<PAGE>
PROSPECTUS Filed Pursuant to Rule 424(b)(4)
Registration Number 333-05051
4,000,000 SHARES LOGO
THE LEAP GROUP, INC.
----------------
COMMON STOCK
All of the 4,000,000 shares being offered hereby are being sold by The Leap
Group, Inc. (the "Company"). Up to 600,000 additional shares may be sold
by certain of the Company's stockholders (the "Selling Stockholders")
in the event that the Underwriters exercise their over-allotment
option. The Company will not receive any of the proceeds from
the sale of shares by the Selling Stockholders. See
"Principal and Selling Stockholders."
----------------
Prior to this offering, there has been no public market for the
Common Stock. See "Underwriting" for information
relating to the factors considered in
determining the
initial public offering price.
----------------
The Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "LEAP."
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------
<TABLE>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
PER SHARE $10.00 $0.70 $9.30
TOTAL(3) $40,000,000 $2,800,000 $37,200,000
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deduction of expenses payable by the Company, estimated at $800,000.
(3) The Selling Stockholders have granted the several Underwriters a 30-day
option to purchase up to an additional 600,000 shares of Common Stock
solely to cover over-allotments, if any. If such option is exercised in
full, the total price to public, underwriting discounts and commissions and
proceeds to Selling Stockholders will be $46,000,000, $3,220,000 and
$5,580,000, respectively. The proceeds to the Company will not change from
the amount set forth. See "Underwriting."
----------------
The Common Stock is being offered by the Underwriters named herein when, as
and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected
that delivery of the shares will be made in New York on or about October 2,
1996.
----------------
DEAN WITTER REYNOLDS INC. DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
September 27, 1996
<PAGE>
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information, including "Risk Factors," and
consolidated financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that the Underwriters' over-allotment option described
in "Underwriting" is not exercised. Financial data pertaining to periods prior
to March 11, 1996 reflect the consolidated financial data of The Leap
Partnership, Inc. ("Leap Partnership"), Lilypad Services, Inc. ("Lilypad") and
Tadpole Productions, Inc. ("Tadpole"), which became wholly-owned subsidiaries
of The Leap Group, Inc. on such date. Unless the context otherwise requires,
"Company" or "Leap" shall mean The Leap Group, Inc. and its subsidiaries.
References herein to "fiscal 1996," "fiscal 1995" and "fiscal 1994" refer,
respectively, to the twelve months ended January 31, 1996, the twelve months
ended January 31, 1995 and the period from inception (September 20, 1993) to
January 31, 1994.
THE COMPANY
Leap is a strategic and creative communications company that develops and
implements integrated brand marketing campaigns using traditional and new media
primarily for market leading clients. Traditional marketing services provided
by Leap include television, print, radio and outdoor advertising, promotions,
direct mail and package and logo design; and its new media services include
digital interactive applications such as World Wide Web sites, CD-ROMs and
interactive presentations. The Company's marketing and communications services
combine comprehensive strategic brand marketing skills, award-winning creative
talent, and the production capabilities of world class full service advertising
agencies with the technological expertise to exploit new interactive and other
digital media. Leap's mission is to build brand equity for its clients. Leap
focuses on establishing long-term marketing partnerships with marquee clients
of national and international scope that position the Company as the steward
for major brands with correspondingly significant advertising budgets.
The Company believes that certain core strengths have been, and will continue
to be, integral to Leap's strategy. These strengths include superior creative
talent, a focus on and an expertise in strategic brand positioning, a "flat"
organizational structure built around cross-functional work teams that maximize
accessibility and responsiveness to clients, and expertise in the application
of new marketing communications technology integrated with a wide range of
traditional services. Leap believes that these strengths enable the Company to
create integrated marketing communications campaigns that fulfill its clients'
marketing goals on a timely and cost-effective basis.
The Company targets Fortune 500 clients who are national and global industry
leaders. Since its founding in late 1993, Leap has successfully competed for
and managed large national accounts for prestigious clients such as Nike, Inc.
("Nike") and Miller Brewing Company ("Miller"). The Company's past and current
projects include (i) serving as agency of record for Niketown and Nike Factory
Stores, Tommy Armour Golf Company ("Tommy Armour"), U.S. Robotics, Inc., ("U.S.
Robotics"), and Ameritech Corporation, (ii) World Wide Web site development for
Nike, Tommy Armour and the Chicago Tribune Company, (iii) strategic brand
positioning for Niketown, R.J. Reynolds Tobacco Co. ("R.J. Reynolds"), Pizza
Hut, Inc., and YES! Entertainment and (iv) the January 1995 Super Bowl campaign
for Miller. In December 1995, Leap voluntarily resigned the Miller account in
order to pursue other assignments. See "--Summary Consolidated Financial and
Other Data."
3
<PAGE>
Leap's present and prospective clients currently advertise primarily on
national mass circulation media such as network television, network radio and
nationally circulating newspapers and magazines. According to McCann-Erickson
Worldwide, a leading advertising agency that regularly publishes such
information, total U.S. spending on such media amounted to approximately $40
billion in 1995. Leap believes that large advertisers increasingly are looking
for ways to improve the effectiveness of their advertising without increasing
advertising expenditures, and to better measure results from advertising. As a
result, advertisers are beginning to shift away from relying primarily on
traditional one-way "broad cast" media, such as broadcast television, to media
that enable advertisers to "narrow cast" or customize marketing messages to a
well-defined audience. Recent developments in digital technology have led to
the emergence of new media communications vehicles such as the World Wide Web,
the Internet, CD-ROMs and interactive presentations. Now, such new media not
only permit real time one-to-one communications links with consumers, but allow
consumers, as a consequence of the interactive process, to shape the
advertising messages that they receive and become more engaged by the messages.
A Forrester Research report dated May 1996 estimated that the market for online
advertising spending will reach $80 million in 1996 and $4.8 billion by the
year 2000.
The Company was incorporated in Delaware in March 1996 as a holding company
for Leap Partnership, Lilypad and Tadpole. Leap Partnership was incorporated in
Illinois in September 1993. Lilypad and Tadpole were incorporated in Illinois
in September 1995.
The Company's principal executive offices are located at 22 West Hubbard
Street, Chicago, Illinois 60610, and its telephone number is (312) 494-0300.
The Company's World Wide Web site address is: http://www.leapnet.com.
Information contained in the Company's Web site shall not be deemed to be a
part of this Prospectus.
THE OFFERING
Common Stock Offered by the Company..... 4,000,000 shares
Common Stock to be Outstanding after
the Offering............................ 13,600,000 shares(1)
Use of Proceeds......................... For working capital and other general
corporate purposes and for repayment
of indebtedness. See "Use of
Proceeds."
Nasdaq National Market symbol........... LEAP
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(1) Excludes (i) 2,424,000 shares of Common Stock issuable upon exercise of
options outstanding as of the date of this Prospectus (options to purchase
1,662,333 of such shares are currently exercisable) and (ii) 2,580,000
shares of Common Stock reserved for issuance upon exercise of options that
may be granted in the future under the Company's stock option and stock
purchase plans. See "Capitalization," "Management--Stock Option Plans" and
Notes 5 and 9 of Notes to the Company's Consolidated Financial Statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The summary consolidated financial and other data should be read in
conjunction with the audited financial statements, including the notes thereto,
appearing elsewhere in this Prospectus and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Results for interim
periods are not necessarily indicative of results to be expected during the
remainder of the fiscal year or for any future period. The following data are
presented in thousands, except per share amounts and the number of Creative
Partners.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED JULY
JANUARY 31, 31,
----------------------- -------------
1994(1) 1995 1996 1995 1996
------- ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................. $ 373 $4,679 $8,210 $5,577 $7,290
Operating income/(loss)................... (123) (1,390) 1,356 1,240 355
Net income/(loss)......................... (76) (1,065) 700 675 257
Net income/(loss) per share(2)............ $(0.01) $(0.11) $ 0.07 $ 0.07 $ 0.03
Shares used in per share computation(2)... 10,109 10,109 10,109 10,109 10,109
</TABLE>
<TABLE>
<CAPTION>
AS OF JULY 31, 1996
-----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 82 $33,643
Working capital........................................ (1,425) 34,426
Total assets........................................... 6,101 39,662
Long-term debt......................................... 648 99
Total stockholders' equity/(deficit)................... (182) 36,218
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED JULY
JANUARY 31, 31,
------------------------- -------------
1994(1) 1995 1996 1995 1996
------- ------- ------- ---- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OTHER DATA (UNAUDITED):
Revenues, excluding Miller(4)....... $ 373 $ 1,700 $ 2,758 $813 $ 7,290
Retainer and fee revenues(5)........ $ 0 $ 560 $ 1,642 $163 $ 1,946
Retainer and fee revenues as a
percentage of total revenues(5).... 0.0% 12.0% 20.0% 2.9% 26.7%
Number of Creative Partners at end
of period(6)....................... 15 27 38 30 65
</TABLE>
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(1) The Company's initial operating business, Leap Partnership, was formed
September 20, 1993, and had no operations prior to November 1993.
(2) Calculated on the basis described in Note 2 of Notes to the Company's
Consolidated Financial Statements.
(3) As adjusted to give effect to the offering (after deduction of underwriting
discounts, commissions and estimated offering expenses payable by the
Company) and the application by the Company of the net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
(4) In December 1995, the Company voluntarily resigned the Miller account in
order to pursue other assignments. The information provided presents
revenues as if Miller had been excluded throughout each of the periods
presented. See "Business--Leap's Clients."
(5) Retainer and fee revenues represent revenues derived from fixed fee
arrangements with clients, not specific to particular projects, which
typically contemplate monthly payments over specified service periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
(6) All of Leap's employees share the same title--"Creative Partner." See
"Business--Leap's Core Strengths--Talent and Creative Distinction."
5
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following factors, in
addition to the other information contained in this Prospectus, in evaluating
an investment in the shares of Common Stock offered hereby. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth in the following risk factors and elsewhere in this
Prospectus.
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT
The Company has a limited operating history. The Company began operations in
November 1993 and experienced operating losses during fiscal 1994 and fiscal
1995. Although the Company had operating income of approximately $1,356,000 in
fiscal 1996 and approximately $355,000 for the six months ended July 31, 1996,
the Company had an accumulated deficit of approximately $183,000 as of July
31, 1996. There can be no assurance that the Company will sustain
profitability in the future. Future operating results will depend on many
factors, including demand for the Company's services, the Company's ability to
maintain its client relationships and obtain assignments from new clients, the
Company's success in attracting and retaining qualified personnel, the level
of competition and the Company's ability to respond to competitive
developments. There can be no assurance that the Company will be successful in
addressing the risks presented by such factors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
DEPENDENCE ON KEY CLIENTS AND PROJECTS
An important part of the Company's strategy is to develop in-depth, long-
term relationships with a select group of clients in a variety of industries.
Consistent with such strategy, a large portion of the Company's revenues has
been and is expected to continue to be concentrated among a relatively small
number of major clients. For the fiscal year ended January 31, 1996, Miller
accounted for approximately 66% of the Company's revenues and the Company's
three largest clients (including Miller) accounted for approximately 85% of
such revenues. In December 1995, the Company voluntarily resigned the Miller
account in order to pursue other assignments. For the six months ended July
31, 1996, Nike, Tommy Armour, U.S. Robotics and Cincinnati Bell accounted for
approximately 29.5%, 20.8%, 20.5% and 14.3%, respectively, of the Company's
revenues. Since Leap is often retained by its clients on a project-by-project
basis, there can be no assurance that any significant client in any prior
period will be a source of significant revenues in any future period.
While the Company typically enters into written agreements with its clients,
it at times performs services prior to the execution of such agreements, and
written contracts are typically terminable by either party on short notice,
often 90 days and in certain instances less. The Company considers its
relationships with existing clients to be good. However, the loss of any one
or more of the Company's significant clients, the deterioration of the
Company's relationship with any of these clients or a decline in the clients'
businesses could have a material adverse effect on the Company's business,
financial condition or results of operations. Due to the nature of the
advertising business, any of the Company's clients could at any time in the
future, and for any reason, reduce its marketing budget, engage another entity
or take in-house all or part of the business performed by the Company. There
can be no assurance that the Company will perform any future work for any of
its existing clients. See "Business--Leap's Clients" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
POTENTIAL ADVERSE EFFECT OF FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY OF
BUSINESS
The Company's operating results are subject to variations in any given year,
and from quarter to quarter, as the Company's business reflects, to a large
degree, the advertising expenditures of its clients. Factors that may cause
operating results to fluctuate include the timing of the completion or
cancellation of a major project, an increase or reduction in the scope of
services to be performed for a client, the addition or loss of a major client,
the relative mix of higher and lower margin projects, changes in pricing
strategies, capital expenditures and other costs relating to the expansion of
operations, the hiring or loss of personnel, the opening or closing of
offices, and other factors that may be outside the Company's control. As a
result of the foregoing and other factors, the Company anticipates that it may
experience material fluctuations in operating results on a quarterly basis,
which may contribute to volatility in the price of the Common Stock. Depending
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upon its client mix at any time, the Company could experience seasonality in
its business. Such seasonality could arise from the timing of product
introductions and business cycles of the Company's clients and could be
material to the Company's results of operations. Such cycles vary from client
to client, and the overall impact on the Company's results of operations
cannot be predicted. In addition, the advertising industry as a whole exhibits
seasonality. Typically, advertising expenditures are highest in the fourth
calendar quarter and lowest in the first calendar quarter, particularly in
January. Although the Company has too limited an operating history to exhibit
any discernible seasonal trend, as the Company matures, its business and
results of operations could be affected by the overall seasonality of the
industry. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the efforts and
abilities of its senior management, including R. Steven Lutterbach, Frederick
Smith, Joseph A. Sciarrotta, George Gier and Thomas R. Sharbaugh, and other
key creative, technical, financial and strategic marketing personnel. Although
the Company has entered into three-year employment agreements with Messrs.
Lutterbach, Smith, Gier, Sciarrotta and Sharbaugh, there can be no assurance
that any of such persons will not voluntarily terminate his employment with
the Company. See "Management--Employment Agreements." Competition for highly
qualified personnel is intense, and the loss of any executive officer, senior
manager or other key employee could have a material adverse effect upon the
Company's business, operating results and financial condition. Although the
Company maintains key man life insurance policies in the amount of $1,250,000
on each of Messrs. Lutterbach, Smith, Sciarrotta and Gier, there can be no
assurance that such policies would adequately compensate for the loss of such
individuals.
If one or more of the Company's key employees resigns from the Company to
join a competitor or to form a competing company, the loss of such personnel
and any resulting loss of existing or potential clients to any such competitor
could have a material adverse effect on the Company's business, financial
condition and operating results. Each member of Leap's management and its
other significant employees have executed confidentiality and non-solicitation
agreements that restrict such persons from misappropriating confidential
information during such person's term of employment and thereafter and from
soliciting the Company's clients, prospects or employees for two years
following termination of employment. Notwithstanding such agreements, in the
event of the loss of any such personnel there can be no assurance that the
Company would be able to prevent the unauthorized disclosure or use of its
technical knowledge, practices, procedures or client lists.
The Company also believes that its future success will depend in large part
upon its ability to attract and retain additional highly skilled creative,
technical and marketing personnel. Competition for such personnel, especially
creative and technical talent, is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel.
Failure to attract and retain key personnel could have a material adverse
effect upon the Company's business, operating results and financial condition.
See "Business--Leap's Core Strengths--Talent and Creative Distinction."
POTENTIAL ADVERSE EFFECT OF INABILITY TO MANAGE GROWTH; RISKS ASSOCIATED WITH
ACQUISITIONS
The Company has experienced since its inception and may continue to
experience significant growth of its business which places demands on the
Company's management, employees, operations and physical resources. The
Company's senior management has limited experience in managing a public
company. The Company's strategy contemplates further growth of its business.
To manage such growth, the Company will be required to continue to improve its
operating systems, attract and retain superior advertising and new media
talent, and expand the Company's facilities. If the Company is unable to
effectively manage growth, the Company's business, operating results or
financial condition could be adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
In addition, a principal component of Leap's growth strategy involves the
strategic hiring of talent or the acquisition of businesses in fields related
to or complementary to those of Leap. The success of this strategy depends not
only upon the Company's ability to identify and hire people or acquire
businesses on a cost-
7
<PAGE>
effective basis, but also upon its ability to integrate acquisitions
effectively, to retain and motivate key personnel, and to retain the clients
of acquired firms. There can be no assurance that the Company will be able to
identify, acquire or integrate new operations. In general, there can be no
assurance that the Company will be able to manage acquisitions successfully,
and any inability to do so would have a material adverse effect on the
Company's business, financial condition and operating results. There also can
be no assurance that the Company will be able to sustain the rates of growth
in revenues or personnel that it has experienced in the past. See "Business--
Leap's Strategy--Pursue Acquisitions and Alliances."
UNPROVEN MARKET ACCEPTANCE OF THE COMPANY'S APPROACH
Using an unusual organizational structure built around cross-functional work
teams, the Company provides integrated brand marketing campaigns for its
clients using traditional and new media. The Company believes that both its
structure and its expertise in new media distinguish it from the traditional
agency approach. There can be no assurance that potential clients of the
Company, many of whom have long-standing relationships with traditional
advertising agencies, will be willing to embrace the Company's approach.
Moreover, to compete successfully against specialized service providers in new
media and other areas, the Company believes that its products and services in
each discipline will need to be competitive with the services offered by the
firms that specialize in each discipline. There can be no assurance that the
Company will be successful in providing competitive solutions to its clients.
Failure to do so could result in the loss of existing clients or the inability
to attract and retain new clients, either of which developments could have a
material adverse effect on the Company's business, financial condition and
operating results.
UNCERTAINTIES RELATING TO DEVELOPING MARKET FOR NEW MEDIA; NEW ENTRANTS;
UNPROVEN ACCEPTANCE OF THE COMPANY'S NEW MEDIA SOLUTIONS AND STRATEGY TO
DEVELOP PROPRIETARY MATERIAL
The Company's future growth depends in part upon its ability to increase the
amount of revenue it derives from providing marketing and advertising
solutions to its customers through new media, which the Company defines as
media that deliver content to end users in digital form, including the World
Wide Web, the Internet, proprietary online services, CD-ROMs and interactive
presentations. The new media advertising market has only recently begun to
develop, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed products and services for
communication and commerce through new media. Demand and market acceptance for
recently introduced products and services are subject to a high level of
uncertainty. There can be no assurance that commerce and communication through
new media will continue to grow or that targeted demographic groups will be
reachable through new media. The use of new media in marketing and
advertising, particularly by those individuals and enterprises that have
historically relied upon traditional means of marketing and advertising,
generally requires the acceptance of a new way of conducting business and
exchanging information. In particular, enterprises that have already invested
substantial resources in other means of conducting commerce and exchanging
information may be particularly reluctant or slow to adopt a new strategy that
may make their existing resources and infrastructure less useful. See
"Business--Industry Background."
The Company has a strategy to develop, own and maintain proprietary program
material that can be licensed by the Company with the goal of providing, over
time, a recurring revenue stream. The Company has not generated any revenues
from this strategy and no assurance can be given that the Company will be able
to negotiate such arrangements with clients or that any such arrangements will
generate revenues sufficient to offset the costs incurred by the Company in
developing such proprietary materials. See "Business--Leap's Strategy--Develop
Proprietary Program Material."
HIGHLY COMPETITIVE ENVIRONMENT; LOW BARRIERS TO ENTRY
The markets for the Company's services are highly competitive and the
Company faces competition from a number of sources. These sources include
national and regional advertising agencies as well as specialized and
integrated marketing communications firms. In addition, with respect to new
media, many advertising agencies have started to either internally develop or
acquire new media capabilities. New boutiques that provide either integrated
or specialized services (e.g., corporate identity and packaging, advertising
services or World Wide Web site design) and are technologically proficient,
especially in the new media arena, have
8
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emerged and are competing with the Company. Many of the Company's competitors
or potential competitors have longer operating histories, longer client
relationships and significantly greater financial, management, technological,
development, sales, marketing and other resources than the Company. In
addition, the Company's ability to maintain its existing clients and obtain
assignments from new clients depends to a significant degree on the quality of
its services and its reputation among its clients and potential clients, as
compared with the quality of services provided by and the reputations of the
Company's competitors. To the extent the Company loses clients to the
Company's competitors because of dissatisfaction with the Company's services
or the Company's reputation is adversely impacted for any other reason, the
Company's business, financial condition and operating results could be
materially adversely affected.
