of $194,000 or 27% from the first quarter 2000 loss of
$713,000. The Company reduced operating costs for the second quarter of 2000 by
24% or $173,000 from the previous quarter total of $714,000. This decrease in
operating expenses was offset by a non-cash charge for the Company's equity in
the loss of Healthology of $368,000 recorded in the second quarter of 2000. No
such charge was recorded in the first quarter of 2000. The reduction in
operating expenses was due to lower salaries and wages and professional fees.
Salaries and wages were $260,000 in the second quarter of 2000, a decrease of
26% or $89,000 from the previous quarter. The decline resulted primarily from
(1) the scheduled expiration on March 31, 2000 of employment agreements with the
former Chairman and with the former Chief Financial Officer of the Company, and
(2) a decrease in the accrual for bonuses provided for in certain management
employment agreements. Professional fees were $171,000 in the second quarter of
2000, decreasing $93,000 or 35% from the preceding quarter. The majority of this
decrease was due to the scheduled expiration on March 31, 2000 of the consulting
agreement with a firm owned by the Company's former Chairman and to lower out of
pocket costs paid to the outside investment banking firm formerly retained by
the Company.
The Company completed its investment in Healthology during March 2000. Following
such investment, and pursuant to the equity method of accounting, the Company
began recording its equity in the loss of Healthology during the three months
ended June 30, 2000. The resulting non-cash charge of $368,000 consists of (1)
the Company's proportionate share of Healthology's net loss, and (2)
amortization of the amount by which the carrying value of the Company's
investment in Healthology exceeds its share of the underlying net assets of
Healthology. For the three months ended June 30, 2000, Healthology incurred a
loss of $1,082,000 such that the Company's then approximate 21% equity in the
loss was $225,000. Amortization of the amount by which the Company's carrying
value exceeds its share of the underlying net assets of Healthology was $143,000
for the three months ended June 30, 2000. Such excess is being amortized on a
straight-line basis over five years as an adjustment to the Company's share of
Healthology's net income or loss.
Generally, pursuant to the equity method of accounting, when a Company's
ownership interest in an investee drops below 20%, the equity method of
accounting is no longer applicable and the Company uses the cost method of
accounting. Under the cost method, investments are stated at the lower of cost
or net realizable value and no charge is recorded for the Company's equity in
income or loss of the investee. Following the Omnicom investment in Healthology
on August 3, 2000, the Company's interest in the issued equity securities of
Healthology declined to approximately 13.3%. Despite this lower ownership
interest, the Company continues to exercise influence on the operations of
Healthology, primarily by virtue of the contractual right to maintain two seats
on Healthology's Board of Directors and its Super-Voting Right. The Company has
not yet determined which method of accounting will be applicable pursuant to
generally accepted accounting principles for its investment in Healthology
following the Omnicom investment.
18
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Forward Looking Information
In the discussion above (and elsewhere in this report) regarding the Company's
business, any statement of its future expectations, including without
limitation, future revenues and earnings (losses), plans and objectives for
future operations, future agreements, future economic performance or expected
operational developments and all other statements regarding the future are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and as that term is defined in the Private Securities Litigation Reform
Act of 1995. The Company intends that the forward-looking statements be subject
to the safe harbors created thereby. These forward-looking statements are based
on the Company's strategic plans and involve risks and uncertainties that may
cause actual results to differ materially from the forward-looking statements.
Factors, risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements herein include (the
"Cautionary Statements"), without limitation the items listed below. Based on
the nature of the Company's operations, these factors, risks and uncertainties
relate not only to the Company, but also to its investees, Healthology and
Camber.
* The ability to raise capital,
* The ability to execute business strategy in a very competitive environment,
* The degree of financial leverage,
* The ability to control future operating and other expenses,
* Risks associated with the capital markets and investment climate for Internet
and Healthcare businesses,
* Risks associated with acquisitions and the integration thereof,
* Risks associated with start-up and early-stage enterprises,
* Risks associated with providing services over the Internet,
* Healthcare regulatory considerations and risks,
* Regulatory considerations under the Investment Company Act of 1940,
* Contingent liabilities,
* The impact of competitive services and pricing, and
* Other risks referenced from time to time in the Company's filings with the
Securities and Exchange Commission.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements. The Company does not undertake any
obligations to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
19
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 5 of the Company's June 30, 2000 financial statements included in Part
I, Item 1 of this Form 10-QSB.
