SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Mark One)
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from
________ to ____________
Commission file number: 33-83894-NY
LOIS/USA INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3441962
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identifcation No.)
40 WEST 57TH STREET, NEW YORK, NEW YORK 10019
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (212)373-4700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Indicate by check
mark whether Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-KB is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [x]
The registrant had revenues of $23,067,000, in its most recent fiscal year.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on May 30, 1997, was $5,632,410 (based on the last trade at $10.00
per share on May 23, 1997). As of May 30, 1997, there were 2,366,692 shares of
Common Stock, $.01 par value per share ("Common Stock"), outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
<PAGE>
PART I
ITEM 1. BUSINESS.
Lois/USA Inc. (the ACompany") is a full service advertising and marketing
communications company operating on a national basis through advertising
agencies located in New York, Chicago, Detroit and Los Angeles. Through 1995,
the Company operated principally in New York, through its Lois/USA New York,
Inc. advertising agency, and in Chicago, through its Lois/USA Chicago, Inc.
agency. The Company also had less significant operations on the west coast
through the Lois, Colby/LA Agency (ALois/Colby"), which was operated by Lois/USA
West, Inc. (AWest"), a wholly-owned subsidiary of the Company. In 1996, the
Company expanded its operations through the acquisition of Eisaman, Johns, and
Laws Advertising, Inc. (AEJL"), a full service advertising agency with offices
in Los Angeles, Chicago, Houston and Detroit. The acquisition of EJL was a part
of the Company's ongoing strategy and efforts to increase the size and economies
of its operations, as well as to establish operations in other strategically
selected locations, through acquisitions, internal expansion or other forms of
alliances.
Cost savings from the combination of the EJL agencies are being
implemented, particularly in the areas of real estate leasing and agency
administration costs. However, before these cost saving measures could be fully
implemented during 1996, the Company incurred non-recurring charges of
$3,583,000, including costs resulting from the closing of EJL's Houston office
due to the loss of a significant client and salary expenses related to excess
staffing. The Company believes that the cost and operating restructuring of the
acquired EJL operations will allow it to begin to realize the economies of the
combination in 1997 and contribute to a return to profitability.
From 1991 to 1994, the Company's growth had been constrained by the need to
pay interest on a $3.2 million subordinated note (the ASubordinated Note").
Approximately $1,363,000 in net proceeds of a public offering by the Company of
300,000 shares of Common Stock consummated on January 3, 1995 (the AOffering"),
together with bank financing obtained by the Company from The Chase Manhattan
Bank, N.A. (AChase Bank") concurrently with consummation of the Offering, were
used to repay the Subordinated Note, easing the Company's debt service burden
and enabling management to take steps to implement the Company's expansion
strategy. Concurrently with consummation of the Offering, Chase Bank provided
the Company with a secured three-year reducing revolving credit facility (the
AReducing Revolving Credit Agreement") of $2 million and increased its line of
credit to the Company from $1 million to $2 million. In May 1997, the Company
replaced the Reducing Revolving Credit Agreement with a one year $2.5 million
line of credit and raised additional capital of approximately $2 million through
the private placement of shares of Series A Convertible Preferred Stock. See
Item 6 - AManagement's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources."
George Lois, the Company's Co-Chairman and Co-Chief Executive Officer, is a
widely respected creative innovator in the field of advertising. Among the
successful slogans Mr. Lois has created during his career of over 30 years in
advertising are slogans used by the MTV cable television network (AI want my
MTV"), Time magazine (AMake Time for Time") and Reebok athletic footwear and
clothing (APump up and Air out"). THE WALL STREET JOURNAL has cited two
advertising campaigns created by Mr. Lois - one for the Lean Cuisine line of
frozen foods (Mr. Lois also created the product name ALean Cuisine") and the
other for the newspaper USA Today - among a list of thirteen marketing
Amilestones" of the 1980's.
The Company was formed in 1978 when one of its operating subsidiaries,
Lois/USA New York, Inc., was founded as a New York-based advertising agency. In
the mid-1980s, the Company's management, led by Mr. Lois and Theodore Veru, the
Company's Co-Chairman, Co-Chief Executive Officer and President established the
goal of building the Lois firm into a national, full-service communications
company with broad-based management and creative capabilities. In late 1987, the
Lois firm acquired the personnel, assets and accounts of the Chicago agency of
Grey Advertising, Inc. and subsequently changed the name of the agency to
Lois/USA Chicago. Since that acquisition, the Chicago agency has grown by
expanding its business with its existing clients and acquiring new clients. In
1989, the Lois firm consolidated its media buying services in Chicago. The
Company believes it is currently the largest spot broadcast media buyer in the
Chicago regional area.