There are relatively low barriers to entry into the Company's business, and
the Company expects that it will face additional competition from new entrants
into the market in the future. The Company has no significant proprietary
technology that would preclude or inhibit competitors from entering the
Company's markets. There can be no assurance that existing or future
competitors will not develop or offer services and products that provide
significant performance, price, creative or other advantages over those
offered by the Company, which could have a material adverse effect on the
Company's business, financial condition and operating results. See "Business--
Competition."
UNCERTAIN ADOPTION OF THE INTERNET AS A MEDIUM OF COMMERCE AND COMMUNICATIONS;
DEPENDENCE ON THE INTERNET; UNCERTAINTIES REGARDING THE INTERNET
The Company's ability to derive revenues from new media solutions will
depend in part upon a robust industry and the infrastructure for providing
Internet access and carrying Internet traffic. The Internet may not prove to
be a viable commercial marketplace because of inadequate development of the
necessary infrastructure, such as a reliable network backbone or timely
development of complementary products, such as high-speed modems. Because
global commerce and online exchange of information on the Internet and other
similar open wide area networks are new and evolving, it is difficult to
predict with any assurance whether the Internet will prove to be and remain a
viable commercial marketplace. Moreover, critical issues concerning the
commercial use of the Internet (including security, reliability, cost, ease of
use and access, and quality of service) remain unresolved and may impact the
growth of Internet use. In addition, the applicability to the Internet of
existing laws governing issues such as property ownership, libel and personal
privacy is uncertain. The Federal Trade Commission and Congress have expressed
interest in regulating advertising on the Internet, and although no material
regulation has yet occurred, it may in the future, and could have an adverse
impact on the Company's business. There can be no assurance that the Internet
will become a viable commercial marketplace or that targeted demographic
groups will be reachable through the Internet. If the necessary infrastructure
or complementary products are not developed, or if the Internet does not
become a viable commercial marketplace, the Company's business, operating
results and financial condition could be materially adversely affected. See
"Business--Industry Background."
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS
The Company's revenues and results of operations will be subject to
fluctuations based upon the general economic conditions in the United States.
If there were to be a general economic downturn or a recession in the United
States, then the Company expects that business enterprises, including its
clients and potential clients, would substantially and immediately reduce
their advertising and marketing budgets. In the event of such an economic
downturn, there can be no assurance that the Company's business, operating
results and financial condition would not be materially and adversely
affected.
POTENTIAL ADVERSE EFFECT OF CONFLICTS OF INTEREST
Conflicts of interest are inherent in certain segments of the marketing
communications industry, particularly in advertising. The Company has in the
past and will in the future be unable to pursue potential advertising and
other opportunities because such opportunities would require the Company to
provide services to direct competitors of existing Company clients. In
addition, the Company risks alienating or straining relationships with
existing clients each time the Company agrees to provide services to even
indirect competitors of existing Company clients.
9
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UNCERTAINTIES REGARDING INTELLECTUAL PROPERTY RIGHTS
A majority of the Company's current agreements with its clients contain
provisions that grant to the client intellectual property rights to the
Company's work product created during the course of the Company's assignment
(except to the extent that such work product is not accepted by the client),
and agreements with future clients may contain similar provisions. Other
existing agreements are, and future agreements may be, silent as to the
ownership of such rights. To the extent that the ownership of such
intellectual property rights is expressly granted to the client or is
ambiguous, the Company's ability to reuse or resell such rights will or may be
limited.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The marketing communications industry is subject to extensive government
regulation, both domestic and foreign, with respect to the truth and fairness
of advertising. The Company must comply with Federal Trade Commission
regulations with respect to the marketing of products and services and similar
state regulations. In addition, there has been an increasing tendency in the
United States on the part of businesses to resort to the judicial system to
challenge comparative advertising of their competitors on the grounds that the
advertising is false and deceptive. Although the Company maintains
communication liability insurance coverage, there can be no assurance that
such coverage would adequately protect the Company in the event any such
claims are made against the Company or its clients by other companies or
governmental agencies. Some of the contracts that the Company enters into with
its clients require that the Company indemnify clients with respect to any
claims or actions brought by third parties which result from the use by the
clients of materials furnished by the Company.
POTENTIAL ADVERSE EFFECT OF LITIGATION
The Company is a defendant in pending litigation involving claims by the
Spin Doctors (a recording and performing group) arising from a television
commercial created by the Company. The plaintiff is seeking substantial
damages and, if successful, the damages could be material and in excess of any
available insurance coverage. See "Business--Legal Proceedings" and Note 6 of
Notes to the Company's Consolidated Financial Statements.
CONTROL BY CERTAIN STOCKHOLDERS; POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER
PROVISIONS
Upon completion of the offering, and assuming the exercise of currently
exercisable options, the Company's officers and directors and their respective
affiliates will beneficially own approximately 72.4 percent (approximately
68.4 percent if the over-allotment option is exercised in full) of the
Company's outstanding Common Stock. Although no voting agreements or similar
arrangements among such stockholders will exist upon completion of the
offering, if such stockholders were to act in concert in the future, they
would effectively be able to elect all of the directors of the Company,
approve or disapprove certain matters requiring stockholder approval and
otherwise control the management and affairs of the Company, including the
sale of all or substantially all of the Company's assets. Such concentration
of control of the Company may also have the effect of delaying, deferring or
preventing a third-party from acquiring a majority of the outstanding voting
stock of the Company, may discourage bids for the Company's Common Stock at a
premium over the market price and may adversely affect the market price of and
other rights of the holders of Common Stock. The Company's Amended and
Restated Certificate of Incorporation (the "Restated Certificate") and Amended
and Restated Bylaws (the "Bylaws") contain provisions that (i) limit a
stockholder's ability to nominate directors or act by written consent, (ii)
provide for a staggered board of directors and (iii) allow the Company's Board
of Directors, without obtaining stockholder approval, to issue shares of
preferred stock having rights that could adversely affect the voting power and
economic rights of holders of the Common Stock. Also, Section 203 of the
Delaware General Corporation Law restricts certain business combinations with
any "interested stockholder" as defined by such statute. Any of the foregoing
factors may delay, defer or prevent a change in control of the Company. See
"Management," "Principal and Selling Stockholders" and "Description of Capital
Stock."
10
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing
market prices for the Common Stock. In addition, any such sale or perception
could make it more difficult for the Company to sell equity securities or
equity related securities in the future at a time and price that the Company
deems appropriate. Upon consummation of the offering, the Company will have a
total of 13,600,000 shares of Common Stock outstanding, of which the 4,000,000
shares offered hereby will be eligible for immediate sale in the public market
without restriction, unless they are held by "affiliates" of the Company
within the meaning of Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). The remaining 9,600,000 shares will be "restricted"
securities within the meaning of Rule 144 under the Securities Act. The
Company, its officers and directors and its stockholders (who in the aggregate
will hold all of the restricted securities upon completion of the offering)
have agreed with the Underwriters that they will not directly or indirectly
offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of, without the prior written consent of Dean Witter Reynolds Inc.
("Dean Witter"), any shares of Common Stock or any other equity security of
the Company, or any securities convertible into or exercisable or exchangeable
for, or warrants, options or rights to purchase or acquire, Common Stock or
any other equity security of the Company, or enter into any agreements to do
any of the foregoing, for a period of 180 days from the effective date of the
Registration Statement of which this Prospectus forms a part. Upon expiration
of such 180 day period (or earlier upon the consent of Dean Witter), all of
the currently outstanding restricted shares will be eligible for sale under
Rule 144, subject to volume and other limitations of the Rule. Dean Witter
may, in its sole discretion, and at any time without notice, release all or
any portion of the shares subject to the lock-up agreements.
In addition, the Company intends to file a registration statement under the
Securities Act no earlier than 90 days after the offering, covering an
aggregate of 5,004,000 shares of Common Stock reserved for issuance under the
Company's stock option and stock purchase plans. As of the date of this
Prospectus, there are stock options for 2,424,000 shares outstanding, of which
1,662,333 are currently exercisable. The holders of 1,478,333 of the options
exercisable upon consummation of the offering will be subject to the lock-up
agreements described above. No prediction can be made as to the effect, if
any, that future sales of shares, or the availability of shares for future
sales, will have on the market price of the Common Stock from time to time or
the Company's ability to raise capital through an offering of its equity
securities. See "Management--Stock Option Plans," "Description of Capital
Stock," "Shares Eligible for Future Sale" and "Underwriting."
NO PRIOR MARKET FOR THE SHARES; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to the offering, there has been no public market for the Common Stock.
There can be no assurance that an active trading market will develop upon
completion of the offering or, if it does develop, that such market will be
sustained. The initial public offering price of the Common Stock will be
determined by negotiation among the Company and the representatives of the
Underwriters and may not be indicative of the market price of the Common Stock
after the offering. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.
The market price for the Common Stock may be significantly affected by
factors such as the announcement of new products or services by the Company or
its competitors, technological innovation by the Company or its competitors,
quarterly variations in the Company's operating results or the operating
results of the Company's competitors, changes in earnings estimates by
analysts or reported results that may vary from such estimates. In addition,
the stock market has experienced significant price fluctuations that have
particularly affected the market prices of equity securities of many high
technology and emerging growth companies and that often have been unrelated to
the operating performance of such companies. These broad market fluctuations
may materially and adversely affect the market price of the Company's Common
Stock. Following periods of volatility in the market price of a company's
securities, securities class action litigation has
11
<PAGE>
often been instituted against such a company and its officers and directors.
Any such litigation against the Company could result in substantial costs and
a diversion of management's attention and resources, which would have a
material adverse effect on the Company's business, operating results and
financial condition.
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS
The initial public offering price of the Common Stock offered hereby is
substantially higher than the net tangible book value per share of the
currently outstanding Common Stock. Therefore, purchasers of Common Stock in
the offering will incur immediate and substantial dilution of approximately
$7.34 in the net tangible book value per share of Common Stock. See
"Dilution."
BROAD DISCRETION AS TO USE OF PROCEEDS
The Company has not designated any specific uses for the net proceeds from
the sale by the Company of the Common Stock offered hereby, other than the use
of approximately $2.8 million for the payment of certain outstanding debt. The
Company intends to use the net proceeds primarily for working capital and
other general corporate purposes, including possible acquisitions.
Accordingly, management will have significant flexibility in applying the net
proceeds of this offering. See "Use of Proceeds."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
4,000,000 shares of Common Stock offered by the Company hereby (after
deducting underwriting discounts and commissions and estimated offering
expenses) are estimated to be $36.4 million.
The Company intends to use approximately $1,849,000 of the net proceeds to
retire all indebtedness outstanding under the Company's existing bank loan
facilities, approximately $590,000 to repay a loan secured by a mortgage on
the Company's office building, and approximately $400,000 to repay a loan to
the Company from Mr. Lutterbach. Borrowings under the bank loan facilities
bear interest at 1% above the lender's prime rate (9.25% at August 31, 1996),
and the loan from Mr. Lutterbach bears interest at the rate of prime plus 1
1/2% per annum (9.75% at August 31, 1996). Borrowings under the lines of
credit and the loans from Mr. Lutterbach were utilized by the Company to
finance the Company's working capital needs. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The Company intends to use the remaining net proceeds of the offering,
approximately $33.6 million, for working capital or other general corporate
purposes, including possible acquisitions. The Company actively seeks out and
evaluates potential acquisitions of businesses, talent, products or
technologies that are complementary to the Company's business; however, it
currently has no understandings, commitments or agreements with respect to any
such transactions. In addition, the Company may use a portion of the proceeds
to expand or acquire new facilities for its business.
Management will have significant flexibility in applying the net proceeds of
the offering. Pending use of the net proceeds for the foregoing purposes, the
Company intends to invest the net proceeds in short-term, investment grade
interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future, but
intends to retain future earnings, if any, for reinvestment in the future
operation and expansion of the Company's business and related development
activities. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant, as well as the terms
of any financing arrangements.
12
<PAGE>
DILUTION
As of July 31, 1996, the Company had a net tangible book value deficit of
$182,345 or $(0.02) per share of Common Stock. Net tangible book value per
share is determined by dividing the net tangible worth of the Company
(tangible assets less total liabilities) by the total number of shares of
Common Stock outstanding. After giving effect to the sale by the Company of
the shares of Common Stock offered hereby (after deducting underwriting
discounts, commissions and estimated offering expenses payable by the Company
in connection therewith) and the application of the net proceeds therefrom,
the net tangible book value of the Company as of July 31, 1996, as adjusted,
would have been $36.2 million or $2.66 per share. This represents an immediate
increase in net tangible book value of $2.68 per share to the existing
stockholders and an immediate dilution of $7.34 per share to new investors
purchasing shares in this offering. The following table illustrates the per
share dilution to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price................................. $10.00
Net tangible book value (deficit) per share before the of-
fering..................................................... (.02)
Increase per share attributable to new investors............ 2.68
----
Net tangible book value per share as adjusted for this offer-
ing.......................................................... 2.66
------
Dilution per share to new investors........................... $ 7.34
======
</TABLE>
The following table summarizes as of July 31, 1996, after giving effect to
this offering, the number of shares of Common Stock purchased from the
Company, the total consideration paid therefor and the average price per share
paid by the existing stockholders and by the new investors purchasing shares
of Common Stock in this offering before deduction of the underwriting
discounts and commissions and estimated offering expenses payable by the
Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 9,600,000 70.6% $ 1,000 0.0% $.0001
New investors.................. 4,000,000 29.4 40,000,000 100.0 10.00
---------- ----- ----------- -----
Total(1)..................... 13,600,000 100.0% $40,001,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Following the sale of Common Stock by the Selling Stockholders in the
offering if the Underwriters' over-allotment option is exercised in full,
the number of shares held by all existing stockholders will be reduced by
600,000 shares to 9,000,000, or 66.2% of the total shares of Common Stock
outstanding after the offering. New investors will hold 4,600,000 shares,
or 33.8% of the total shares of Common Stock outstanding after the
offering, if the Underwriters' over-allotment option is exercised in full.
See "Principal and Selling Stockholders."
Each of the foregoing tables assumes that outstanding employee stock options
will not be exercised. As of the date of this Prospectus, an aggregate of
2,424,000 shares of Common Stock were subject to outstanding options under the
Company's stock option plans at exercise prices ranging from $3.00 to $10.00
per share, with a weighted average exercise price of $6.50 per share. Of these
options, 1,662,333 are currently exercisable. To the extent that such stock
options are exercised, there may be further dilution to new investors. See
"Management--Stock Option Plans" and Notes 5 and 9 of Notes to Consolidated
Financial Statements.
13
<PAGE>
CAPITALIZATION
The table below sets forth the current portion of long-term debt and
capitalization of the Company as of July 31, 1996 and as adjusted to give
effect to the sale of the 4,000,000 shares of Common Stock offered by the
Company hereby (after deducting underwriting discounts, commissions and
estimated offering expenses) and the application of the estimated net proceeds
therefrom as described in "Use of Proceeds." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JULY 31, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Current portion of long-term debt....................... $ 89,795 $ 49,136
======== ===========
Long-term debt, excluding current portion............... $647,867 $ 98,790
Stockholders' equity (deficit):
Preferred Stock, $0.01 par value; 20,000,000 shares
authorized; no shares issued and outstanding actual
and as adjusted...................................... -- --
Common Stock, $0.01 par value; 100,000,000 shares
authorized; 9,600,000 shares issued and outstanding
actual, 13,600,000 shares issued and outstanding as
adjusted(1).......................................... 96,000 136,000
Additional paid-in-capital............................ (95,000) 36,265,000
Accumulated deficit................................... (183,345) (183,345)
-------- -----------
Total stockholders' equity (deficit)................ (182,345) 36,217,655
-------- -----------
Total capitalization.............................. $465,522 $36,316,445
======== ===========
</TABLE>
- --------
(1) Excludes (i) 2,424,000 shares of Common Stock issuable upon exercise of
options outstanding as of the date of this Prospectus (options to purchase
1,662,333 of such shares are currently exercisable) and (ii) 2,580,000
shares of Common Stock reserved for issuance upon exercise of options that
may be granted in the future under the Company's stock option and stock
purchase plans. See "Management--Stock Option Plans" and Notes 5 and 9 of
Notes to Consolidated Financial Statements.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial data as of January 31, 1995
and 1996 and for the period from inception (September 20, 1993) to January 31,
1994 and each of the two fiscal years in the periods ended January 31, 1995
and 1996 have been derived from the Company's Consolidated Financial
Statements, which have been audited by Arthur Andersen LLP, independent public
accountants. The selected consolidated financial data as of July 31, 1996 and
for the six months ended July 31, 1995 and 1996 have been derived from the
unaudited consolidated financial statements of the Company. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's consolidated financial position and results of operations
for the periods presented. The results of operations for the six months ended
July 31, 1996 are not necessarily indicative of future operating results. The
data set forth below are qualified by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements and the
related Notes thereto and other financial information appearing elsewhere in
this Prospectus. The following data are presented in thousands, except per
share amounts and the number of Creative Partners.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
JANUARY 31, JULY 31,
------------------------- ----------------
1994(1) 1995 1996 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.......................... $ 373 $ 4,679 $ 8,210 $ 5,577 $ 7,290
Operating expenses:
Direct costs and related
expenses......................... 244 3,749 3,622 2,930 4,494
Salaries and related expenses..... 133 1,598 2,247 943 1,691
General and administrative........ 119 722 985 464 750
------- ------- ------- ------- -------
Total operating expenses......... 496 6,069 6,854 4,337 6,935
------- ------- ------- ------- -------
Operating income/(loss)........... (123) (1,390) 1,356 1,240 355
Interest expense.................. 3 103 162 88 98
------- ------- ------- ------- -------
Income/(loss) before income
taxes............................ (126) (1,493) 1,194 1,152 257
Income tax benefit/(expense)...... 50 427 (494) (477) 0
------- ------- ------- ------- -------
Net income/(loss)................. $ (76) $(1,065) $ 700 $ 675 $ 257
======= ======= ======= ======= =======
PER SHARE DATA:
Net income/(loss) per share(2).... $ (0.01) $ (0.11) $ 0.07 $ 0.07 $ 0.03
Shares used in per share
computation(2)................... 10,109 10,109 10,109 10,109 10,109
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
--------------- -----------
1995 1996 1996
------- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 7 $ 48 $ 82
Working capital................................... (1,515) (973) (1,425)
Total assets...................................... 2,538 2,053 6,101
Long-term debt.................................... 420 448 648
Total stockholders' deficit....................... (1,140) (440) (182)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED JULY
JANUARY 31, 31,
------------------------ --------------
1994(1) 1995 1996 1995 1996
------- ------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OTHER DATA (UNAUDITED):
Revenues, excluding Miller(3)........ $ 373 $ 1,700 $2,758 $ 813 $7,290
Retainer and fee revenues(4)......... $ 0 $ 560 $1,642 $ 163 $1,946
Retainer and fee revenues as a
percentage of total revenues(4)..... 0.0% 12.0% 20.0% 2.9% 26.7%
Number of Creative Partners at end of
period.............................. 15 27 38 30 65
</TABLE>
- --------
(1) The Company's initial operating business, Leap Partnership, was formed
September 20, 1993, and had no operations prior to November 1993.
(2) Calculated on the basis described in Note 2 of Notes to the Company's
Consolidated Financial Statements.
(3) In December 1995, the Company voluntarily resigned the Miller account in
order to pursue other assignments. The information provided presents
revenues as if Miller had been excluded throughout each of the periods
presented. See "Business--Leap's Clients."
(4) Retainer and fee revenues represent revenues derived from fixed fee
arrangements with clients, not specific to particular projects, which
typically contemplate monthly payments over specified service periods. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview."
15
<PAGE>
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 elsewhere in this
Prospectus. The following presentation contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including those set forth under "Risk Factors"
and elsewhere in this Prospectus.
OVERVIEW
Leap is a strategic and creative communications company that develops and
implements integrated brand marketing campaigns using traditional and new
media primarily for market leading clients. Its central mission is to build
brand equity for its clients.