Item 2. Changes in Securities
Pursuant to that certain letter dated September 30, 1999, the Company's majority
stockholder agreed to make available to the Company up to Ten Million Dollars
($10,000,000) in funding (the "Funding Commitment") for working capital purposes
and to enable the Company to enter into acquisitions and other transactions, as
approved by the Board of Directors. In connection with the Funding Commitment
the Company's majority stockholder and certain of his affiliates (collectively,
the "Majority Stockholder") had contributed $4,050,000 (the "Funds") to the
Company through March 30, 2000.
In consideration of the contribution by the Majority Stockholder of the Funds,
the Board of Directors of the Company and the Majority Stockholder agreed on
March 30, 2000 that the Company would issue to the Majority Stockholder 771,428
shares of the Company's Class A Common Stock ("Class A Common Stock") at a
purchase price of $5.25 per share for $4,050,000 in funds which had been
contributed to the Company as of that date. Such shares were issued on April 17,
2000.
The Board of Directors of the Company and the Majority Stockholder further
agreed on March 30, 2000 that the balance of the Funding Commitment (the
"Additional Funds") would represent a subscription for additional shares of the
Company's Class A Common Stock at $5.25 per share .
Pursuant to the Funding Commitment, an additional 180,952 shares of common stock
were issued to the Majority Stockholder during June 2000 for $950,000
contributed to the Company during the second quarter 2000.
As of June 30, 2000, $5,000,000 of Additional Funds were available to the
Company pursuant to the Funding Commitment. Such Additional Funds represent a
subscription for shares of the Company's Class A Common Stock at $5.25 per share
(an aggregate of 952,380 shares when the remaining $5,000,000 is contributed).
Each of the foregoing issuances of securities to the Majority Stockholder was
exempt from registration pursuant to Section 4(2) of the Securities Act.
20
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Item 4. Submission of Matters to a Vote of Security Holders
On July 5, 2000, the Company held its Annual Meeting of Stockholders pursuant to
the notice of meeting announced in the proxy statement dated June 22, 2000.
The results of the voting on the various proposals is as follows:
Proposal 1: The election of directors of the Corporation.
For Withheld Non-Vote
--- -------- --------
Class A Directors:
Thomas M. Ferguson 31,556,833 250 0
John J. Rydzewski 31,556,833 250 0
Jose B. Valle 31,556,833 250 0
Laurence B. Brody, DDS 31,556,833 250 0
For Withheld Non-Vote
--- -------- --------
Class B Directors:
M. Lee Pearce, M.D. 25,000 0 0
Robert G. Tancredi, M.D. 25,000 0 0
Timothy C. Lincoln 25,000 0 0
Proposal 2: Amend the Certificate of Incorporation in order to change the name
of the Company to Le@P Technology, Inc.
For Against Abstain Non-Vote
--- ------- ------- --------
31,581,783 150 150 0
Proposal 3: Ratification of Ernst & Young, LLP as independent auditors.
For Against Abstain Non-Vote
--- ------- ------- --------
31,581,958 25 100 0
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3 Certificate of Amendment to Certificate of Incorporation of
the Company filed July 5, 2000 in connection with the name
change to Le@P Technology, Inc.
10.1 First Amended and Restated Investors Rights Agreement between
Healthology, Inc., Le@P Technology, Inc., and Communicade, Inc.
dated August 1, 2000.
10.2 First Amended and Restated Stockholders' Agreement between
Healthology, Inc., Le@P Technology, Inc., and Communicade, Inc.
and certain other existing stockholders of Healthology, Inc.
dated August 1, 2000.
10.3 Amended and Restated Certificate of Incorporation of
Healthology, Inc. filed August 1, 2000.
27 Financial Data Schedule.
(b) Reports on Form 8-K
(i) Current Report on Form 8-K dated July 5, 2000
(File No. 000-05667) filed on July 19, 2000, announcing the
Company's new name and stock trading symbol.
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LE@P TECHNOLOGY, INC.,
Dated: August 14, 2000 By: /s/ Cecilio M. Rodriguez
------------------------
Cecilio M. Rodriguez
Chief Financial Officer
and Treasurer
(Principal Financial Officer
and Duly Authorized Officer)
23
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