In addition to planning, creating and placing advertising, the Company
offers its clients a broad range of other marketing communication services,
including marketing consultation, consumer market research, direct mail
advertising, merchandising design and corporate identification services. The
Company believes that creating a communications campaign that will effectively
deliver the client's advertising message begins with a thorough understanding of
the client's business and marketplace. The Company utilizes its research
capabilities, which the Company views as one of its strengths, to provide
clients with a marketing focus. The Company's research group performs such
diversified services as market forecasting, test market sharing, package
testing, and product testing. The Company attempts to differentiate its
advertising service from those of other advertising agencies by combining the
efforts and input of its research, creative, media planning and buying and
marketing functions at the earliest stages of an assignment. The Company
believes that creative media planning at the early stages of a project is often
the key to a successful advertising campaign. The Company further believes that
its approach, therefore, increases the chances of successful campaigns and sets
it apart from its competitors that generally create advertising campaigns
sequentially, first by conducting research, then by creating the advertising,
and thereafter by planning the media placement. The Company is also developing
new marketing initiatives to better serve its existing clients and to create
opportunities to attract new clients.
ACQUISITION OF EISAMAN, JOHNS & LAWS ADVERTISING, INC.
On February 12, 1996, the Company acquired all of the outstanding shares of
capital stock of Eisaman, Johns & Laws Advertising, Inc., a California
corporation, pursuant to a Stock Purchase Agreement (the AOriginal Agreement")
between the Company and the shareholders of EJL. The Original Agreement provided
for the exchange of all of the shares of common stock of EJL for an initial
payment of $6 million, comprised of $4 million in cash and $2 million paid
through the issuance of 333,333 shares of the Company's common stock. The shares
of the Company's common stock were issued from its existing authorized capital
stock, and the cash was paid out of working capital and additional bank debt. In
addition, the Company was to pay the EJL shareholders 5% of the revenue of the
combined EJL operations, over the next five years, subject to certain
adjustments. These payments were to be made partly in cash and through the
issuance of additional shares of stock. The total purchase price to be paid to
EJL stockholders was to range from a minimum of $12.75 million to a maximum of
$18.75 million.
In May 1997, the Company and the former owners of EJL agreed to a revision
to the Original Agreement (Athe Revised Agreement"). Under the Revised
Agreement, the total purchase price has been reduced to $9.6 million, of which
$5.9 million has been paid through December 31, 1996 through cash payments of
$4.8 million and the issuance of 189,183 shares of the Company's common stock,
and the remaining $3.7 million will be paid, in cash, in varying monthly
installments from June 1999 through March 2009. See Note 3 of Notes to
Consolidated Financial Statements.
EXPANSION STRATEGY
The Company's expansion program is intended to provide clients throughout
the United States with the advantages of national creative and marketing
resources coupled with the immediacy and responsiveness of direct local access
to service personnel. In addition, the Company believes that acquisitions
provide an efficient and effective method of acquiring both new clients and
established creative and media placement functions to serivice them. An
acquisition may also add to the Company particular research or creative talents,
the benefits of which the Company attempts to maximize by making the resources
of each of its agencies' research and creative departments available to projects
and clients of other Company agencies. As a result, the personnel from the
various agencies will interact on client marketing and advertising projects.
The Company's expansion strategy has initially been focused on New York,
Chicago and Los Angeles. The Company believes that these markets have
significant growth potential and that acquisitions in these locations would both
add clients and revenues while offering the Company an opportunity to realize
economies of scale through the combination of certain functions of the acquired
operations with those of the Company's existing operations in those cities. As
the first step in this program, in December 1993, the Company formed Lois/USA
West (now operating as Lois/EJL Los Angeles) to develop new clients in the
western United States and to assist its existing clients in the area. This unit
now holds the assets of the acquired Los Angeles office of EJL. EJL's Chicago
office was combined with Lois/USA Chicago Inc. and operates as Lois/EJL Chicago.
By consolidating these regional offices the Company can take advantage of
certain economies of scale through the sharing of existing infrastructures.
Management believes that the Company's expansion strategy can enable the
Company to realize greater creative and management depth, economies of scale,
and increased revenues and profitability. In addition, it believes that the
widely known ALois" name will have significant value in seeking potential
acquisition candidates and that such candidates will be attracted to the
Company's reputation for creative and effective advertising, its entrepreneurial
management culture, the opportunities the Company offers for personal and
business growth, and the absence of numerous levels of management. To maximize
the opportunities for economies of scale, the financial and administrative
management of the Company's agencies is centralized, to the extent possible, at
the Company's headquarters in New York, and a substantial portion of the media
buying function for all agencies' clients is conducted by the media buying group
in Chicago. The operations of each agency are overseen by the Company's senior
management, which sets specific performance goals for each agency, and regularly
monitors the agencies' performance through meetings with local management and
monthly reporting.