The Company generates its revenues from a variety of sources: fees and
retainers for strategic marketing and creative services, which may include
fees based upon the airing or publication of Company-created material on
various media; production revenues for creative executions, including the
communication of messages through a variety of new media; and fixed fees for
specific project assignments.
Fees and retainers are established by the Company taking into consideration
the Company's resources and skills which will be applied to generate relevant
strategic solutions for the client's marketing and communication concerns, the
value of Leap's strategic thinking and Leap's ability to produce memorable,
entertaining and effective advertising. The Company prefers to structure its
compensation arrangements with clients to provide for retainers or fees that
integrate such an added value approach, rather than fees based on a percentage
of media charges or other fixed methodologies. However, certain assignments
covered by fees and retainers have been based upon traditional methodologies
which have included either an estimate of the amount and level of professional
expertise provided by the Company and other committed resources needed to
execute a particular client's engagement or based upon an estimate of the
client's advertising expenditures over certain periods.
The term of written agreements between the Company and its clients generally
is a minimum of one year. However, written agreements typically are terminable
by either the client or the Company on short notice, often 90 days, and in
certain instances less. The Company at times performs services prior to the
execution of written agreements. Revenues, even if predominantly retainer- or
project-based, can vary materially from period to period. The Company's
strategy is to focus on providing expanding ranges and amounts of services to
a relatively limited number of major clients. The Company's results of
operations will, therefore, by design, be dependent upon the Company's ability
to maintain its relationships with its key clients or to replace clients
quickly should the Company or the client desire to reduce or terminate a
relationship. There can be no assurance that period-to-period fluctuations in
operating results will not occur.
The Company has experienced fluctuations in its revenues since inception,
which are to a significant degree a function of establishing or terminating
client relationships and to a lesser degree reflect its mix of fees and
production revenues. The Company has a limited operating history upon which an
evaluation of the Company and its prospects may be based, and the Company has
not identified any particular trends with respect to its historic revenues.
Revenues from fixed fee arrangements, typically in the form of monthly
retainers, are recognized over the period in which services are rendered.
Revenues from production services are recognized at the completion of such
services. Leap's production projects are usually commenced and completed in a
short time period, often less than 60 days. Outside production costs are
initially recorded as costs in excess of billings and are expensed as direct
costs and related expenses at the completion of such services. Revenues earned
from fees based upon third-party media placements are recognized when the
Company-created materials appear on various media in accordance with industry
practice. Salaries and other related general and administrative costs are
expensed as incurred.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenues, operating
expenses and certain other items which are included in the Company's
statements of operations for the fiscal years and six-month periods indicated.
The information for each of the six-month periods reflected is unaudited, but
has been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of the Company's management, reflects all
adjustments in conjunction with the Company's audited consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. Operating
results for any period are not necessarily indicative of results for any
future periods.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS
JANUARY 31, ENDED JULY 31,
------------------- ----------------
1995 1996 1995 1996
-------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................. 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Direct costs and related expenses...... 80.1 44.1 52.6 61.6
Salaries and related expenses.......... 34.2 27.4 16.9 23.2
General and administrative............. 15.4 12.0 8.3 10.3
-------- -------- ------- -------
Total operating expenses............. 129.7 83.5 77.8 95.1
Operating income/(loss).................. (29.7) 16.5 22.2 4.9
Interest expense......................... 2.2 2.0 1.6 1.4
-------- -------- ------- -------
Income/(loss) before income taxes........ (31.9) 14.5 20.6 3.5
Income tax benefit/(expense)............. 9.1 (6.0) (8.5) 0.0
-------- -------- ------- -------
Net income/(loss)........................ (22.8)% 8.5% 12.1 3.5
======== ======== ======= =======
</TABLE>
Six Months Ended July 31, 1996 Compared to Six Months Ended July 31, 1995
Revenues increased to $7.3 million for the six months ended July 31, 1996
from $5.6 million for the six months ended July 31, 1995, an increase of $1.7
million or 30.7%. The net increase of $1.7 million is primarily attributable
to a significant increase in new business which was offset in part by the loss
of Miller revenues. Excluding Miller, revenues increased approximately $6.5
million, or 797%, to $7.3 million for the six months ended July 31, 1996 from
$813,000 for the six months ended July 31, 1995. Miller revenues represented
approximately $4.8 million or 85% of the Company's revenues in the six months
ended July 31, 1995. In the second half of fiscal 1996, Miller began to reduce
its advertising expenditures on campaigns in which the Company was involved,
which resulted in a significant decline in Leap's revenues during such period.
The Company's management viewed an expansion of Miller's advertising budget
for such campaigns as unlikely and determined that Leap's resources could be
better utilized for other opportunities. The Company therefore resigned the
Miller account in December 1995 in order to pursue other assignments. The
decrease in Miller revenues was offset in full by an increase in new and
existing business. Clients from which the Company received revenues for the
first time during the six months ended July 31, 1996 included U.S. Robotics,
R.J. Reynolds, Pizza Hut, Chicago Tribune and Ameritech. Of the $7.3 million
in revenues for the six months ended July 31, 1996, approximately $2.5 million
is attributable to these new clients and $4.8 million is due to increased
services to pre-existing clients including Nike and Tommy Armour.
Direct costs and related expenses generally consist of production costs
which include services such as filming, animation, editing, special effects,
photography and illustrations, artwork, computer design and various related
production services which are generally outsourced, along with contract labor,
talent and other costs related to creative executions which may include
traditional media as well as new technologies and multimedia. Direct costs and
related expenses increased to $4.5 million for the six months ended July 31,
1996 from $2.9 million for the six months ended July 31, 1995, an increase of
$1.6 million or 53.4%. The increase was primarily attributable to an increase
in production activities. As a percentage of revenues, direct costs increased
9% as a result of lower margins on certain production revenues during the
period.
17
<PAGE>
Salaries and related expenses consist primarily of salaries and wages for
employees, related payroll tax expenses, group medical and dental insurance
coverages and recruiting expenses. Salaries and related expenses increased to
$1.7 million for the six months ended July 31, 1996 from $943,000 for the six
months ended July 31, 1995, an increase of $748,000 or 79.4%. The increased
expenses reflect the addition,
since July 31, 1995, of 35 new Creative Partners who are primarily engaged in
creative activities, including programmers and multimedia designers, to
support new clients and to strengthen the Company's management team.
General and administrative expenses include space and facilities expenses,
corporate expenses, depreciation, insurance, legal and accounting fees and
management information system expenses. General and administrative expenses
increased to $750,000 for the six months ended July 31, 1996 from $464,000 for
the six months ended July 31, 1995, an increase of $286,000 or 61.7%. The
increase is primarily due to additional legal and accounting fees and
depreciation.
Interest expense increased to $98,000 for the six months ended July 31, 1996
from $88,000 for the six months ended July 31, 1995, an increase of $10,000 or
11.2%. The increase is primarily attributable to increased borrowings from
available bank lines of credit.
Combined federal and state income tax rates were 40% for the six months
ended July 31, 1996 and 1995. Income tax expense of $477,000 is reflected for
the six months ended July 31, 1995 as a result of the Company's taxable income
during the period. For the six months ended July 31, 1996, income tax expense
of $103,000 was offset by the net operating loss carryforward, which had been
fully reserved at January 31, 1996. As a result, no income tax expense was
recorded for the period.
Fiscal Year Ended January 31, 1996 Compared to Fiscal Year Ended January 31,
1995
Revenues increased to $8.2 million for fiscal 1996 from $4.7 million for
fiscal 1995, an increase of $3.5 million, or 74.5%. The increase is primarily
attributable to a significant increase in fees earned from Miller during
fiscal 1996, and the remainder is attributable to services provided to new
clients and increased demand for services by existing clients. Miller
represented approximately 66% and 64% of the Company's total revenues for
fiscal 1996 and 1995, respectively. Excluding Miller, revenues increased from
$1.7 million in fiscal 1995 to $2.8 million in fiscal 1996, an increase of
$1.1 million or 64.7%.
Direct costs and related expenses decreased to $3.6 million for fiscal 1996
from $3.7 million for fiscal 1995, a decrease of $100,000 or 2.7%.
Approximately $375,000, or 10%, of the direct costs in fiscal 1995 were
incurred in connection with business development activities for which no
corresponding revenues were generated by the Company. Exclusive of these
costs, direct costs increased by approximately $300,000, or 9%, from fiscal
1995 to fiscal 1996. This increase was attributable to an increase in
production activities. Revenues specific to production activities increased
approximately 24% in fiscal 1996. As a percentage of production revenues,
direct costs decreased by approximately 11%, as a result of increased
efficiencies and improved margins.
Salaries and related expenses increased to $2.2 million for fiscal 1996 from
$1.6 million for fiscal 1995, an increase of $600,000, but declined as a
percentage of revenues from 34.2% to 27.4%. The increased expenses reflected
the addition, in fiscal 1996, of 11 new Creative Partners.
General and administrative expenses increased to $985,000 for fiscal 1996
from $722,000 for fiscal 1995, an increase of $263,000. The increase is
primarily due to additional expenses associated with increased occupancy costs
and increased staffing in administrative functions. As a percentage of
revenues, general and administrative expenses declined from 15.4% in fiscal
1995 to 12.0% in fiscal 1996.
Interest expense increased to $161,000 for fiscal 1996 from $103,000 for
fiscal 1995, an increase of $58,000 or 56.3%. The increase is primarily
attributable to increased borrowings from available bank lines of
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credit in order to fund the Company's growth and operations. Interest rates
remained relatively constant for both fiscal 1996 and 1995.
Combined federal and state income tax rates were 40% for fiscal 1996 and
1995, respectively. An income tax expense of $494,000 is reflected for fiscal
1996, as a result of the Company's taxable income during the year. An income
tax benefit of $427,300 is reflected for fiscal 1995, as a result of the
Company's net operating loss during the period. The Company generated a net
operating loss from its inception, September 20, 1993, through January 31,
1995 of approximately $1.6 million. The net operating loss offsets the taxable
income generated in fiscal 1996. The balance of the net operating loss of
approximately $260,000 has been fully reserved, primarily due to the Company's
history of operating losses.
Fiscal Year Ended January 31, 1995 Compared to Fiscal Year Ended January 31,
1994
The Company's inception was September 20, 1993, and operations commenced
during November 1993. Since less than three months of operations are included
in fiscal 1994, comparisons to fiscal 1995 are not meaningful.
During fiscal 1994, the Company's revenues were $373,000 and operating
expenses were $496,000, resulting in a net loss of $123,000. The loss was
primarily attributable to start-up costs incurred in connection with
commencing operations.
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QUARTERLY RESULTS AND SEASONALITY
The following table presents the Company's operating results and other data
for each of the eight quarters preceding July 31, 1996, including such
operating results expressed as a percentage of revenues for the respective
periods. The information for each of these quarters is unaudited, but has been
prepared on the same basis as the audited consolidated financial statements
and, in the opinion of the Company's management, reflects all adjustments in
conjunction with the Company's audited consolidated financial statements and
notes thereto appearing elsewhere in this Prospectus. Operating results for
any quarter are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1994 1995 1995 1995 1995 1996 1996 1996
----------- ----------- --------- -------- ----------- ----------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $1,212 $2,299 $3,150 $2,427 $1,419 $1,214 $2,037 $5,253
Operating expenses:
Direct costs and
related expenses..... 1,076 1,873 1,885 1,046 537 154 1,178 3,315
Salaries and related
expenses............. 476 530 466 477 561 743 755 936
General and
administrative....... 177 236 234 229 249 273 255 497
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............ 1,729 2,639 2,585 1,752 1,347 1,170 2,188 4,748
Operating
income/(loss).......... (517) (340) 565 675 72 44 (151) 505
Interest expense........ 30 38 42 46 32 41 33 64
------ ------ ------ ------ ------ ------ ------ ------
Income/(loss) before
income taxes........... (547) (378) 523 629 40 3 (184) 441
Income tax
benefit/(expense)...... 156 109 (217) (260) (16) (1) 0 0
------ ------ ------ ------ ------ ------ ------ ------
Net income/(loss)....... $ (391) $ (269) $ 306 $ 369 $ 24 $ 2 $ (184) $ 441
====== ====== ====== ====== ====== ====== ====== ======
PER SHARE DATA:
Net income/(loss) per
share(1)............. $(0.04) $(0.03) $ 0.03 $ 0.04 $ 0.00 $ 0.00 $(0.02) $ 0.04
Shares used in per
share
computation(1)....... 10,109 10,109 10,109 10,109 10,109 10,109 10,109 10,109
OTHER DATA:
Revenues, excluding
Miller(2)............ $ 529 $ 143 $ 52 $ 761 $ 882 $1,063 $2,037 $5,253
<CAPTION>
AS A PERCENTAGE OF REVENUES
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Direct costs and
related expenses..... 88.8 81.4 59.9 43.1 37.9 12.7 57.8 63.1
Salaries and related
expenses............. 39.3 23.1 14.8 19.7 39.6 61.2 37.1 17.8
General and
administrative....... 14.6 10.3 7.4 9.4 17.5 22.5 12.5 9.5
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses............ 142.7 114.8 82.1 72.2 95.0 96.4 107.4 90.4
Operating
income/(loss).......... (42.7) (14.8) 17.9 27.8 5.0 3.6 (7.4) 9.6
Interest expense........ 2.5 1.6 1.3 1.9 2.2 3.4 1.7 1.2
------ ------ ------ ------ ------ ------ ------ ------
Income/(loss) before
income taxes........... (45.2) (16.4) 16.6 25.9 2.8 0.2 (9.1) 8.4
Income taxes
benefit/(expense)...... 12.9 4.7 (6.9) (10.7) (1.1) (0.1) 0.0 0.0
------ ------ ------ ------ ------ ------ ------ ------
Net income/(loss)....... (32.3)% (11.7)% 9.7% 15.2% 1.7% 0.1% (9.1)% 8.4%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- -------
(1) Calculated on the basis described in Note 2 of Notes to the Company's
Consolidated Financial Statements.
(2) The Company voluntarily resigned the Miller account in December 1995 in
order to pursue other assignments. See "Business--Leap's Clients."
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<PAGE>
Depending upon its client mix at any time, the Company could experience
seasonality in its business. Such seasonality arises from the timing of
product introductions and business cycles of the Company's clients and could
be material to the Company's interim results. Such cycles vary from client to
client, and the overall impact on the Company's results of operations cannot
be predicted. In addition, the advertising industry as a whole exhibits
seasonality. Typically, advertising expenditures are highest in the fourth
calendar quarter and lowest in the first calendar quarter, particularly in
January. Although the Company has too limited an operating history to exhibit
any discernible seasonal trend, as the Company matures, its business and
results of operations could be affected by the overall seasonality of the
industry.
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, loans from a Company officer and equipment leases. At July 31,
1996, the Company had no material capital commitments.
The Company had an accumulated deficit of $183,000 at July 31, 1996. The
Company's operations are subject to certain risks and uncertainties including,
among others, a limited operating history, net operating losses, management's
plan for growth and expansion, changing technologies, and current and
potential competitors with greater financial, technical and marketing
resources.
The Company's net working capital deficit increased $452,000 to $1.4 million
at July 31, 1996 from $973,000 at January 31, 1996. The increase is primarily
attributable to increased short-term bank borrowings to fund the growth of the
Company's business and working capital requirements. The Company's net working
capital deficit decreased $542,000 to $973,000 at January 31, 1996, from $1.5
million at January 31, 1995. The decrease is primarily attributable to the
Company's net income of $700,460 during fiscal 1996 which resulted in a net
reduction of $117,000 of short-term borrowings and net changes in various
working capital accounts.
The Company's cash and cash equivalents increased $34,167 and $80,975 for
the six months ended July 31, 1996 and 1995, respectively. The increases are
the result of net increases in cash flows from financing activities of $1.6
million and $269,000, for the six months ended July 31, 1996 and 1995,
respectively. For the six months ended July 31, 1996, the increased cash flows
from financing activities resulted primarily from increased borrowings of $1.4
million on the Company's lines of credit. During the six months ended July 31,
1995, the increased cash flows from financing activities were primarily due to
borrowings of $450,000 from an officer of the Company. The cash provided from
financing activities was used in part to fund decreases in cash flows from
operating and investing activities of $1.2 million and $152,000 for the six
months ended July 31, 1996 and 1995, respectively. The decrease in cash flows
from operating activities for the six months ended July 31, 1996 arose
primarily from increases in accounts receivable of $2.9 million, which were
offset in part by an increase in payables of $2.1 million. For the six months
ended July 31, 1995, the decrease in cash flows from operating activities
resulted from an increase in accounts receivable of $577,000 and a $1.2
million paydown of payables, partially offset by net income of approximately
$675,000 and a decrease in costs in excess of billings of approximately
$484,000. Decreases in cash flows from investing activities of $299,000 and
$36,000 for the six months ended July 31, 1996 and 1995, respectively, were
due to increased purchases of computer and office equipment.
The Company's cash and cash equivalents increased $41,000 and decreased
$111,000 for fiscal years 1996 and 1995, respectively. The increase in fiscal
1996 is the result of a net increase of $400,000 in cash flows from operating
activities which primarily consist of the Company's net income of $700,000,
after the effects of depreciation and other non-cash items of $648,000, a
decrease of $286,000 in accounts receivable offset by a decrease of $1.1
million in accounts payable; a decrease of $242,000 in cash flows from
investing activities for purchases of computer and office equipment; and a net
decrease of $117,000 in cash flows from financing activities resulting from
net increased borrowings of $400,000 from an officer of the Company and
$517,000 of principal reductions on the Company's bank borrowings. The
decrease in fiscal 1995 is the result of a net decrease of $564,000 in cash
flows from operating activities which primarily consist of the Company's net
loss of $1.1 million, after the effects of depreciation and other non-cash
items of $320,000, an increase of $555,000 in accounts receivable and an
increase of $591,000 in costs in excess of billings, offset by an increase of
$2.0
21
<PAGE>
million in accounts payable and accrued expenses; a decrease of $282,000 in
cash flows from investing activities for purchases of computer and office
equipment; and an increase of $735,000 in cash flows from financing activities
resulting from increased borrowings on the Company's existing lines of credit.
The Company has a $1.5 million credit facility available under a revolving
line of credit. The Company also has a separate $500,000 line of credit
available to purchase computer and office equipment. The credit facilities are
collateralized by all Company chattel paper, billed and unbilled accounts,
equipment and general intangibles. Furthermore, the obligations are guaranteed
by certain stockholders of the Company. The credit facilities bear interest at
the bank's index rate plus 1%. At July 31, 1996, the outstanding balances were
$1,359,500 for the revolving line of credit and approximately $490,000 for the
line of credit. The Company intends to repay this indebtedness in full from
the proceeds of the offering. See "Use of Proceeds." The credit agreements
expire on October 31, 1996. In connection with the offering, the Company
expects to negotiate amendments to the existing credit facilities that will,
among other things, extend their maturity dates.
In February 1995, the Company secured financing from an officer of the
Company to fund additional working capital needs. The $450,000 installment
note bears interest at prime plus 1.5% through October 31, 1996 and is
collateralized by a second mortgage on the Company's principal office
building. $50,000 has been repaid on the loan and the remainder will be repaid
from the proceeds of the offering. See "Use of Proceeds" and "Certain
Transactions."
On May 30, 1996, the Company obtained a $596,000 loan secured by a mortgage
on the building in which the Company's offices are located. The loan bears
interest at the lender's index rate and is payable in monthly principal and
interest installments of $7,794 through May 2001, with a balloon payment of
approximately $360,000 in June 2001. The Company intends to repay this
indebtedness in full from the proceeds of the offering. See "Use of Proceeds."
The Company is a defendant in pending litigation involving claims by the
Spin Doctors (a recording and performance group) arising from a television
commercial created by the Company. Although such litigation is in an early
stage, and it is therefore difficult to predict its ultimate outcome, an
adverse determination and award not covered by insurance could have a material
adverse effect on the Company's results of operations and, if the offering
contemplated by this Prospectus is not consummated, on the Company's liquidity
and consolidated financial position. See "Business--Legal Proceedings" and
Note 6 of Notes to the Company's Consolidated Financial Statements.
The Company believes that the net proceeds of the offering, together with
existing credit facilities and any funds from operations, will be sufficient
to meet the Company's cash requirements for at least the next twelve months.
The Company's long-term capital requirements will depend on numerous factors,
including the rates at which the Company grows, expands its personnel and
infrastructure to accommodate growth and invests in new technologies. The
Company has various ongoing needs for capital, including working capital for
operations, project development costs and capital expenditures to maintain and
expand its operations. In addition, as part of its strategy, the Company
evaluates potential acquisitions of, or alliances with, businesses that extend
or complement the Company's business. While the Company has no present plans,
commitments or agreements with respect to any material acquisition or
alliance, the Company may in the future consummate acquisitions or alliances
which may require the Company to make additional capital expenditures, and
such expenditures may be significant. Future acquisitions and alliances may be
funded with available cash from the net proceeds of the offering, seller
financing, institutional financing and/or additional equity or debt offerings.
22
<PAGE>
BUSINESS
The following presentation contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
Leap is a strategic and creative communications company that develops and
implements integrated brand marketing campaigns using traditional and new
media primarily for market leading clients. The Company's marketing and
communications services combine comprehensive strategic brand marketing
skills, award-winning creative talent, and the production capabilities of
world class full service advertising agencies with the technological expertise
to exploit new interactive and other digital media. Leap's mission is to build
brand equity for its clients. Leap focuses on establishing long-term marketing
partnerships with marquee clients of national and international scope that
position the Company as the steward for major brands with correspondingly
significant advertising budgets.
INDUSTRY BACKGROUND
A number of significant factors and trends are driving changes and creating
opportunities in the marketing communications business, including the
following:
Advertising Market. Approximately $161 billion was spent on advertising in
the United States in 1995, according to McCann-Erickson Worldwide, a leading
advertising agency that regularly publishes such information. A significant
portion of such market is accounted for by large national-to-global
advertisers with correspondingly large advertising budgets. Leap's present and
prospective clients currently advertise primarily on national mass circulation
media such as network television, network radio and nationally circulating
newspapers and magazines. According to McCann-Erickson, total U.S. spending on
such media amounted to approximately $40 billion in 1995.
Advertising Migrating to Accountable Media. Leap believes that large
advertisers increasingly are looking for ways to improve the effectiveness of
their advertising without increasing advertising expenditures, and to better
measure results from advertising. Historically, large advertisers, through
their advertising agencies, have had a strong bias towards using "broad cast"
media, such as television and newspapers. According to McCann-Erickson
research, 22.5% of total advertising spending in 1995 went to television,
22.6% to newspapers, 20.4% to direct-response mail advertising, 7.0% to radio
and 6.4% to yellow page publishers. The remaining 21% was allocated to
magazines, outdoor signage, and other media. Management believes that less
than $50 million was spent in 1995 on digital interactive media, classified
within the "other" segment, such as the Internet, CD-ROMs and interactive
presentations.
The Company believes that advertisers are beginning to shift away from
relying primarily on traditional one-way "broad cast" media, such as broadcast
television, to media that enable advertisers to "narrow cast" or customize
marketing messages to a well-defined audience. For example, according to
McCann-Erickson, direct mail advertising in the total U.S. advertising market
increased 41% between 1990 and 1995 compared to a 26% increase for all
advertising expenditures during the same period. Similarly, the Company
believes that the emergence of telemarketing is indicative of this trend. Leap
believes that these trends are primarily due to the fact that by using
interactive media, advertisers can target a particular segment of consumers
with a precision not found in print and broadcast television advertising. In
addition, interactive media can provide an almost instantaneous gauge of the
advertisement's effectiveness. This feedback allows an advertiser to increase
use of a particular message to take advantage of a favorable response, or
continuously to freshen and modify the message to improve its effectiveness.
23
<PAGE>
Emergence of New Media. Advances in technology over the past ten years have
impacted the distribution of brand messages to an extent not seen since the
advent of television, and the Company believes that, as a result, marketers
must make equally sweeping changes in the way they think about communicating
with their customers. For years, companies have sought to create marketing
programs that would communicate with consumers on a personal, one-to-one
basis. Techniques such as direct mail and telemarketing were used to reach
consumers more directly than traditional media including television,
magazines, newspapers or billboards. Recent developments in digital technology
have led to the emergence of new media communications vehicles such as the
World Wide Web, the Internet, CD-ROMs and interactive presentations. Now, such
new media not only permit real time one-to-one communications links with
consumers, but allow consumers, as a consequence of the interactive process,
to shape the advertising messages that they receive and become more engaged by
the messages.
Leap believes that the Internet, and particularly the World Wide Web, by
enabling advertisers to reach well-defined audiences without paying the
significant costs required to buy print space and broadcast media time, is
fast becoming the most cost-effective medium by which marketers can establish
a personalized two-way relationship with consumers. According to the 1995
CommerceNet/Nielsen Internet Demographics Survey, there are over 18 million
users of the World Wide Web. InterNet Info reports that as of April 12, 1996,
approximately 276,400 commercial Web sites were registered as domain names, an
increase of more than 60% in the first quarter of 1996 over the fourth quarter
of 1995. Industry observers expect this trend to continue and accelerate. The
Internet offers the ability to target and track consumers with specific brand
messages plus the opportunity to capture consumer preferences, opinions, needs
and wants. Advertising and marketing management could have instant access to
consumer feedback and continuously sharpen marketing plans to address the
current marketplace. Leap believes that a marketer's Web site, if used
correctly, can significantly augment traditional consumer research efforts
while providing useful information to customers and prospects.
Early adopters of Internet advertising have generally established Web sites
as a relatively inexpensive way to signal a technologically sophisticated
image to consumers without spending a significant portion of their overall
advertising budget. The Company believes, however, that as advertisers become
more familiar with interactive advertising techniques and opportunities, the
amounts spent to utilize new media will increase rapidly. A Forrester Research
report dated May 1996 estimated that online advertising spending will reach
$80 million in 1996 and $4.8 billion by the year 2000. Management believes
that over the next few years the rate of growth of advertising expenditures on
new media will greatly exceed that of expenditures for traditional media such
as television or print as more consumers, households and businesses connect to
the World Wide Web and marketers feel compelled to communicate through that
channel.
Increasing Importance of Brand Identity. The Company believes that branding
of products and services, always important in the consumer markets, will
become even more important in coming years. In some markets, consumers are
presented with an increasing proliferation of products that are difficult to
distinguish. Even when a product or service is demonstrably better, the
Company believes that competitors can rapidly adapt their products to
neutralize such advantages. As a result, most sophisticated marketers rely on
the image or brand identity of their companies, products or services to
differentiate themselves from competitors. A well defined brand identity can
build long term equity with consumers and can be the basis for a sustainable
competitive advantage.
Importance of Speed to Market. As competitive pressures have increased and
the importance of being first to market has increased, companies are
shortening the cycle times required to bring products to market. In turn,
their marketing partners must reduce their own cycle times for creating and
producing communications elements. In addition, in recent years an increasing
number of marketers have downsized and streamlined their organizations. Their
advertising agencies, which are traditionally heavily departmentalized, are
expected to respond to such measures by themselves becoming more efficient.
Leap believes that advertising agencies that have responsive and nimble
organizations and embrace developing technologies will be best positioned to
respond to client demands for speed and increased efficiency.
In summary, as brand identity and speed to market become more important to
advertisers, and as more advertisers add new media to the portfolio of
marketing communications channels they use, Leap expects that
24
<PAGE>
there will be increased demand for the services of marketing communications
companies able to develop powerful, strategically sound brand identities
across a broad spectrum of media. Leap believes that more and more advertisers
are looking to their marketing partners for more complete marketing solutions;
they are seeking both traditional marketing expertise in research,
segmentation, strategy development, creative development, production, and
message distribution, and the ability to extend that work into new areas. This
ability requires forward thinking media strategies that are free from the
historical advertising agency biases that favor traditional media, as well as
the technological expertise necessary to operate in new media areas. The
Company believes that firms that offer such integrated skills have the
greatest opportunity to be entrusted with developing brand identity for
forward thinking clients and should enjoy access to the significant
advertising budgets that accompany such assignments.
LEAP'S CORE STRENGTHS
Leap's central mission is to build brand equity for its clients by designing
and implementing strategic brand marketing plans and comprehensive advertising
campaigns that are driven by premier talent and creative content and employ
both traditional and new media. Management believes that certain core
strengths have been, and will continue to be, integral to Leap's success in
achieving this goal.
Roster of Marquee Clients. Leap has successfully competed for and serviced
major accounts. For example, Leap was selected after a nationwide review as
agency of record for Nike's Niketown and Nike Factory Stores. In addition to
Nike, Leap's present clients include U.S. Robotics, Tommy Armour, the Chicago
Tribune Company, Ameritech Corporation, R.J. Reynolds, Pizza Hut, Inc. and The
University of Notre Dame. Leap's projects for national advertisers have
included the 1995 Super Bowl campaign for Miller, based on fictional
quarterback "Elmer Bruker," for which Leap won a "Clio" award. Leap attributes
its success in attracting such clients to the reputations of Leap and its
senior management, as well as its other core strengths, and believes that
these factors, coupled with the client roster itself, will enhance Leap's
ability to attract additional significant clients of national and
international scope.
Strategic Orientation. Leap specializes in the strategic positioning of
brands. Beginning with a thorough appraisal of the needs, wants, impressions
and opinions of the client's customers and the position of the client's brand
in its marketplace in relationship to customers, competitors and retailers,
Leap develops a distinct identity for the brand. Fusing the brand strategy
with client goals, objectives and information, Leap then develops a strategic
platform that serves as the grounding for all brand messages across all media.
For example, when Nike first engaged Leap, Niketown had been positioned simply
from a retail orientation as "the most Nike stuff anywhere." Leap, however,
envisioned Niketown not merely as a retail concept but as a structure that
embodies and serves as a standard bearer for the Nike philosophy and adds to
the overall brand values.
Talent and Creative Distinction. Leap maintains a multidisciplinary talent
strategy as one of its core principles. Recognizing that the best strategic
platform is useless without creative executions that inform, engage and
entertain consumers, Leap's management places heavy emphasis on creativity in
the selection and training of personnel. The Company believes that its success
in attracting such creatives is in part attributable to the reputations of
Frederick Smith, George Gier, Joseph A. Sciarrotta and Thomas R. Sharbaugh,
who in the aggregate have over 70 years of advertising experience. Among
numerous accolades received by these men for their work, Messrs. Gier and
Sciarrotta were each named a National Creative All-Star for 1994 by Adweek
magazine. While employed by DDB Needham, Messrs. Smith, Gier and Sciarrotta
were best known for their campaigns for Anheuser-Busch, Inc.'s Bud Light
brand. The team created and produced the memorable "Yes I am!" and "Ladies
Night" commercials for Bud Light. Mr. Sharbaugh has a wealth of experience in
brand stewardship acquired during 18 years in marketing at Anheuser-Busch,
Inc. ("Anheuser-Busch") and Sears Roebuck and Co. ("Sears"). Mr. Sharbaugh
oversaw the "Softer Side of Sears" campaign, which was an important part of
the fundamental repositioning of Sears' retail operations. In addition, during
his tenure at Anheuser-Busch, Mr. Sharbaugh oversaw noteworthy campaigns, such
as "This Bud's For You," "Gimme a
25
<PAGE>
Light," "Spuds McKenzie" and "the Bud Bowl," that contributed to Budweiser's
stronghold on the top position in the beer market and Bud Light's emergence as
the leading light beer. See "Management--Executive Officers, Directors and
Significant Employees."
Leap's employees include experienced writers, art directors, graphic
designers, Web designers, producers and strategic thinkers. Leap's talent
strategy targets skilled individuals who, in addition to being creative, are
adept marketers attuned to the brand strategy and business objectives of
clients. The Company believes that it has to date, despite intense competition
for talent, been successful in attracting and retaining superior creative and
strategic thinkers as well as highly skilled programmers and interactive media
developers. All employees share the same title, "Creative Partner," and are
called upon to contribute beyond their primary areas of expertise.
The depth of Leap's talent extends well beyond its senior management. Leap's
strategy is to recruit the very best talent available, and the work of Leap's
Creative Partners has received numerous accolades and awards. Despite its
short history, Leap has achieved international recognition for creative
advertising. The Company received a "Clio" award for Special Effects for its
1995 Super Bowl Campaign for Miller, was a finalist in two categories at the
1995 London International Advertising Awards and has received more than a
dozen awards from the Chicago Show.
Organizational Model and Creative Process. Leap operates with an
organizational structure that differs significantly from the traditional
agency model. Instead of functional departments organized in a vertical
hierarchy, Leap is a flat organization built around cross-functional work
teams. Employees with varied skill sets (such as writers, art directors,
graphic designers, Web designers, programmers, account planners, producers or
media planners) are brought together as needed to service each client's
specific needs. Unlike the traditional agency model, Leap's structure enables
the client to deal directly with the creative and other team members and also
does not grant any one person proprietary control over a creative concept.
Management believes that this flat open structure yields better
communications, shorter cycle times, more responsive services, more efficient
use of resources, and a richer flow of creative ideas. Management also
believes that this unusual structure has enabled Leap to create a culture and
working environment that is attractive to creative talent. Leap has used this
to its advantage, bringing together top level marketing practitioners,
creative minds and technical talent selected for their balance of strategic
understanding and creative capabilities. In addition, Leap has used advanced
technology to link its people, assets and ideas into a flexible, fast-acting
organization.
Integrated Services Approach. Leap provides a full range of strategic,
creative, interactive and production services for both traditional and new
media projects. Leap's strategies are designed to integrate the most effective
and beneficial aspects of a wide array of media. Creative executions may
include television, print, outdoor and radio advertisements, as well as
promotions, direct mail, package design and logo design. Leap will also
develop and execute digital interactive solutions including World Wide Web
sites, CD-ROMs and interactive presentations. While Leap does not provide
traditional media buying services, it does coordinate placements of
advertisements on interactive media for its clients.
Technological Sophistication and Expertise. Management believes that the
Company is in the forefront in the application of new marketing communications
technology. The Company provides creative services for itself and its clients
by developing and maintaining sites on the Internet's World Wide Web. In
addition, Leap creates and implements interactive marketing solutions in a
variety of digital media including CD-ROMs. The Company's Creative Partners
include skilled programmers and interactive media developers. Management
believes that Leap's investment in technology serves as a competitive
advantage in recruiting and retaining talented employees.
As an example of the Company's technological sophistication, Leap recently
obtained a U.S. patent for an interactive video display system. The system
utilizes cable, wireless and digital satellite technologies to
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enable a large screen display system to receive digital audio/video signals
and to transmit the signals to a consumer or viewer at an adjacent or remote
location. The Company believes that the system described in the patent could
over time be used in multiple applications ranging from enhancement of an
advertiser's message on a billboard to interactive entertainment programming
at sporting and concert venues. The Company has not yet used the system
described in the patent in its business and there can be no assurance that it
will do so in the future.
Leap is networked to the Internet through a 1.5 Mbps T1 line. The Company
has developed an intranet Web site to allow easy distribution of information
internally in a secured environment, and its clients can view and proof both
print and graphics remotely through password protected Web pages. Proofing and
annotation of audio and video work is accomplished with Emotion's Creative
Partner content distribution system. Leap's programmers are versed in Basic,
Pascal, C/C++, Java, Perl, Lingo and Hypertalk. Leap develops Internet
projects on a number of platforms including Macintosh and Windows NT servers.
Leap also utilizes two Sun Microsystems Sparc Servers, one in-house and one
offsite. The in-house Sparc Server is used for development of Web projects and
beta testing new technologies for companies, including Netscape and
Macromedia, before they are released to the public for general sale. Completed
work is transferred to a Sun Sparc 20, which is housed at a location that
contains Chicago's Network Access Point, one of the hubs at which the world's
telecommunications providers (such as Sprint and MCI) share information
between networks. This Sparc 20 is monitored 24 hours a day, 7 days a week to
ensure optimal connectivity and functionality.
LEAP'S STRATEGY
Leap's strategy embodies the following key elements to build its business
and succeed in its mission:
Focus on Brand Stewardship. Leap's objective is to develop and nurture long-
term relationships with existing and new clients who have entrusted the
Company with the stewardship of their brands and the responsibility for
designing, creating and delivering key consumer messages over traditional and
new media. Leap has thus far been successful in winning additional assignments
from several clients who initially retained Leap to undertake a single project
in Web design or a specific brand advertising assignment. As such clients
worked with Leap and experienced its integrated, value-added approach, other
assignments and additional responsibilities followed. For example, Leap
received an initial assignment to do the strategic positioning and creative
development for Tommy Armour's 855s irons. Leap's scope of work for Tommy
Armour grew to include assignments for a World Wide Web site, new club design,
logo design, package design and material used at the point-of-purchase.
Similarly, Leap was initially engaged by U.S. Robotics to develop advertising
for its modem division. Leap has since received assignments to redesign and
develop a number of U.S. Robotics' Web sites. Leap is also working on adapting
U.S. Robotics' installation software CD-ROM to an advertising/marketing new
media tool. In addition, the Company has been engaged to do advertising for
U.S. Robotics' telephony division. Management believes that its focus on long-
term partnerships should provide a recurring revenue stream not associated
with single project assignments.
Maintain Superiority in Talent, Technology, and Service. Leap intends to
continue to attract, hire and retain top level strategic, creative and
technical talent and to be a leader in developing better ways of communicating
with consumers through leading-edge technology. With its flexible work team
approach and flat organizational structure, Leap is dedicated to providing
faster and more cost effective solutions to its clients' needs. Leap believes
that it can provide a competitive advantage to itself and its clients by
creating leading multimedia marketing programs that use interactive
technologies and MIS tools for optimizing the effectiveness of marketing
initiatives.
Target Market Leaders as Clients. Leap intends to focus on a limited number
of marquee clients, with businesses of national or global scope, that seek to
develop long-term marketing partnerships for significant national or
international brands and are interested in using traditional and new media for
their marketing communications. Many of Leap's current clients are, and future
targets are expected to be, market leaders with aggressive plans for growth
and multi-faceted communications needs.
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Develop Proprietary Program Material. Leap believes there is a significant
opportunity to create, develop and own proprietary program material for its
clients or itself. For example, Leap could create fictional characters, events
(a fictional sports league, for example) or locations (a fictional shopping
mall) that could be used in clients' marketing campaigns. This is similar in
concept to the early days of television when third parties, often advertising
agencies, developed entertainment programs sponsored by agency clients. Leap's
strategy, in contrast to the earlier concept, is to retain ownership of
programs it creates and to use such fictional creations primarily on the World
Wide Web, rather than television. If these fictional characters, events or
locations are developed and prove popular, the Company could license them to
sponsors. Moreover, the Company could create collateral merchandise, such as
clothing, games, and toys, based on these fictional creations. Leap's
management believes that this strategy, over time, could result in the
creation of intellectual property which, if properly utilized, could generate
a recurring revenue stream for the Company.
Pursue Acquisitions and Alliances. The Company expects to pursue
acquisitions of, or alliances with, businesses that extend or complement the
Company's business. The Company may explore acquisitions to obtain additional
top level talent, to supplement its scope of services and technology or to add
to its client roster. To assist the Company in attracting and servicing
international clients, the Company intends to seek out and establish strategic
alliances with international partners who share or expand Leap's core
strengths and services.
Broaden Operations Geographically to Service Clients. In keeping with the
Company's strategy of developing long-term relationships with national-to-
global clients, management intends to expand localized client account
management and support services through cost effective computerized local
offices. Primary creative marketing and advertising support will be provided
by personnel at the Company's corporate headquarters as management believes
that centralized operations can best preserve Leap's culture, assist
creativity and maximize the operational efficiencies of Leap's structure. The
Company presently operates a remote facility to ensure responsiveness to a
particular client's needs, and management will continue to evaluate the need
for localized account management and support on a client by client basis. It
is currently anticipated that larger national accounts will require small
local offices to supplement the primary operations at headquarters.
Create the Marketing Multiplier. In its work for clients, Leap applies a
concept it calls the "marketing multiplier." This concept involves the mixing
of advertising, entertainment and technology to increase the opportunities for
delivering brand messages in a fresh way. Ideally, this generates publicity
and public relations opportunities, creates product recognition and makes the
selling message more memorable. Leap seeks to create the "big idea," a
marketing theme which has greater impact as it is translated across multiple
communications channels into advertising, promotions, programming,
entertainment and Internet content. For example, in 1994 Leap created a series
of humorous spots for Miller that followed fictional quarterback Elmer Bruker,
a member of every winning Super Bowl team who never saw any playing time. Leap
wrote a Bruker biography, created Bruker trading cards and orchestrated
promotions and public relations efforts. The Bruker idea generated "free"
publicity and product recognition that went far beyond the spots themselves.