In investiging a potential acquisition the Company, after identifying the
opportunity, will study the agency's business to determine if it is
complementary to the Company's existing business and creative philosophies. To
reduce both the immediate cash needs and the risk that the Company will
significantly overpay for an acquisition, the Company has, and will, generally
attempt to negotiate acquisitions that involve the payment of a portion of the
total purchase price on a deferred basis based on the post-acquisition
performance of the acquired operations. Additionally, the Company attempts to
negotiate the payment of a portion of the acquisition price in the form of the
issuance of shares of the Company's common stock, and will offer various forms
of participation in the Company's Stock Option Plan to key employees as a means
of incentivizing future performance.
There can be no assurance that the Company will be able to successfully
complete additional acquisitions. Additionally, although the Company attempts to
carefully study all potential acquisitions and plan for their integration into
the Company's operations, there can be no assurance that unforeseen
circumstances or developments will not cause a particular acquisition to fail to
have the desired effects on the Company's financial condition and results of
operations.
THE ADVERTISING MARKET
Total United States advertising spending in 1996 increased by 7.6% over the
1995 level, in part due the effects on advertising expenditures of the
presidential election and the Summer Olympics in Atlanta. The 1996 increase came
after increases of 7.7% in 1995 and 7.9% in 1994.
The Company experienced significant growth in 1994 and 1995 as the result
of the addition of several large clients and increased spending by existing
clients. Similar revenue growth was not experienced in 1996, due in large part
to the shift of the Company's focus to the completion of the EJL acquisition and
the subsequent assimilation of its operations and implementation of cost
reduction steps. Since the completion of those efforts, the Company has
reemphasized client growth and has acquired several new clients, incuding
Continental Cable, Rio Hotel and Casino, ThermoLase, Ritz Camera Centers and
Tourneau Watches. During 1996, the Company's Chicago office was named one of the
agencies recommended by the Chevrolet division of General Motors to provide
marketing services to its dealer groups. This designation has led to new
opportunities, and the Company is already providing creative services to the New
York/ Philadelphia Area Market Group.
THE COMPANY'S CREATIVE STRATEGY
George Lois, the Company's Co-Chairman of the Board and Co-Chief Executive
Officer, is a widely acknowledged creative innovator in the field of advertising
with over 30 years of experience in the business. Through Mr. Lois' influence,
the Company has established a reputation in the advertising industry for
creative and effective advertising. Mr. Lois is the only living person to have
been named to both the Art Directors Hall of Fame and the Creative Hall of Fame.
The Art Directors Hall of Fame, established in 1972 by the Art Directors Club of
New York, has 78 honorees. The Creative Hall of Fame, created by the One Club
for Art and Copy in 1982, has 700 members, including copywriters and art
directors.
In its creative approach, the Company attempts to distinguish itself from
other full service advertising agencies by its relentless pursuit of the Abig
idea." The Company's philosophy is that advertising for a client's products or
services should generate publicity as well as create product recognition.
Accordingly, the Company attempts to develop a selling message that reaches the
target audience for the client's product and at the same time becomes familiar
to the general public. Ideally, the Abig idea" not only leads to an advertising
campaign, but creates various public relations opportunities for the client. For
example, on several occasions newspapers, magazines, and radio and television
stations have publicized the Company's advertising campaigns as news events. The
Company believes that public familiarity with an advertising campaign frequently
leads to increased sales of the product or service being advertised. Once it
identifies the Abig idea" for a client's product, the Company's creative staff
works to support that idea with marketing, research, packaging and logo design
and media strategy, and to produce print and broadcast campaigns, sales
promotion and direct response advertising to achieve a dramatic response.
The Company believes that research plays an essential role in the pursuit
of the Abig idea." Unlike other advertising agencies of similar size, the
Company maintains a research department, with a full-time research librarian,
and has the technical capability to conduct many types of research projects,
including market forecasting, test-market planning and package and product
testing. In addition, the Company has long-term relationships with many well
known research firms. The Company believes that research should be
result-oriented, and its researchers work closely with the creative, marketing
and media departments in developing clients' campaigns.
CLIENTS
The Company serves a diversified client roster that includes a variety of
public and private companies, including clients in the retail, media,
pharmaceutical, restaurant, leisure and travel, automotive, packaged goods,
financial services, apparel, consulting and technology. Among the Company's
current clients are Cadillac Dealer Advertising Association, Chevrolet Dealer
Advertising Association, Alberto-Culver Company, American Drug Stores, Car-X
Muffler & Brake Shops, First Alert, Kayser-Roth Inc. (makers of No-Nonsense
Pantyhose), Minolta Corporation, Pendleton Woolen Mills, Price Pfister, Sandoz
Crop Protection, Southern California Gas Company and The Walt Disney Company.