At Super Bowl 1995, network sportscasters interviewed Bruker and fans
displayed Bruker banners. The Company believes that major national-to-global
advertisers are embracing the "marketing multiplier" or "big idea" marketing
strategy as a way to build brand equity on a cost effective basis and that
Leap, with its expertise in developing communications across all platforms and
its relationships with clients and members of the media and entertainment
industries, is well positioned to leverage the multiplier effectively for the
brands it promotes.
LEAP'S SERVICES
Leap focuses on providing integrated marketing and communications services
designed to build brand equity through both traditional and new media.
Creative marketing solutions are generated with the goal of increasing the
client's sales while maximizing return on investment. The Company's solutions
are formulated through an ongoing process of building brand strategy and
creating and producing traditional and new media content.
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Strategic Brand Management. Leap focuses on developing a unique selling
proposition for a client or a client's product that builds brand equity and
differentiates the client or product from its competition. The Company creates
integrated marketing communications campaigns using a combination of
traditional and new media techniques designed to leverage marketing multiplier
principles. Leap has an account planning philosophy that places the consumer
at the center of the process, enhancing understanding of consumer needs,
motives and perceptions.
Creative Content Development. Leap develops creative ideas and executions
for delivery through a variety of distribution channels. Leap creates
television, print, radio and outdoor ads; develops logos, packaging, product
and collateral designs; creates promotions; generates design, programming and
content for World Wide Web sites, interactive kiosks and laptop presentations;
and develops entertainment programming.
New Media Production and Services. As part of Leap's integrated marketing
strategy, it generates and provides new media products and services including
designing and programming World Wide Web sites, interactive kiosks, CD-ROMs
and laptop presentations.
Innovative Production. Once strategy and creative content are approved by
clients, Leap produces the work in a manner designed to maintain high
standards of quality and deliver an attractive return on investment. Leap
seeks to deliver innovative solutions that can lower production costs, or
provide new media or new distribution channels for Leap's clients.
LEAP'S CLIENTS
Leap serves a variety of clients ranging from large companies such as Nike
and R.J. Reynolds to small companies such as Luminair Multimedia One, LLC and
The One Show. Leap's current clients include Nike, Ameritech Corporation, R.J.
Reynolds, the Chicago Tribune Company, U.S. Robotics, Tommy Armour and The
University of Notre Dame. Leap also believes in providing pro-bono services to
worthy organizations and has to date provided services to the Brain Injury
Association and the Partnership for a Drug Free America.
The Company's clients to date have included the following:
<TABLE>
<CAPTION>
CLIENT SERVICES PROVIDED BY LEAP
------ -------------------------
<C> <S>
Nike, Inc..................... Agency of record for Niketown and Nike Factory
Stores, developing strategic brand
positioning, producing print, radio, digital
design, packaging, multi-media, World Wide Web
strategy and design and strategic database
design.
U.S. Robotics, Inc............ Agency of record producing television, print,
radio, World Wide Web design, CD-ROM and
strategic database design.
Tommy Armour Golf Co.......... Agency of record developing strategic brand
positioning, producing television, print,
World Wide Web strategy and design, golf club
design, and logo design.
Ameritech Corporation......... Agency of record assigned to Ameritech Internet
services.
R.J. Reynolds Tobacco Co...... Providing strategic brand repositioning and
creative campaigns for selected brands.
Pizza Hut, Inc................ Strategic planning.
Chicago Tribune Company....... Development of World Wide Web programming and
content for delivery via the Internet.
The University of Notre Dame.. Television, CD-ROM, and multi-media design on a
project basis.
Cincinnati Bell Telephone..... Television, print, Internet access marketing,
radio, name generation, logo design, and
package design for various services on a
project basis.
</TABLE>
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<TABLE>
<CAPTION>
CLIENT SERVICES PROVIDED BY LEAP
------ -------------------------
<C> <S>
Anheuser-Busch, Inc................... Television on a project basis.
YES! Entertainment.................... Strategic positioning and television on
a project basis.
Brain Injury Association.............. Television and print on a pro bono
basis.
Partnership for a Drug Free America... Television on a pro bono basis.
The One Show.......................... Production of the CD-ROM for an award
show.
Boston Chicken, Inc................... Television, outdoor, menu design, and
promotions on a project basis.
United States Satellite Broadcasting.. Television and print on a project
basis.
Papa John's International, Inc. ...... Positioning, television, and menu
design on a project basis for this
regional pizza delivery company.
Luminair Multimedia One, LLC.......... Development of "History of Notre Dame
Football" CD-ROM.
Miller Brewing Company................ Previous agency of record for Miller
Lite Ice producing television, radio,
and print; television and promotional
work for Miller Lite on a project
basis producing a Super Bowl
commercial and campaign; new product
development and World Wide Web site
development for Plank Road Brewery and
America Specialty & Craft Beers
divisions on a project basis.
</TABLE>
Leap was added to Miller's roster of agencies in May 1994 to do project work
for Miller Brewing Company and Plank Road Brewery. During the course of an 18-
month relationship, Leap developed a Super Bowl campaign for Miller Lite, was
assigned agency of record for Miller Lite Ice, and worked on a number of new
product development assignments for Plank Road. In December 1995, the Company
voluntarily resigned the Miller account in order to pursue other assignments.
Leap's three largest clients accounted for approximately 85% of Leap's
revenues for the fiscal year ended January 31, 1996, with fluctuations in the
amount of revenue contribution from each such client from quarter to quarter.
Miller, Leap's largest client during fiscal 1996, accounted for approximately
66% of Leap's revenues during such period. Nike, Tommy Armour, U.S. Robotics
and Cincinnati Bell accounted for approximately 29.5%, 20.8%, 20.5% and 14.3%,
respectively, of the Company's revenues for the six months ended July 31,
1996. Since Leap is retained by a number of its clients on a project-by-
project basis, a client from whom Leap generates substantial revenue in one
period may not be a substantial source of revenue in a subsequent period.
CLIENT CASES
The following cases further illustrate the range of services that the
Company offers its clients and the value that such services can provide.
Niketown
Nike's global marketing director embarked on a national search for a second
agency to augment its longtime agency of record, Wieden & Kennedy. After a
nationwide review, Leap was selected as Nike's second agency of record. Leap's
first assignment was to reposition the Niketown brand of retail stores from a
basic retail strategy to an extension of Nike's "Just Do It" philosophy. Nike
management approved Leap's positioning strategy for Niketown and Leap then
created and executed elements including television, radio, print, outdoor
advertising, in-store strategies, multimedia strategy and design, Web site
development and packaging. In addition to ongoing advertising for existing
Niketown locations, Leap is also heavily involved in launching new locations
domestically and internationally.
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Chicago Tribune Company -- Online Arts and Entertainment Service Guide
Leap has been engaged as the strategic developer of the architecture and
look and feel of a leisure and entertainment segment of the Chicago Tribune
Company's Web site which the Company expects to be the most comprehensive
entertainment guide for the Chicago area. The site is intended to provide
consumers with up-to-date high-quality content, and eventually transactional
abilities, for nightclubs, bars, restaurants, live music, calendars, movie
guides, libraries, museums, parks and special events. The Company's plans also
envision versions of the site which will be "intelligent" and through usage
will track a user's preferences and provide personalized information.
Miller Brewing Company -- Super Bowl Campaign
As a member of Miller's agency roster, Leap recognized an opportunity for
Miller to reinforce its position as the NFL official beer sponsor as well as
compete directly with the Anheuser-Busch promotion "Bud Bowl." Facing a fast
turnaround schedule (six weeks), Leap created and produced television
commercials complete with celebrity talent and estate negotiation, a live
action shoot, a blue screen shoot, selection of NFL footage, editing and
compositing. The result was "Elmer Bruker," the story of the quarterback who
was a member of every winning Super Bowl team but never played. The spot
employed visual effects technology, such as that used in the movie "Forest
Gump," to incorporate football legends including Vince Lombardi and Hank
Stramm, and live action shots with Jimmy Johnson. The spots launched during
the college Bowl games on December 31, 1994. Leap orchestrated promotions and
public relations, wrote a Bruker biography, and created Bruker trading cards.
Tommy Armour Golf Company
Leap was retained as agency of record for Tommy Armour in May 1995. The
initial assignment was to create an advertising campaign that would relaunch
Tommy Armour's 855s Oversized Irons and begin to reposition the company as
forward thinking and technology focused. The 855s irons had been launched in
1994 with little advertising support and Tommy Armour felt it had missed an
opportunity to convey product innovation to consumers.
Leap developed a campaign based on game improvements and a themeline for the
advertising, "Take your game to the next level." The elements of the
communication plan included national television advertising, featuring
professional golfer Jim Gallagher, Jr., that ran on Saturday and Sunday golf
tournament telecasts and the CNN Airport Network. National trade and consumer
print advertising was also placed in golf publications. Leap created
integrated point of purchase materials, developed an updated Tommy Armour
logo, assisted in promotions and developed a Web site.
At the time Leap suggested the development of a Web site to Tommy Armour,
the Company was not aware of any other golf companies on the World Wide Web.
Leap convinced Tommy Armour that the Web site should be an integrated part of
its marketing plan and would offer benefits to consumers, trade partners and
the company. Leap crafted a deal with Golf Web, an online golf magazine, for
Tommy Armour to be the sole sponsor of Golf Web's coverage of all four major
tournaments in 1996, with a hyperlink to the Tommy Armour Web site. Leap
designed and developed the Tommy Armour Web site which includes product
information, a pro shop locator to help consumers find Tommy Armour products,
pro biographies, Tommy Armour news, and a golf trivia quiz. The Tommy Armour
Web site now serves consumers by providing relevant information and games,
trade partners by funneling customers to their retail outlets and Tommy Armour
by providing information about its customers.
COMPETITION
The markets for the Company's services are highly competitive. Clients may
change their marketing and communications advisors with relative ease or
perform these functions themselves. Clients may also reduce or eliminate their
expenditures on advertising and marketing at any time for any reason. The
Company faces
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competition from a number of sources, all striving to attract new clients or
additional assignments or accounts from existing clients. These sources
include national and regional full-service and specialty advertising agencies
as well as specialized and integrated marketing communications firms. The
Company could also be viewed as competing with large
entertainment/technology/marketing companies. While management believes that
Leap has a technological head start over most traditional agencies, many
agencies have begun to internally develop or acquire new media capabilities
(e.g., corporate identity and packaging, advertising services or World Wide
Web site design), have emerged technically proficient in the new media arena
and are competing with the Company in the interactive advertising market. Many
of the Company's competitors or potential competitors have longer operating
histories, longer client relationships and significantly greater financial,
management, technology, development, sales, marketing and other resources than
the Company.
There are relatively low barriers to entry into the Company's business. For
example, the Company has no significant proprietary technology that would
preclude or inhibit competitors from entering the integrated marketing
communication solutions market. The Company expects that it will face
additional competition from new entrants into the market in the future. There
can be no assurance that existing or future competitors will not develop or
offer services and products that provide significant performance, price,
creative or other advantages over those offered by the Company, which could
have a material adverse effect on the Company's business, financial condition
and operating results.
The Company believes that the principal competitive factors in its markets
are the abilities to understand the client's business and develop
strategically sound interactive solutions, present unique creative concepts,
demonstrate breadth and depth of technical and new media expertise, develop
strong customer relationships and produce high quality products with speed and
efficiency, and at a competitive price. The Company believes that it competes
favorably with respect to each of these factors, due in large part to a
structure that combines the creative talent and other skills of a traditional
advertising agency, as well as access to significant client advertising
budgets, with the technological vision required to convert client budgets into
effective digital, interactive marketing communications. However, there can be
no assurance that the Company will continue to compete successfully. To the
extent that the Company's competitors are perceived as providing superior
products, services or terms, or to the extent that the Company's clients are
dissatisfied with the Company's products, services or terms, the Company's
business, operating results and financial condition could be materially
adversely affected.
CREATIVE PARTNERS
As of August 31, 1996, Leap employed a total of 72 Creative Partners, 65 of
whom were full-time and 7 part-time. Of these, 62 were engaged in servicing
clients and 10 were involved in finance and administration. The Company
expects to hire a significant number of Creative Partners in fiscal 1997 to
accommodate anticipated growth and expansion. None of the Company's Creative
Partners are represented by a labor union, and the Company believes that its
relations with its Creative Partners are good.
FACILITIES
The Company owns its main office in Chicago which is a 12,400 square foot
two-story facility. The Company also leases a 2,200 square foot facility in
Portland, Oregon to service a local client. The Company is currently seeking
additional office space in Chicago, and believes that the space required to
serve the Company's present needs and anticipated growth will be available for
purchase or lease on commercially reasonable terms on an as-needed basis.
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LEGAL PROCEEDINGS
In September 1995, the Spin Doctors (also known as Modigliani, Inc.), a
recording and performing group, and Mow B'Jow Music, Inc., their music
publisher, filed a lawsuit against Leap, Miller and Trivers/Myers Music in the
United States District Court, Central District of California. The complaint
alleges copyright and persona infringement, statutory and common law unfair
competition and unjust enrichment stemming from the airing of a television
commercial created by Leap for a client. The suit has been referred to the
Company's insurance carrier and legal counsel. The complaint seeks substantial
monetary damages. In an unsolicited demand, the plaintiffs have offered to
compromise the case in the amount of $5,750,000. The defendants rejected such
offer to settle because of their belief that the plaintiffs' claims have no
merit, and the Company intends to vigorously defend its position. Although the
suit is in an early stage and it is therefore difficult to predict its
ultimate outcome, an adverse determination and award not covered by insurance
could have a material adverse effect on the Company's results of operations
and, if the offering contemplated by this Prospectus is not consummated, on
the Company's liquidity and consolidated financial position.
The Company is not a party to any other material litigation.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES
The executive officers, directors and significant employees of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
R. Steven Lutterbach(1).......... 46 Chairman and Chief Executive Officer
Frederick Smith.................. 42 Vice Chairman and Chief Operating Officer
Thomas R. Sharbaugh.............. 52 President and Director
George Gier...................... 36 Executive Vice President, Chief Marketing
and Information Officer and Director
Joseph A. Sciarrotta............. 34 Executive Vice President, Chief Creative
Officer and Director
Peter Vezmar..................... 39 Chief Financial Officer and Treasurer
Robert C. Bramlette.............. 46 Chief Legal and Strategic Officer and
Secretary
Guy Day(1)(2)(4)................. 66 Director
John Keane(1)(2)(3)(4)........... 66 Director
Thomas McElligott(2)(3).......... 53 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Messrs. Day, Keane and McElligott will become directors of the Company on
the effective date of the Registration Statement filed in connection with
the offering.
(3) Member of Audit Committee.
(4) Member of Stock Committee.
R. Steven Lutterbach co-founded Leap, has served as a director and officer
of the Company since its inception and became Chairman of the Board and Chief
Executive Officer in March 1996. From 1990 to the present, Mr. Lutterbach has
served as President of Forest Beach Development, Inc. and Long Beach
Development, Inc., both real estate development companies, which require
minimal amounts of his time. Mr. Lutterbach also co-founded the Alliance
Banking and Financial Service Companies, a full service bank in Michigan. Mr.
Lutterbach's previous experience includes positions as Chairman and Chief
Executive Officer of Control Resources Industries, Inc., a publicly held
company specializing in environmental products and service. Mr. Lutterbach
currently serves on the Board of Directors of several privately-held
businesses, foundations and social organizations, including Alliance Banking
Company.
Frederick Smith, a co-founder of Leap, was appointed Vice Chairman and Chief
Operating Officer of the Company in May 1996 and has served as a director and
officer since the Company's inception. From January 1991 until the formation
of Leap in September 1993, Mr. Smith was employed by DDB Needham Chicago,
where he was a Vice President, Executive Producer. While there, his principal
accounts were Bud Light, Michelob (for which he produced a commercial
featuring Phil Collins), Discover Card Services, General Mills and Audi. Mr.
Smith's previous experience included one year at Young and Rubicam Chicago,
where he was responsible for the Old Style "Heart of the Heartland" campaign,
and five years at Leo Burnett in Chicago where his client list included
McDonald's, Kelloggs and United Airlines.
Thomas R. Sharbaugh joined the Company in April 1996, became a director at
that time and was appointed President in May 1996. Prior to joining Leap, Mr.
Sharbaugh was employed by Sears from March 1994 until February 1996 as Vice
President, Strategic Marketing and Advertising. While at Sears, Mr. Sharbaugh
oversaw the "Softer Side of Sears" campaign, which was named as one of the top
10 print campaigns and top 25 television campaigns of 1995 (for the first time
ever for a retail advertiser). Prior to joining Sears, Mr. Sharbaugh held
various senior level executive marketing positions during his 16-year tenure
at Anheuser-Busch. As Vice President of Brand Management and, prior to that,
as Vice President of
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Budweiser Brands, he was responsible for managing brand marketing activities
and new product marketing. Mr. Sharbaugh's responsibilities at Anheuser-Busch
included the development and market launch of Bud Light; management of the
"This Bud's For You" campaign for Budweiser; the "Gimme a Light", "Spuds
McKenzie" and "Make it a Bud Light" campaigns for Bud Light; and the "Bud
Bowl" promotional campaign. Mr. Sharbaugh has received many awards for his
marketing accomplishments, including the Food and Beverage Marketing's
"Brammy" award for best sports marketing promotion in 1990, and was named to
Advertising Age's "Marketing 100" in 1992.
George Gier co-founded Leap, has served as a director and officer of Leap
since its inception and was appointed Executive Vice President, Chief
Marketing and Information Officer in May 1996. From January 1991 until joining
the Company, he was employed by DDB Needham Chicago, where he was a Vice
President, Creative Director. Mr. Gier's previous experience included Hal
Riney & Partners in San Francisco, where his principal assignment was the
introduction of Saturn automobiles. Prior to joining Hal Riney & Partners, Mr.
Gier spent four years at Fallon McElligott in Minneapolis, where his client
list included Lee Jeans, Porsche, Federal Express, Gilbey's Gin and Time/Life
Books. Mr. Gier's accolades include three "Clios" and 14 awards from The One
Show, and he has twice been a finalist for the Stephen E. Kelly Awards. In
1993, Mr. Gier was named Midwest Copywriter of the year by Adweek magazine,
and in 1994, he was named a National Creative All-Star by Adweek magazine.
Joseph A. Sciarrotta co-founded Leap, has served as a director and officer
of Leap since its inception and was appointed Executive Vice President, Chief
Creative Officer in May 1996. From January 1991 to August 1993, he was
employed by DDB Needham Chicago, where he was a Senior Vice President, Group
Creative Director. While at DDB Needham, Mr. Sciarrotta was responsible for
the Bud Light, Frito Lay, and Busch Garden Theme Parks accounts, among others.
Prior to his move to DDB Needham, Mr. Sciarrotta spent six years at J. Walter
Thompson Chicago where he was a Senior Vice President, Creative Director. His
work, while at J. Walter Thompson, on 7-11, Lowenbrau, Oscar Mayer, Kraft
Miracle Whip, Quaker Oats and Godfather's Pizza earned him various creative
awards as well as Effie awards for effective advertising. In 1990, Mr.
Sciarrotta was named to the Adweek Creative All-Star Team as TV Art Director
of the Year for the Midwest, and in 1994, he was named a National Creative
All-Star by Adweek magazine.
Peter Vezmar joined the Company in June 1994 as the Director of Finance and
has served as Chief Financial Officer and Treasurer of Leap since March 1996.
From February 1989 until November 1994, Mr. Vezmar was employed by Pavichevich
Brewing Co., a public company, as its Chief Financial Officer. Mr. Vezmar is a
Certified Public Accountant and a former partner in a regional CPA firm.
Robert C. Bramlette has served as Chief Legal and Strategic Officer and as
Secretary of the Company since May 1996. Prior to joining Leap, Mr. Bramlette
was Of Counsel to the law firm Krupa & Braun, which he joined in February
1996. Prior to joining Krupa & Braun, Mr. Bramlette was employed by Sears for
sixteen years, most recently as its Assistant General Counsel, Real Estate,
and prior to that time, in a number of positions including Director of
Corporate Communications.
Guy Day will become a member of the Company's Board of Directors on the
effective date of the Registration Statement filed in connection with the
offering. Mr. Day is the sole owner and employee of G. Bidet Co. Inc., a
California-based advertising consulting company, which he founded in 1987.
From 1989 to 1990, Mr. Day held the position of Vice Chairman at the
advertising agency Keye/Donna/Pearlstine where he assisted in the
reorganization of this midsize agency. Mr. Day joined McElligott Wright
Morrison White as its Vice Chairman for a four-month period in 1991 during
which he assisted in the firm's campaign to obtain an automobile manufacturer
as a client. In 1966 Mr. Day co-founded Faust/Day, Inc. which by way of merger
became Chiat/Day, Inc. From 1968 to 1976, Mr. Day served this agency as
Creative Director and Chief Operating Officer. In 1982, Mr. Day returned to
Chiat/Day, Inc. from a sabbatical and served as its President in charge of
western operations until 1987. During his employment at Chiat/Day the agency
was twice selected as Advertising Age's "National Agency of the Year."
John Keane will become a member of the Company's Board of Directors on the
effective date of the Registration Statement filed in connection with the
offering. Mr. Keane is the Gillen Dean and Korth Professor of Strategic
Management at The University of Notre Dame's College of Business
Administration.
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<PAGE>
He joined The University of Notre Dame in January 1989 in his current
position. Prior to such time, Mr. Keane held various management and consulting
positions in the advertising industry. From 1972 to 1984 he was the founding
President of Managing Change, Inc., a marketing consulting firm, and from 1961
to 1972 he was employed by Needham, Harper & Steers, Inc., Wade Advertising,
Inc., North Advertising, Inc. and J. Walter Thompson Company, where his
clients included Seven-Up, Kraft Foods, Oscar Mayer, Quaker Oats, S.C. Johnson
and Campbell Taggart. Mr. Keane is a director of Excel Industries, Inc., a
publicly held manufacturer of automotive parts.
Thomas McElligott will become a member of the Company's Board of Directors
on the effective date of the Registration Statement filed in connection with
the offering. In 1981, Mr. McElligott co-founded the Fallon McElligott Rice
agency, which in 1984 was named Advertising Age's "National Agency of the
Year." After seven years at Fallon McElligott Rice, he moved in 1989 to
Chiat/Day/Mojo, serving as its Executive Creative Director. In 1990, Mr.
McElligott founded the advertising agency McElligott Wright Morrison White
where he served as Chief Executive Officer and Creative Director until he
retired in 1992. Mr. McElligott is a member of the Advertising Hall of Fame.
BOARD OF DIRECTORS
Upon the completion of the offering, the Board of Directors will be divided
into three classes. The Board will be composed of three Class I directors
(Messrs. Smith, Sciarrotta and Keane), two Class II directors (Messrs.
Sharbaugh and Gier) and three Class III directors (Messrs. Lutterbach, Day and
McElligott). The terms of the Class I, Class II and Class III directors expire
on the date of the 1997, 1998 and 1999 annual meetings, respectively. At each
annual meeting, successors to the class of directors whose term expires at
that annual meeting will be elected for a three-year term. Directors elected
by the stockholders may be removed only for cause.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee
The Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public
accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of the Company's internal
accounting controls.
Compensation Committee
The Compensation Committee determines the compensation of the Company's
executive officers and makes recommendations concerning the grant of options
to purchase shares of the Company's stock under the Company's 1996 Stock
Option Plan, Employee Incentive Compensation Plan and Employee Stock Purchase
Plan.
Stock Committee
The Stock Committee will administer the Company's 1996 Stock Option Plan,
Employee Incentive Compensation Plan and Employee Stock Purchase Plan.
Other Committees
The Board of Directors may establish such other committees as deemed
necessary and appropriate from time to time.
36
<PAGE>
COMPENSATION OF THE BOARD OF DIRECTORS
The Company intends to pay a fee of $2,000 per Board meeting attended and
$500 per committee meeting attended to its directors who are not employees of
the Company. The Company will reimburse such directors for travel and lodging
expenses incurred in connection with their activities on behalf of the
Company. In addition, non-employee directors are eligible to participate in
the Company's Non-Employee Directors' Stock Option Plan. On the effective date
of the Registration Statement filed in connection with the offering, each of
Messrs. Day, Keane and McElligott was granted options to purchase 20,000
shares of Common Stock pursuant to the plan. See "--Stock Option Plans--Non-
Employee Directors' Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the cash
compensation paid by the Company for services rendered during the fiscal year
ended January 31, 1996 to its chief executive officer and the other executive
officers of the Company whose total annual salary and bonus exceeded $100,000
during such period (each, a "Named Executive Officer").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME SALARY ($) BONUS ($) COMPENSATION ($)
- ---- ---------- --------- ----------------
<S> <C> <C> <C>
R. Steven Lutterbach
Chief Executive Officer................. $201,000 -- --
Frederick Smith
Chief Operating Officer................. 201,000 -- --
George Gier
Executive Vice President, Chief
Marketing and Information Officer...... 201,000 -- --
Joseph A. Sciarrotta
Executive Vice President and Chief Crea-
tive Officer........................... 221,226 -- --
</TABLE>
No stock options or stock appreciation rights have been granted to the Named
Executive Officers since the Company's inception.
STOCK OPTION AND STOCK PURCHASE PLANS
1996 Stock Option Plan
Effective January 3, 1996, the Company adopted the 1996 Stock Option Plan
(the "1996 Stock Option Plan") which permits the grant of incentive stock
options and non-qualified stock options. The 1996 Stock Option Plan was
amended and restated, effective March 12, 1996, upon the Company's
reorganization. The 1996 Stock Option Plan is administered by the Stock
Committee, which has broad authority, subject to the terms of the 1996 Stock
Option Plan, to determine the material terms and provisions under which the
options are granted, including the individuals to whom such options may be
granted, exercise prices and numbers of shares subject to options, the time or
times during which options may be exercised and certain other terms and
conditions of the options granted. Officers, directors, and other key
employees of the Company, its subsidiaries and affiliates are eligible to
receive grants.
The exercise price of the incentive stock options under the 1996 Stock
Option Plan shall be equal to the fair market value of the Common Stock on the
date of grant; provided, however, that in the case of incentive stock options
granted to holders of more than 10% of the voting stock of the Company or any
subsidiary, the exercise price shall be not less than 110% of the fair market
value of the Common Stock on the date of grant. The exercise price of non-
qualified options shall be equal to the fair market value of the Common Stock
on the grant date as determined by the Stock Committee. The exercise price may
be paid in cash, by delivery of Common Stock or a combination thereof. The
Plan will terminate March 10, 2006 unless previously terminated by the Board
of Directors.
37
<PAGE>
As of the date of this Prospectus, options for 2,304,000 shares of Common
Stock had been granted under the 1996 Stock Option Plan and no additional
shares of Common Stock remained available for issuance thereunder. Of the
options granted, 504,000 were granted on January 3, 1996 to employees of the
Company at an exercise price of $3.00 per share, and 1,800,000 were granted to
a newly hired executive officer on March 12, 1996 at an exercise price of
$7.25 per share. In estimating the fair market value of the Common Stock as of
the respective dates of grant, the Company's Board of Directors took into
account a number of factors including the Company's business and business
prospects, its limited operating history, the lack of an established market
for the Common Stock and developments in the public markets.
At the time of the January grants, no independent valuation of the Company
was available, and in determining the appropriate exercise price for the
options, the Board of Directors considered the Company's historical results of
operations, the then-current state of its business and management's business
plan. The Board of Directors also took into account uncertainties in the
business, in particular the reduction in revenues resulting from the Company's
resignation of the Miller account. An additional factor considered important
by the Board of Directors was the lack of an established trading market for
the Common Stock. Based upon these considerations, the Board of Directors
established an exercise price of $3.00 per share.
Between the January 3 and March 12 grant dates, a number of events occurred
which in the view of the Board of Directors indicated that the fair market
value of the Common Stock had increased significantly. Most importantly, based
on assignments from existing and new clients, management believed that the
Company was making progress in replacing the Miller revenues. In addition, the
Company succeeded in hiring an experienced and prominent marketing executive.
While the Company did not determine to proceed with an initial public offering
until late April, prior to March 12 the Company had engaged in preliminary
discussions with investment bankers concerning a variety of financing
opportunities including a public offering. The Board of Directors considered
it appropriate to take into account developments in the public markets for
comparable companies, the initial public offering prices for such companies
and appropriate discounts to reflect the fact that the Company was still
privately held and the significant uncertainty existing as of the grant date
as to whether a public offering would in fact occur. Based upon all of these
considerations, the Board of Directors established an exercise price of $7.25
per share.
The option exercise prices were equal to the fair market value of the Common
Stock as of the respective dates of grant as determined by the Board of
Directors, and accordingly, no compensation expense was recorded.
Non-employee Directors' Stock Option Plan
Effective May 1996, the Company adopted the 1996 Non-employee Directors'
Stock Option Plan (the "Directors' Plan"), pursuant to which options to
acquire a maximum of 200,000 shares of Common Stock may be granted to non-
employee directors. Options granted under the Directors' Plan do not qualify
as incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended. On the effective date of the Registration
Statement filed in connection with the offering, each of Messrs. Day, Keane
and McElligott was granted options to purchase 20,000 shares of Common Stock,
at an exercise price equal to the initial public offering price, pursuant to
the Directors' Plan. Such options became fully exercisable on the date of
grant. Pursuant to the Directors' Plan, each non-employee director appointed
or elected after the offering will be granted options to purchase 5,000 shares
of Common Stock on the date of such director's initial election or appointment
to the Board of Directors and on each anniversary of the initial grant date.
Such options shall become exercisable one year after the date of grant at an
exercise price equal to the fair market value of the Common Stock on the date
of grant. All options granted under the Directors' Plan will have a five-year
term. The options may be exercised by payment in cash, check or shares of
Common Stock.
Employee Incentive Compensation Plan
Effective May 1996, the Company adopted the Employee Incentive Compensation
Plan (the "Incentive Plan"), which permits grants of incentive stock options,
non-qualified stock options, stock appreciation rights
38
<PAGE>
("SARs"), performance shares, restricted stock, deferred stock and other
stock-based awards. The Incentive Plan authorizes the issuance of up to
2,000,000 shares of Common Stock in connection with such awards. As of the
date of this Prospectus, options to purchase 60,000 shares of Common Stock had
been granted under the Incentive Plan. The Incentive Plan is administered by
the Stock Committee, which has broad authority, subject to the terms of the
Incentive Plan, to grant stock options and make other awards under the
Incentive Plan. Directors, officers, employees and consultants of the Company
are eligible to receive grants.
The exercise price of stock options may not be less than the fair market
value of the Common Stock on the grant date. The Stock Committee will
determine when options may be exercised. The exercise price may be paid in
cash, by delivery of Common Stock or both.
SARs may be granted in conjunction with any stock option under the Incentive
Plan, in which case the exercise of the SAR shall require the cancellation of
a corresponding stock option, and the exercise of the stock option shall
require the cancellation of a corresponding portion of the SAR. In the case of
non-qualified stock options, such SARs may be granted at or after the time of
grant of such stock option. In the case of incentive stock options, such SARs
may be granted only at the time of grant of such option. An SAR may also be
granted on a standalone basis. Upon exercise of an SAR, the holder is entitled
to receive in cash, stock or both, as determined by the Stock Committee, the
difference between the fair market value of one share of Common Stock and (i)
the grant price of the SAR if the SAR was granted on a stand alone basis or
(ii) the option price if the SAR was granted in conjunction with a stock
option. An SAR granted in tandem with an incentive stock option is not
exercisable unless the fair market value of the Common Stock on the date of
exercise exceeds the option price.
The Incentive Plan also authorizes the granting of restricted and deferred
stock. The Stock Committee may condition the grant of restricted and deferred
stock upon the attainment of specified performance goals by the grantee or the
Company or other factors or criteria as the Stock Committee shall determine.
The Incentive Plan also authorizes other awards that are payable in, valued
in whole or in part by reference to, or otherwise based on or related to
shares of Common Stock, as deemed by the Stock Committee to be consistent with
the purposes of the Incentive Plan. Such stock-based awards may include,
without limitation, shares of Common Stock awarded as bonus, not subject to
any restrictions or conditions, convertible or exchangeable debt securities,
other rights convertible or exchangeable into the shares of Common Stock,
awards with value and payment contingent upon performance of the Company or
any other factors, and awards valued by reference to the book value of shares
of stock or the value of securities of or the performance of the Company.
Employee Stock Purchase Plan
Effective May 1996, the Company adopted the Employee Stock Purchase Plan
(the "Stock Purchase Plan"). A total of 500,000 shares of Common Stock have
been reserved for issuance under the Purchase Plan. The Purchase Plan, which
is intended to qualify under Section 423 of the Code, permits eligible
employees of the Company to purchase Common Stock through payroll deductions
with all such deductions credited to an account under the Purchase Plan.
Payroll deductions may not exceed $25,000 for all purchase periods ending
within any Plan Year (as hereinafter defined).
The Purchase Plan operates on a calendar year basis (the "Plan Year"). To be
eligible to participate during a Plan Year, an employee must file all
requisite forms prior to a specified due date known as the "Grant Date."
Generally the first day of each Plan Year will be the Grant Date and the last
day of each Plan Year will be an Exercise Date (the "Exercise Date"). The
determination of the Grant Date and the Exercise Dates are completely within
the discretion of the Plan Committee. On each Exercise Date, participants'
payroll deductions credited to their accounts will be automatically applied to
the purchase price of Common Stock at a price per share which is the lesser of
eighty-five percent (85%) of the fair market value of the Common
39
<PAGE>
Stock on the Grant Date or on the Exercise Date. Employees may end their
participation in the Purchase Plan at any time during an offering period, and
their payroll deductions to date will be refunded. Participation ends
automatically upon termination of employment with the Company.
Employees are eligible to participate in the Stock Purchase Plan if they are
customarily employed by the Company or a designated subsidiary for at least 20
hours per week and for more than five months in any calendar year. No person
will be able to purchase Common Stock under the Stock Purchase Plan if such
person, immediately after the purchase, would own stock possessing 5% or more
of the total combined voting power or value of all outstanding shares of all
classes of stock of the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with each of Messrs.
Lutterbach, Smith, Gier, Sciarrotta and Sharbaugh. The employment agreement
with Mr. Lutterbach provides for an annual base salary of $300,000. The
agreements between the Company and each of Messrs. Smith, Gier and Sciarrotta
provide for an annual base salary of $200,000. Each of such agreements expires
on March 11, 1999 and is terminable by the Company only in the event of death
or disability or for "Cause" (as defined).
The employment agreement between Leap and Mr. Sharbaugh provides for an
annual base salary of $300,000. In addition, pursuant to such agreement, Mr.
Sharbaugh received options to purchase 1,800,000 shares of Common Stock
pursuant to the 1996 Stock Option Plan. The options granted to Mr. Sharbaugh
have an exercise price of $7.25 per share and a 10-year term. Of such options,
1,400,000 vested and became exercisable on March 12, 1996 upon execution of
the employment agreement and 100,000 shares will vest and become exercisable
on each anniversary thereof for the next four years. Mr. Sharbaugh's
employment agreement expires on March 30, 1999 and is terminable by the
Company only in the event of death or disability or for "Cause" (as defined).
Each of the employment agreements contains provisions that restrict the
employee from misappropriating confidential information during the term of
employment and thereafter and from soliciting Leap's clients, prospects or
employees for two years following termination of employment.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law ("DGCL"),
the Company has adopted provisions in the Restated Certificate which eliminate
the personal liability of its directors to the Company or its stockholders for
monetary damages for breach of their fiduciary duty as a director to the
fullest extent permitted by the DGCL except for liability (i) for any breach
of their duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (unlawful
payments of dividends or unlawful stock repurchases or redemptions), or (iv)
for any transaction from which the director derived an improper personal
benefit.
The Restated Certificate also contains provisions which require the Company
to indemnify its directors and officers and permit the Company to indemnify
its employees to the fullest extent permitted by Delaware law, including those
circumstances in which indemnification would otherwise be discretionary,
except that the Company shall not be obligated to indemnify any such person
(i) with respect to proceedings, claims or actions initiated or brought
voluntarily by any such person and not by way of defense or (ii) for any
amounts paid in settlement of an action indemnified against by the Company
without the prior written consent of the Company. The Company has entered into
indemnity agreements with each of its directors, Mr. Vezmar and Mr. Bramlette
providing for such indemnification and for certain additional indemnification
rights.
40
<PAGE>
CERTAIN TRANSACTIONS
In February 1995, Mr. Lutterbach made a loan to the Company which totalled
approximately $400,000 at August 31, 1996. Such loan bears interest at the
prime rate plus 1 1/2% per annum. The loan is secured by a second mortgage on
the property located at 22 West Hubbard Street, Chicago, Illinois 60610, the
Company's principal executive offices. The Company intends to repay this
indebtedness in full from the proceeds of the offering. See "Use of Proceeds."
The Company currently has outstanding approximately $2.0 million of
indebtedness to Manufacturers Bank of Chicago ("Manufacturers") under two loan
facilities and recently obtained a loan in the principal amount of $596,000
from Manufacturers, secured by a mortgage on the Company's office building.
The full amount of such indebtedness is personally guaranteed by Mr.
Lutterbach and his spouse, Mr. Gier and his spouse, Mr. Sciarrotta and Mr.
Smith. The Company intends to repay this indebtedness in full from the
proceeds of the offering. See "Use of Proceeds."
From November 1, 1994 until October 26, 1995, the Company was a party to a
revolving credit agreement with Alliance Banking Company ("Alliance") of New
Buffalo, Michigan, under which amounts up to approximately $1,000,000 were
outstanding from time to time. On October 26, 1995, all outstanding debt under
the revolving credit agreement was paid in full and the agreement was
terminated. In addition, the Company had outstanding a mortgage loan,
initially in the amount of $480,000 from Alliance. Such loan was paid in full
on May 31, 1996. The full amount of such indebtedness was personally
guaranteed by Messrs. Gier, Lutterbach, Sciarrotta and Smith. Mr. Lutterbach
is a member of the Board of Directors of and a significant stockholder in
Alliance.
The Company has adopted a policy that all future transactions with
affiliated entities or persons will be on terms no less favorable than could
be obtained from unrelated parties and all future transactions between the
Company and its officers, directors, principal stockholders and affiliates
will be approved by a majority of the Company's independent directors.
41
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus and
as adjusted to give effect to the sale of shares of Common Stock in the
offering, by (a) each director and executive officer of the Company, (b) each
person known by the Company to own beneficially five percent or more of the
Common Stock, (c) each Selling Stockholder and (d) all current executive
officers and directors as a group.
<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY
BENEFICIALLY OWNED AFTER
SHARES OWNED AFTER OFFERING IF OVER-
BENEFICIALLY OFFERING IF OVER- NUMBER ALLOTMENT OPTION
OWNED PRIOR TO ALLOTMENT OPTION OF EXERCISED IN
OFFERING(1) NOT EXERCISED(1) SHARES FULL(1)
------------------ --------------------- BEING ---------------------
NAME NUMBER PERCENT NUMBER PERCENT OFFERED NUMBER PERCENT
---- ---------- ------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
R. Steven
Lutterbach(2).......... 2,400,000 25.0% 2,400,000 17.6% 150,000 2,250,000 16.5%
Frederick Smith(3)...... 2,400,000 25.0 2,400,000 17.6 150,000 2,250,000 16.5
Joseph A.
Sciarrotta(4).......... 2,340,000 24.4 2,340,000 17.2 150,000 2,190,000 16.1
George Gier(5).......... 2,300,000 24.0 2,300,000 16.9 150,000 2,150,000 15.8
Thomas R. Sharbaugh(6).. 1,400,000 12.7 1,400,000 9.3 -- 1,400,000 9.3
All executive officers
and directors as a group
(7 persons prior to the
offering, 10 persons
after the offering)(7).. 10,858,333 98.5% 10,918,333(8) 72.4% 600,000 10,318,333(8) 68.4%
</TABLE>
- --------
(1) Unless otherwise indicated below, the persons in the above table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) The shares shown include 150,000 shares held by trusts for Mr.
Lutterbach's children, as to which Mr. Lutterbach disclaims beneficial
ownership.
(3) The shares shown include 150,000 shares held by trusts for Mr. Smith's
children, for which Mr. Smith, as co-trustee, shares voting and investment
power.
(4) The shares shown include 50,000 shares held by a trust for Mr.
Sciarrotta's family, for which Mr. Sciarrotta, as co-trustee, shares
voting and investment power.
(5) The shares shown include 100,000 shares held by trusts for Mr. Gier's
children, for which Mr. Gier, as co-trustee, shares voting and investment
power.
(6) The shares shown are issuable to Mr. Sharbaugh pursuant to currently
exercisable options.
(7) The shares shown include 1,418,333 shares issuable to officers pursuant to
currently exercisable options.
(8) Includes 60,000 shares issuable to non-employee directors pursuant to
currently exercisable options.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.01 per share, and 20,000,000 shares of Preferred
Stock, par value $.01 per share.
The following summary of certain provisions of the Common Stock and the
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Restated
Certificate and Bylaws that are included as exhibits to the Registration
Statement of which this Prospectus is a part, and by the provisions of
applicable law.
COMMON STOCK
As of August 31, 1996, there were 9,600,000 shares of Common Stock
outstanding that were held of record by 18 stockholders. There will be
13,600,000 shares of Common Stock outstanding after giving effect to the sale
of the shares of Common Stock offered hereby and excluding shares of Common
Stock reserved for issuance upon exercise of options granted under the
Company's stock option plans. The Common Stock
42
<PAGE>
has been approved for quotation on the Nasdaq National Market under the symbol
"LEAP." To date, there exists no market for the Common Stock and there can be
no assurance that a market will develop.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." Holders of Common Stock are entitled to one
vote per share in all matters to be voted upon by stockholders. In the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
the Company's liabilities and the liquidation preferences of any outstanding
Preferred Stock. Holders of Common Stock have no preemptive rights and no
rights to convert their Common Stock into any other securities, and there are
no redemption provisions with respect to such shares. All of the outstanding
shares of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may issue in the future.
PREFERRED STOCK
The authorized class of Preferred Stock may be issued in series from time to
time with such designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions thereof as the Board of Directors
determines. The rights, priorities, preferences, qualifications, limitations
and restrictions of different series of Preferred Stock may differ with
respect to dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions and other
matters. The Board of Directors may authorize the issuance of Preferred Stock
which ranks senior to the Common Stock with respect to the payment of
dividends and the distribution of assets on liquidation. In addition, the
Board of Directors is authorized to fix the limitations and restrictions, if
any, upon the payment of dividends on Common Stock to be effective while any
shares of Preferred Stock are outstanding. The Board of Directors, without
stockholder approval, can issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change of control of the Company. The Company has no
present intention to issue shares of Preferred Stock.
CERTAIN CORPORATE PROVISIONS
The Company's Restated Certificate and Bylaws contain a number of provisions
relating to corporate governance and to the rights of stockholders. Certain of
these provisions may be deemed to have a potential "anti-takeover" effect in
that such provisions may delay, defer or prevent a change of control of the
Company. These provisions include (a) the classification of the Board of
Directors into three classes, each serving for staggered three year terms, (b)
the authority of the Board to issue series of Preferred Stock with such voting
rights and other powers as the Board of Directors may determine, (c) notice
requirements in the Bylaws relating to nominations to the Board of Directors
and to the raising of business matters at stockholders meetings, (d) a
requirement that a vote of the holders of at least 80% of the shares entitled
to vote generally for the election of directors is required to amend
provisions of the Restated Certificate relating to the classification of the
Board and removal of directors, and (e) a prohibition of stockholder action by
written consent.
The Company is subject to the provisions of the DGCL. Section 203 of the
DGCL prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the business combinations is approved in a
prescribed manner. A "business combination" includes mergers, asset sales, and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates owns, or within three years did own, 15
percent or more of the corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
Chicago Trust Company of New York.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for the Company's
Common Stock. Future sales of substantial amounts of Common Stock in the
public market could adversely affect the prevailing market prices.
Upon completion of the offering, there will be 13,600,000 shares of Common
Stock of the Company outstanding. Of these shares, the 4,000,000 shares sold
in the offering will be immediately eligible for resale in the public market
without restriction under the Securities Act, unless they are held by
"affiliates" of the Company within the meaning of Rule 144 under the
Securities Act. The remaining 9,600,000 shares will be "restricted" securities
within the meaning of Rule 144.
The Company, its officers and directors and stockholders (who in the
aggregate will hold all of the restricted securities upon completion of the
offering) have agreed that they will not directly or indirectly, offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of,
without the prior written consent of Dean Witter, any shares of Common Stock
or any other equity security of the Company, or any securities convertible
into or exercisable or exchangeable for, or warrants, options or rights to
purchase or acquire, Common Stock or any other equity security of the Company,
or enter into any agreement to do any of the foregoing, for a period of 180
days from the effective date of the Registration Statement of which this
Prospectus forms a part. Beginning 181 days after the effective date, all of
the currently outstanding restricted shares will become eligible for resale in
the public market subject to compliance with applicable provisions of Rule 144
adopted under the Securities Act. Dean Witter may, in its sole discretion and
at any time without notice, release any portion of the shares subject to lock-
up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a stockholder, including an "affiliate" of the Company, as that term is
defined in Rule 144 (an "Affiliate"), who has beneficially owned his or her
restricted securities (as that term is defined in Rule 144) for at least two
years from the later of the date such securities were acquired from the
Company or (if applicable) the date they were acquired from an Affiliate is
entitled to sell, within any three-month period, a number of such shares that
does not exceed the greater of one percent of the then outstanding shares of
Common Stock (approximately 136,000 shares immediately after the offering) or
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding the date on which notice of such sale was filed under Rule
144, provided certain requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition,
under Rule 144(k), if a period of at least three years has elapsed between the
later of the date restricted securities were acquired from the Company and the
date they were acquired from an Affiliate of the Company, a stockholder who is
not an Affiliate of the Company at the time of sale and has not been an
Affiliate for at least three months prior to the sale would be entitled to
sell the shares immediately without compliance with the foregoing requirements
under Rule 144.
The Company intends to file a registration statement under the Securities
Act no earlier than 90 days after the offering, covering an aggregate of
5,004,000 shares of Common Stock reserved for issuance under the stock option
and stock purchase plans. Upon the effectiveness of that registration
statement, 1,662,333 of the shares of Common Stock issuable under the stock
option and stock purchase plans, other than shares held by Affiliates, will be
immediately eligible for resale in the public market without restriction,
subject to the terms of the lock-up agreements which will be applicable to
options to purchase 1,478,333 shares.
44
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Dean Witter Reynolds Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement (a copy of which has been
filed as an exhibit to the Registration Statement), to purchase from the
Company the number of shares of Common Stock set forth opposite their
respective names in the table below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Dean Witter Reynolds Inc........................................... 1,525,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 1,525,000
Alex. Brown & Sons Incorporated.................................... 100,000
Hambrecht & Quist LLC.............................................. 100,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 100,000
Salomon Brothers Inc............................................... 100,000
William Blair & Company, L.L.C. ................................... 100,000
Brean Murray, Foster Securities Inc. .............................. 50,000
The Chicago Corporation............................................ 50,000
Cleary Gull Reiland & McDevitt Inc. ............................... 50,000
Everen Securities, Inc. ........................................... 50,000
Gerard Klauer Mattison & Co., Inc. ................................ 50,000
Hoak Securities Corp. ............................................. 50,000
Mesirow Financial, Inc. ........................................... 50,000
Piper Jaffray Inc. ................................................ 50,000
Roney & Co., L.L.C. ............................................... 50,000
---------
Total............................................................ 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligation is such that they must purchase all of the shares (other than those
subject to the over-allotment option) if any are purchased. The Underwriters
have advised the Company that they propose to offer the shares of Common Stock
to the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers (who may include the Underwriters) at such
price less a concession not to exceed $0.40 per share. The Underwriters may
allow, and such dealers may reallow, a discount not to exceed $0.10 per share
on sales to certain other dealers. After the initial offering to the public,
the public offering price and such concessions may be changed.
The Selling Stockholders have granted to the Underwriters an option
exercisable for 30 days from the date of this Prospectus to purchase up to
600,000 additional shares of Common Stock at the initial public offering price
less the underwriting discounts and commissions, solely to cover over-
allotments. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the number of shares
of Common Stock set forth opposite each Underwriter's name in the preceding
table bears to the total number of shares of Common Stock listed in such
table.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, subject to certain exceptions, its directors and officers and
the Selling Stockholders have agreed with the Underwriters that they will not
offer, sell or contract to sell, or otherwise dispose of, or enter into any
agreement to sell, directly or indirectly, any shares of the Company's Common
Stock or any securities convertible into, or exchangeable or exercisable for,
shares of the Company's Common Stock for a period of 180 days after the
effective date of the Registration Statement of which this Prospectus forms a
part without the prior written consent of Dean Witter. See "Shares Eligible
for Future Sale."
45
<PAGE>
The Underwriters do not intend to confirm sales of shares of Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.
Prior to this offering, there has been no established trading market for the
Common Stock. The initial price to public of the Common Stock offered hereby
was determined by negotiation between the Company and the Representatives. The
factors considered in determining the initial price to public include the
history of and the prospects for the industry in which the Company competes,
the ability of the Company's management, the past and present operations of
the Company, the historical results of operations of the Company, the
prospects for future earnings of the Company, the general condition of the
securities market at the time of this offering, the recent market prices of
securities of generally comparable companies and other factors deemed
relevant.
LEGAL MATTERS
The legality of the issuance of the shares of Common Stock being offered
hereby will be passed upon for the Company and the Selling Stockholders by
Katten Muchin & Zavis, a partnership including professional corporations,
Chicago, Illinois. Certain legal matters will be passed upon for the
Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of the Company for the period from
inception (September 20, 1993) to January 31, 1994 and the fiscal years ended
January 31, 1995 and 1996, appearing in this Prospectus and Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report thereon appearing elsewhere in the
Registration Statement, and are included in reliance upon the report given
upon the authority of such firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information, reference is made to
the Registration Statement and exhibits thereto. The information so omitted,
including exhibits, may be obtained from the Commission at its principal
office in Washington, D.C. upon the payment of the prescribed fees, or may be
examined without charge at the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549-1004. Such materials also may be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports contain-
ing consolidated financial statements audited by independent public accoun-
tants.
46
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants............. F-2
Consolidated Balance Sheets as of January 31, 1995 and 1996 and (Unau-
dited) July 31, 1996..................................................... F-3
Consolidated Statements of Operations for the Period from Inception (Sep-
tember 20, 1993) to January 31, 1994 and for the Fiscal Years Ended Janu-
ary 31, 1995 and 1996 and for the (Unaudited) Six-Month Periods Ended
July 31, 1995 and 1996................................................... F-4
Consolidated Statements of Stockholders' Deficit for the Period from In-
ception (September 20, 1993) to January 31, 1994 and for the Fiscal Years
Ended January 31, 1995 and 1996 and for the (Unaudited) Six-Month Period
Ended July 31, 1996...................................................... F-5
Consolidated Statements of Cash Flows for the Period from Inception (Sep-
tember 20, 1993) to January 31, 1994 and for the Fiscal Years Ended Janu-
ary 31, 1995 and 1996 and for the (Unaudited) Six-Month Periods Ended
July 31, 1995 and 1996................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of The Leap Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Leap
Group, Inc. (a Delaware corporation) and subsidiaries as of January 31, 1995
and 1996, and the related consolidated statements of operations, stockholders'
deficit and cash flows for the period from inception (September 20, 1993) to
January 31, 1994 and for each of the years in the two-year period ended
January 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Leap
Group, Inc. and subsidiaries as of January 31, 1995 and 1996, and the results
of its operations and its cash flows for the period from inception (September
20, 1993) to January 31, 1994 and for each of the years in the two-year period
ended January 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois,
September 24, 1996
F-2
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
---------------------- JULY 31,
1995 1996 1996
ASSETS ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents................ $ 6,715 $ 47,981 $ 82,148
Accounts receivable...................... 648,757 362,388 3,303,104
Costs in excess of billings.............. 591,263 619,660 798,733
Deferred income tax asset................ 477,793 0 0
Prepaid expenses......................... 18,285 42,201 27,175
---------- ---------- ----------
Total current assets................... 1,742,813 1,072,230 4,211,160
---------- ---------- ----------
Property and Equipment
Land..................................... 158,921 158,921 158,921
Building and improvements................ 432,093 442,923 469,791
Furniture and equipment.................. 233,162 549,983 883,977
---------- ---------- ----------
824,176 1,151,827 1,512,689
Less accumulated depreciation............ (103,598) (254,454) (397,301)
---------- ---------- ----------
Net property and equipment............. 720,578 897,373 1,115,388
---------- ---------- ----------
Other Assets............................... 74,137 83,190 774,886
---------- ---------- ----------
Total Assets............................... $2,537,528 $2,052,793 $6,101,434
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable......................... $2,000,559 $ 898,133 $2,965,566
Accrued expenses......................... 282,140 230,952 331,286
Notes payable to bank.................... 940,873 459,378 1,849,265
Current portion of mortgage payable...... 34,160 37,117 40,659
Current portion of capital lease
obligations............................. 0 19,178 49,136
Notes payable to officer................. 0 400,000 400,000
---------- ---------- ----------
Total current liabilities.............. 3,257,732 2,044,758 5,635,912
Long-Term Debt
Mortgage payable......................... 419,844 381,097 549,077
Capital lease obligations................ 0 66,526 98,790
---------- ---------- ----------
Total Liabilities.......................... 3,677,576 2,492,381 6,283,779
---------- ---------- ----------
Commitments and Contingencies (Note 6)
Stockholders' Deficit
Preferred Stock, $.01 par value,
20,000,000 shares authorized; no shares
issued or outstanding................... 0 0 0
Common Stock, $.01 par value; 100,000,000
shares authorized, 9,600,000 shares
issued and outstanding.................. 96,000 96,000 96,000
Additional paid in capital............... (95,000) (95,000) (95,000)
Accumulated deficit...................... (1,141,048) (440,588) (183,345)
---------- ---------- ----------
Total Stockholders' Deficit............ (1,140,048) (439,588) (182,345)
---------- ---------- ----------
Total Liabilities and Stockholders'
Deficit................................... $2,537,528 $2,052,793 $6,101,434
========== ========== ==========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-3
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JANUARY 31, ENDED JULY 31,
------------------------------------ ------------------------
1994(1) 1995 1996 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 372,500 $ 4,679,248 $ 8,209,622 $ 5,577,173 $ 7,290,103
Operating expenses:
Direct costs and
related expenses..... 243,717 3,749,019 3,622,016 2,930,261 4,493,580
Salaries and related
expenses............. 132,867 1,598,047 2,246,963 942,958 1,691,252
General and
administrative
expenses............. 118,541 722,092 984,966 463,690 749,904
---------- ----------- ----------- ----------- -----------
Total operating
expenses........... 495,125 6,069,158 6,853,945 4,336,909 6,934,736
---------- ----------- ----------- ----------- -----------
Operating
income/(loss).......... (122,625) (1,389,910) 1,355,677 1,240,264 355,367
Interest expense........ 3,607 102,699 161,194 88,237 98,124
---------- ----------- ----------- ----------- -----------
Income/(loss) before
income taxes....... (126,232) (1,492,609) 1,194,483 1,152,027 257,243
Income tax
benefit/(expense)...... 50,493 427,300 (494,023) (477,011) 0
---------- ----------- ----------- ----------- -----------
Net income/(loss)....... $ (75,739) $(1,065,309) $ 700,460 $ 675,016 $ 257,243
========== =========== =========== =========== ===========
Per share data:
Net income/(loss) per
share................ $ (0.01) $ (0.11) $ 0.07 $ 0.07 $ 0.03
========== =========== =========== =========== ===========
Shares used in per
share computation.... 10,108,680 10,108,680 10,108,680 10,108,680 10,108,680
========== =========== =========== =========== ===========
</TABLE>
- --------
(1) For short period from business inception, September 20, 1993, through
January 31, 1994.
The accompanying notes to the financial statements are an integral part of
these statements.
F-4
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNTS CAPITAL DEFICIT DEFICIT
--------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of September
20, 1993 (Inception)... -- $ -- $ -- $ -- $ --
Issuance of common
stock, at $.01 par
value.................. 9,600,000 96,000 (95,000) -- 1,000
Net loss............... -- -- -- (75,739) (75,739)
--------- ------- -------- ----------- -----------
Balance as of January
31, 1994............... 9,600,000 96,000 (95,000) (75,739) (74,739)
Net loss............... -- -- -- (1,065,309) (1,065,309)
--------- ------- -------- ----------- -----------
Balance as of January
31, 1995............... 9,600,000 96,000 (95,000) (1,141,048) (1,140,048)
Net income............. -- -- -- 700,460 700,460
--------- ------- -------- ----------- -----------
Balance as of January
31, 1996............... 9,600,000 96,000 (95,000) (440,588) (439,588)
Net income--unaudited.. -- -- -- 257,243 257,243
--------- ------- -------- ----------- -----------
Balance as of July 31,
1996--unaudited........ 9,600,000 $96,000 $(95,000) $ (183,345) $ (182,345)
========= ======= ======== =========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of
these statements.
F-5
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JANUARY 31, ENDED JULY 31,
--------------------------------- ----------------------
1994(1) 1995 1996 1995 1996
-------- ----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income/(loss)....... $(75,739) $(1,065,309) $ 700,460 $ 675,016 $ 257,243
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization......... 5,957 106,930 169,598 53,850 155,579
Deferred income
taxes................ (50,493) (427,300) 477,793 477,041 0
Changes in operating
assets and
liabilities:
Accounts receivable.. (93,500) (555,257) 286,369 (576,862) (2,940,716)
Costs in excess of
billings............ 0 (591,263) (28,397) 483,820 (179,073)
Prepaid expenses..... (22,387) 4,103 (23,916) 8,024 15,025
Other assets......... (13,711) (69,716) (27,795) (12,576) (704,428)
Accounts payable..... 191,159 1,809,400 (1,102,426) (1,213,688) 2,067,433
Accrued expenses..... 57,886 224,254 (51,188) (47,017) 100,335
-------- ----------- ---------- ---------- ----------
Net cash (used
in)/provided by
operating activities... (828) (564,158) 400,498 (152,392) (1,228,602)
-------- ----------- ---------- ---------- ----------
Cash flows from investing
activities:
Capital expenditures.... (62,605) (281,571) (241,947) (35,899) (298,640)
-------- ----------- ---------- ---------- ----------
Cash flows from financing
activities:
Proceeds from issuance
of common stock........ 1,000 0 0 0 0
Net
borrowings/(repayments)
on line of credit...... 180,220 760,653 (722,517) (161,373) 1,389,887
Borrowings on term
note................... 0 0 241,022 0 0
Mortgage payable........ 0 (25,996) (35,790) (19,361) 171,522
Note payable to
officer................ 0 0 400,000 450,000 0
-------- ----------- ---------- ---------- ----------
Net cash provided
by/(used in) financing
activities............. 181,220 734,657 (117,285) 269,266 1,561,409
-------- ----------- ---------- ---------- ----------
Net increase/(decrease)
in cash and cash
equivalents............. 117,787 (111,072) 41,266 80,975 34,167
Cash and cash
equivalents, at
beginning of period..... 0 117,787 6,715 6,715 47,981
-------- ----------- ---------- ---------- ----------
Cash and cash
equivalents, at end of
period.................. $117,787 $ 6,715 $ 47,981 $ 87,690 $ 82,148
======== =========== ========== ========== ==========
Supplementary disclosure
of cash paid during the
period:
Interest paid........... $ 2,564 $ 88,091 $ 166,898 $ 93,614 $ 79,181
======== =========== ========== ========== ==========
Schedule of noncash
investing and financing
activities:
Property purchased under
mortgage payable....... $ 0 $ 480,000 $ 0 $ 0 $ 0
======== =========== ========== ========== ==========
Equipment purchased
under capital lease
obligations............ $ 0 $ 0 $ 85,704 $ 24,884 $ 62,222
======== =========== ========== ========== ==========
</TABLE>
- --------
(1) For short period from business inception, September 20, 1993, through
January 31, 1994.
The accompanying notes to the financial statements are an integral part of
these statements.
F-6
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JULY 31, 1996 AND INFORMATION RELATING TO THE SIX MONTHS
ENDED JULY 31, 1995 AND 1996 IS UNAUDITED.)
NOTE 1 -- DESCRIPTION OF BUSINESS
The Leap Group, Inc. (the "Company") is a Delaware corporation incorporated
in March, 1996, to act as the parent company for three wholly-owned
subsidiaries--The Leap Partnership, Inc. ("Leap Partnership"), an Illinois
corporation established in September, 1993; Lilypad Services, Inc.
("Lilypad"), an Illinois corporation established in September, 1995; and
Tadpole Productions, Inc. ("Tadpole"), an Illinois corporation established in
September, 1995.
The Company is a strategic and creative communications company that develops
and implements integrated brand marketing campaigns using traditional and new
media primarily for market leading clients.
The Company has a limited operating history. The Company began operations in
November, 1993 and experienced operating losses during fiscal 1994 and 1995.
Although the Company had operating income in fiscal 1996, it resigned the
account of its most significant client near the end of fiscal 1996. Although
the Company had operating income of $355,367 for the six months ended July 31,
1996, it had an accumulated deficit of $183,345 at July 31, 1996.
The Company's operations are subject to certain risks and uncertainties
including, among others, a limited operating history, substantial operating
losses, management's plan for growth and expansion, and current and potential
competitors with greater financial, technical and marketing resources. These
and other risks and uncertainties are discussed elsewhere in this Prospectus.
Should the initial public offering contemplated by this Prospectus (the
"Offering") not be completed and management desire to continue to implement
its strategic growth plans through fiscal 1997, the Company could, in the
future, be required to consider other financing alternatives. However, such
financing may not be available on terms acceptable to the Company, or at all.
Alternatively, the Company could modify its strategic plans to adjust to
available working capital resources.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying Consolidated Financial Statements have been prepared on the
basis that the entities that now comprise the Company were combined at their
inception for financial reporting purposes. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of ninety days or less to be cash equivalents.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument held by the Company:
Cash, trade receivables and trade payables: the carrying amounts approximate
fair value because of the short maturity of these items.
Notes payable to a bank and mortgage payable: due to the floating interest
rate on these obligations, the carrying amounts approximate fair value.
F-7
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Company policy provides for capitalization of all major
expenditures for renewal and improvements and for current charges to income
for repairs and maintenance. The provision for depreciation and amortization
has been calculated using straight-line and accelerated methods over the
estimated economic lives of the related assets as follows:
<TABLE>
<S> <C>
Building...................................................... 39 years
Building improvements......................................... 7 years
Furniture and fixtures........................................ 7 years
Equipment..................................................... 3-5 years
</TABLE>
Revenue Recognition
Retainers from fixed fee arrangements, typically in the form of monthly
retainers, are recognized over the period in which services are rendered.
Revenues from production services are recognized at the completion of such
services. The Company's production projects are usually commenced and
completed in a short time period, often less than 60 days. Outside production
costs are initially recorded as costs in excess of billings and are expensed
as direct costs and related expenses at completion. Revenue earned from fees
based upon third-party media placements are recognized when the Company-
created materials appear on various media in accordance with industry
practice. Salary and other related general and administrative costs are
expensed as incurred.
Concentration of Credit and Other Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet items. The
Company attempts to limit its concentration of credit risk by securing clients
which are well-known advertisers of consumer and industrial goods and
services. The Company does not have an allowance for doubtful accounts
recorded at January 31, 1995, January 31, 1996 or July 31, 1996.
While the Company typically enters into written agreements with its clients,
it at times performs services prior to the execution of such agreements, and
written contracts are typically terminable by either party on short notice,
often 90 days and in certain instances less. Management considers the
relationships with existing clients to be good, however, the loss of any one
or more of the Company's significant clients could have a material adverse
effect on the Company's business, financial condition and results of
operations. For the six months ended July 31, 1996, four clients accounted for
29.5%, 20.8%, 20.5% and 14.3%, respectively, of consolidated revenues. During
fiscal 1996, one client accounted for approximately 66% of consolidated
revenues. In fiscal 1995, two clients accounted for approximately 64% and 28%,
respectively, of consolidated revenues.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, which requires
recognition of deferred tax assets for the expected future effects of all
deductible temporary differences, loss carryforwards, and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, more likely than
not based on current circumstances, are not expected to be realized.
Post-retirement Benefits
The Company has no obligations for post-retirement benefits.
F-8
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Per Share Data
Net income (loss) per common share is computed by dividing net income (loss)
by the weighted average number of common shares and dilutive common stock
equivalent shares outstanding during the year.
Common and equivalent shares include "cheap stock," whether dilutive or
anti-dilutive. Cheap stock consists of any common stock, options, and warrants
issued within one year prior to the effective date of the Offering, with a
price below the initial public offering price. The initial public offering
price, for purposes of this computation, is assumed to be $10.00 per share.
These have been included as common stock equivalents for all years presented,
reduced by the number of shares of common stock which could be purchased with
the proceeds from the assumed exercise of the options and warrants, including
tax benefits assumed to be realized. Supplementary earnings per common share,
giving effect to the intended repayment of debt with a portion of the proceeds
anticipated with the Offering, is not materially different from net
income/(loss) per common share as shown on the statement of operations.
Deferred Issuance Cost
Costs that were incurred in connection with the Offering prior to the
Offering have been deferred and recorded as an asset. These costs are to be
deducted from the related proceeds when received.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
In the opinion of management, the unaudited interim balance sheet and
related statement of stockholders' deficit as of July 31, 1996, and the
related statements of operations and cash flows for the six months ended July
31, 1995 and 1996, have been prepared on the same basis as the audited
financial statements contained herein and include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial information set forth therein. The results of operations for the six
months ended July 31, 1996, are not necessarily indicative of the results that
may be expected for the fiscal year ending January 31, 1997.
Recently Issued Accounting Standards
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 establishes
financial accounting and reporting standards for stock-based compensation. The
Statement defines a fair value-based method of accounting for an employee
stock option or similar equity instrument. However, it also allows a company
to continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees. Companies electing to remain with the
accounting in Opinion No. 25 must make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined in
the Statement had been applied. The Company will be required to adopt SFAS No.
123 during fiscal 1997. Management believes that the Company will elect to
make pro forma disclosure as allowed by SFAS No. 123.
F-9
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, which the Company adopted in fiscal 1996. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles to be held and
used by the Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. To date, no such events or circumstances have occurred. However,
the Company intends to continue to perform a periodic review of assets for
impairment.
NOTE 3 -- NOTES PAYABLE TO BANKS
Lines of Credit
On November 1, 1994, the Company entered into a revolving credit agreement
with a bank for a line of credit of up to $1 million. The interest rate on
January 31, 1995 (1.5% above the bank's prime lending rate) was 10.5%. The
line was collateralized by all business assets, including a second mortgage on
the Company's commercial real estate, and was guaranteed by certain
stockholders of the Company. At January 31, 1995, $941,000 was outstanding
under such line and was classified as short-term debt. On October 26, 1995,
all outstanding debt under the line was paid in full, the agreement was
terminated and the mortgage was discharged.
On October 4, 1995, the Company obtained a line of credit with a bank for up
to $1,500,000. On July 5, 1996, the agreement expired and was subsequently
extended through October 31, 1996. The interest rate on January 31, 1996 (1%
above the bank's prime lending rate) was 9.5%. The line is collateralized by
most of the Company's general business assets and by the guarantees of certain
stockholders of the Company. At January 31, 1996, $218,000, and at July 31,
1996, $1,359,500, was outstanding under such line and classified as current.
There are no material covenants associated with this line.
Revolving Line and Term Note
On October 4, 1995, the Company obtained an additional line of credit for up
to $500,000 to purchase computer and office equipment. The interest rate on
January 31, 1996, (1% above the bank's prime lending rate) was 9.5%. The note
is secured by all the computer equipment of the Company and is guaranteed by
certain stockholders of the Company. At January 31, 1996, the outstanding
balance was approximately $241,000 which was classified as current. On April
4, 1996, the agreement expired and was subsequently extended through October
31, 1996. At July 31, 1996, the outstanding balance was approximately
$490,000, which was classified as current. The agreement contains various non-
financial covenants with which the Company is in compliance through July 31,
1996.
Mortgage
On March 9, 1994, the Company secured a loan for $480,000 to purchase the
building in which the Company's current offices are located. The three-year
balloon note bore interest at the rate of 8.5%, payable in monthly principal
and interest installments of $5,995 through March 9, 1997, and was
collateralized by a mortgage on the Company's offices. This loan was
refinanced on May 30, 1996.
The new loan is in the amount of $596,000, bears interest at prime plus 1%,
and is payable in monthly principal and interest installments of $7,794
through May 2001, with a balloon payment of approximately $360,000 in June
2001. The loan is secured by a mortgage on the building in which the Company's
current offices are located.
F-10
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS
Guarantees of Notes Payable to Banks
As discussed in Note 3, substantially all of the Company's debt has been
guaranteed by certain shareholders of the Company.
Note Payable to Officer
In February 1995, the Company secured additional financing from an officer
of the Company to fund additional working capital needs of the Company. The
$450,000 installment note bears interest at prime plus 1.5% through October
31, 1996 and is collateralized by a second mortgage on the Company's principal
office building. $50,000 has been repaid on the loan and the remainder will be
repaid within the next year.
NOTE 5 -- CAPITAL STOCK
Incorporation
On September 20, 1993, Leap Partnership was incorporated in Illinois.
Subsequently, on March 11, 1996, the Company was formed and became the parent
to the wholly-owned subsidiaries, Leap Partnership, Lilypad, and Tadpole. In
connection with the formation of the Company, each of the four shareholders of
Leap Partnership exchanged their 25 shares of Leap Partnership common stock
for 2,400,000 shares of the Company's common stock. Common stock and per share
amounts have been retroactively restated in the accompanying financial
statements to reflect the effect of the reorganization. The combined entities
have been under common control since inception and have been included in the
consolidated financial statements at historical cost since their respective
dates of inception in a manner similar to a pooling of interests.
The certificate of incorporation of the Company authorizes 40,000,000 shares
of common stock with $.01 par value and 10,000,000 shares of preferred stock
with a $.01 par value per share. On May 29, 1996, the Board of Directors and
Stockholders of the Company approved an amendment to the certificate of
incorporation which increased the total number of authorized shares of common
stock to 100,000,000 and preferred shares to 20,000,000.
1996 Stock Option Plan
On January 3, 1996, the Board of Directors and Shareholders at Leap
Partnership adopted the 1996 Stock Option Plan (the "1996 Stock Option Plan"),
which was assumed and Amended and Restated on March 12, 1996, by the Board of
Directors and Stockholders of the Company, whereby certain eligible employees
may be granted options. The 1996 Stock Option Plan allows issuance of
incentive stock options and nonqualified options. The 1996 Stock Option Plan
is administered by the Board of Directors, as a whole, or the 1996 Stock
Option Committee of the Board of Directors (the "Stock Committee"). The
exercise price of incentive stock options shall not be less than the stock's
fair market value on the date of grant.
On January 3, 1996, the Stock Committee granted options to purchase 504,000
shares of Common Stock at an exercise price of $3.00 per share under the 1996
Stock Option Plan. Of such options, 181,333 were exercisable on the date of
grant, 161,333 will vest on January 1, 1997, and 161,334 will vest on January
1, 1998.
On March 12, 1996, the Committee granted to an officer of the Company
options to purchase 1,800,000 shares of Common Stock at an exercise price of
$7.25 per share. On the date of grant, 1,400,000 of these options became
exercisable; the remaining 400,000 options will become exercisable in four
equal annual installments beginning one year after the date of grant. No
shares of Common Stock remain available for issuance under the 1996 Stock
Option Plan.
F-11
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Employee Incentive Compensation Plan
Effective May 29, 1996, the Company adopted the Employee Incentive
Compensation Plan (the "Incentive Plan"), which permits grants of incentive
stock options, nonqualified stock options, stock appreciation rights,
performance shares, restricted stock, deferred stock and other stock-based
awards. The Incentive Plan authorizes the issuance of up to 2,000,000 shares
of Common Stock in connection with such awards. On June 7, 1996, pursuant to
the Incentive Plan, an officer of the Company was granted options to purchase
15,000 shares of Common Stock at an exercise price of $12.00 per share. Such
options vest in equal installments on each of the first three anniversaries of
the grant date. On July 16, 1996, options to purchase an aggregate of 20,000
shares of Common Stock were granted to employees of the Company pursuant to
the Incentive Plan at an exercise price of $12.00 per share. Such options
vested in full upon grant. Directors, officers, employees and consultants of
the Company are eligible to receive grants under the Incentive Plan.
Employee Stock Purchase Plan
Effective May 29, 1996, the Company's Board of Directors adopted the
Employee Stock Purchase Plan (the "Stock Purchase Plan"), which provides for
the issuance of a maximum of 500,000 shares of Common Stock. Under Section 423
of the Internal Revenue Code (the "Code"), eligible employees can have
earnings withheld to be used to purchase shares of the common stock on
specified dates determined by the Board of Directors up to a maximum of
$25,000 per year. The price of the common stock purchased under the Stock
Purchase Plan will be equal to 85% of the lower of the fair market value of
the common stock on the commencement date of each offering period or the
specified purchase date.
Non-Employee Director's Stock Option Plan
On May 29, 1996, the Board of Directors adopted the 1996 Non-Employee
Director's Stock Option Plan (the "Directors' Plan"). The Directors' Plan
provides for the issuance of up to 200,000 nonstatutory stock options to non-
employee directors of the Company. On the effective date of the Offering, each
of three non-employee directors will be granted immediately exercisable
options to purchase 20,000 shares of Common Stock at an exercise price equal
to the initial public offering price. Each person who becomes a non-employee
director of the Company after the date of the Offering will automatically be
granted nonstatutory options to purchase 5,000 shares of Common Stock on the
date of such director's initial election or appointment to the Board of
Directors and on each anniversary of the initial grant date. Such options
shall become exercisable one year after the date of grant at an exercise price
equal to the fair market value of the Common Stock on the date of grant. All
options granted under the Directors' Plan will have a five-year term.
NOTE 6-- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases telephones, copiers, and other equipment under operating
leases which expire in 1998. Minimum future lease payments under these leases
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JANUARY 31,
-----------
<S> <C>
1997.......................................................... $27,828
1998.......................................................... 27,828
-------
Total minimum lease payments required......................... $55,656
=======
</TABLE>
F-12
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Capital Leases
The Company leases computer equipment under capital leases. Future minimum
lease payments under the capital leases as of January 31, 1996, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
JANUARY
31,
-----------
<S> <C>
1997........................................................ $ 32,525
1998........................................................ 32,525
1999........................................................ 32,525
2000........................................................ 18,206
--------
Total minimum lease payments required....................... $115,781
less amount representing interest.......................... (30,077)
--------
Obligation under capital leases............................. $ 85,704
less current portion of capital lease obligation........... (19,178)
--------
Non-current portion of capital lease obligation............. $ 66,526
--------
</TABLE>
Litigation
In September, 1995, the Spin Doctors (also known as Modigliani, Inc.), a
recording and performing group, and Mow B'Jow Music, Inc., their music
publisher, filed a lawsuit against Leap, Miller and Trivers/Myers Music in the
United States District Court, Central District of California. The complaint
alleges copyright and persona infringement, statutory and common law unfair
competition and unjust enrichment stemming from the airing of a television
commercial created by the Company for a client. The suit has been referred to
the Company's insurance carrier and legal counsel. The complaint seeks
substantial monetary damages. In an unsolicited demand, the plaintiffs have
offered to compromise the case in the amount of $5,750,000. The defendants
rejected such offer to settle because of their belief that the plaintiffs'
claims have no merit, and the Company intends to vigorously defend its
position. Although the suit is in an early stage and it is therefore difficult
to predict its ultimate outcome, an adverse determination and award of damages
not covered by insurance could have a material adverse effect on the Company's
results of operations and, if the offering contemplated by this Prospectus is
not consummated, on the Company's liquidity and consolidated financial
position.
Employment Agreements
The Company has entered into three-year employment agreements with five
employees, all expiring in March, 1999. Three of the agreements provide for
annual base salaries of $200,000 and the other two agreements provide for
annual base salaries of $300,000.
NOTE 7 -- INCOME TAXES
Income taxes are provided based upon income reported for financial reporting
purposes using the provisions of Financial Accounting Standards Board
Statement No. 109, Accounting for Income Taxes, which requires the liability
method as described in Note 2.
The income tax provisions (benefits) charged to net income are summarized as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY
31,
-----------------------------
1994 1995 1996
-------- --------- --------
<S> <C> <C> <C>
Federal:
Current..................................... $ -- $ -- $ 16,230
Deferred.................................... (42,920) (363,205) 406,125
-------- --------- --------
$(42,920) $(363,205) $422,355
State:
Current..................................... $ -- $ -- $ --
Deferred.................................... (7,573) (64,095) 71,668
-------- --------- --------
Total Tax Provision (Benefit)............. $(50,493) $(427,300) $494,023
======== ========= ========
</TABLE>
F-13
<PAGE>
THE LEAP GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The statutory federal income tax rate is reconciled to the Company's
effective income tax rate below:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED JANUARY
31,
--------------------
1994 1995 1996
----- ----- ----
<S> <C> <C> <C>
Statutory rate......................................... (34.0)% (34.0)% 34.0%
State, net of Federal.................................. (4.9) (4.9) 4.9
Change in valuation allowance.......................... -- 11.4 1.3
Other.................................................. (1.1) (1.1) 1.2
----- ----- ----
Effective rate......................................... (40.0)% (28.6)% 41.4%
===== ===== ====
</TABLE>
Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements. The components of the net deferred income tax asset are as
follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Net operating loss carryforward........................ $ 582,296 $ 103,600
Alternative minimum tax credit......................... -- 16,230
Compensation accruals.................................. 57,868 55,598
Other.................................................. -- 3,173
Less--Valuation allowance.............................. (162,371) (178,601)
--------- ---------
Net deferred income tax asset...................... $ 477,793 $ --
========= =========
</TABLE>
Although the Company achieved net income during 1996, it resigned the
account of its most significant client in December, 1995, as discussed in Note
8. For this reason, and the Company's history of operating losses before
fiscal 1996, management has recorded a valuation allowance to fully reserve
for its net deferred tax asset at January 31, 1996.
At January 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $260,000. The net operating loss
carryforwards expire in 2009 and 2010.
NOTE 8 -- RESIGNATION FROM SIGNIFICANT CLIENT
Revenues from a major client represented approximately 66% and 64% of the
Company's total revenues in fiscal 1995 and 1996, respectively. In December
1995, the Company resigned the account of this client in order to pursue other
assignments.
NOTE 9 -- SUBSEQUENT EVENTS
Initial Public Offering
The Company plans to complete an underwritten Offering of 4,000,000 shares
of its common stock.
Stock Options
On September 24, 1996, the exercise prices of previously granted options to
purchase 35,000 shares of Common Stock were changed from $12.00 per share to
the initial public offering price. Also on such date, the Company granted
options to purchase an aggregate of 25,000 shares of Common Stock to employees
of the Company at an exercise price equal to the initial public offering
price. Of such options, 1,000 vested on the date of grant with the balance
vesting in equal installments on each of the first three anniversaries of the
grant date.
F-14
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UN-
DERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICI-
TATION OF ANY OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 12
Dividend Policy.......................................................... 12
Dilution................................................................. 13
Capitalization........................................................... 14
Selected Consolidated Financial and Other Data........................... 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 23
Management............................................................... 34
Certain Transactions..................................................... 41
Principal and Selling Stockholders....................................... 42
Description of Capital Stock............................................. 42
Shares Eligible For Future Sale.......................................... 44
Underwriting............................................................. 45
Legal Matters............................................................ 46
Experts.................................................................. 46
Additional Information................................................... 46
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
UNTIL OCTOBER 22, 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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THE LEAP GROUP, INC.
LOGO
4,000,000 SHARES
COMMON STOCK
P R O S P E C T U S
DEAN WITTER REYNOLDS INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SEPTEMBER 27, 1996
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