The Company's clients include both businesses whose products and services are
offered to consumers and those which primarily serve the needs of other
businesses.
The Company currently has more than 70 clients. In 1996, one client
represented 11.5% of the Company's consolidated commissions and fees. During
1995, two other clients represented 13% and 12%, respectively, of the Company's
consolidated fees and commissions.
Typically, an advertising agency such as the Company will lose and gain
several client accounts in any given year as a result of competition with other
agencies. In general, the Company has been able to replace the business
represented by clients it has lost, so that the loss of clients has not had a
long-term adverse effect upon the Company's financial condition or its
competitive position. In 1996, the Company lost a client of the acquired EJL
operations shortly after the completion of that acquisition. That client had
been the principal source of business for EJL's Houston office, and its loss led
to the close of that office. During the later part of 1996 and in January 1997,
the Company has gained several new accounts in New York and Chicago which it
believes will offset a significant portion of this loss.
SOLICITATION OF NEW BUSINESS
The Company has been in existence since 1978 and is well known in the
advertising community. The Company generally obtains new clients through
referrals, by identifying prospects through research into companies whose
products and services do not conflict with those of present clients, and by
identifying new business opportunities through trade and business sources. The
Company solicits prospective accounts through personal contacts by members of
the Company's senior management as well as through the efforts of those Company
personnel responsible for business development. Each of the Company's agencies
has a team of approximately eight individuals responsible for the business
development activities of that agency.
A prospective client's initial step in the process of selecting an
advertising agency normally involves the review of credentials submitted by
several agencies, followed by meetings between the client and one or more of
these agencies. In most cases, advertisers seek creative, marketing and media
presentations from a limited number of agencies which reach the final review
stage. In soliciting new clients, the Company often incurs expenditures which
generally are not reimbursed by the client, even if the Company wins the
account. The Company considers the potential revenue from a new account when
determining the appropriate level of expenditures for such presentations. These
costs are expensed as incurred as opposed to production costs reported in the
Company's financial statements as Aexpenditures billable to clients" which
represent external costs incurred in connection with production jobs being
billed to clients. The period of time required by the Company to obtain a new
client and generate revenues from services for the client may range from two
weeks to several months.
ACCOUNT AND PROJECT MANAGEMENT
In order to service its client's perceived creative and marketing needs
while remaining within the client's budgetary constraints, the Company
designates an account team for each client, supervised by the executive in
charge of client services for the particular office. Depending upon the needs of
the client, the account team may consist of an account supervisor, one or more
account managers and one or more assistant account managers. The account team,
working with personnel in media, research, production and other areas,
establishes a marketing strategy and advertising campaign for the client. The
account managers are responsible for coordinating the product and market
research, media and other activities for the client, including the preparation
of budget estimates. In addition, the account manager helps to develop effective
advertising budgets for the client and acts as a clearing house of information
with regard to the client's competition and its advertising needs. When
necessary or beneficial, the account team may include, or be assisted by, either
members of the Company's senior management or research or creative personnel
from another of the Company's agencies.
PRODUCTION OF ADVERTISING
Generally the Company does not itself produce television and radio
commercials. Additionally, the Company may, in some circumstances, utilize
outside contractors to perform photography necessary for a client's print
advertisement. When the Company directs the work of an outside producer or
photographer, its staff directs and supervises the work and the Company bills
the client for the actual outside costs, plus a commission. Presently the
commission is 17.65% of the outside costs, which represents a rate common in the
industry.
MEDIA BUYING
The Company believes that effective media buying is an essential component
of a successful advertising campaign, and that the selection of media for each
promotional campaign must be strategically consistent with the client's overall
marketing objectives. The Company consistently attempts to achieve
cost-effective media buying to provide its clients with the optimal return on
their advertising investment. Unlike many of its competitors, the Company
involves the media department at the beginning of each advertising campaign. As
is typical in the advertising industry, the commissions that the Company
receives for the media placement of its clients' advertisements represents the
Company's principal source of revenues.
In 1989, recognizing that the experienced media professionals in the
Company's Chicago agency were underutilized, the Company decided to consolidate
the majority of the media buying functions of the Company's agencies in Chicago.
As a result, while the New York agency continues to maintain a media director
and media planners to buy print advertising and to plan media advertising for
that agency's clients, most media buying for all of the Company's agencies is
now performed by the Chicago department. The consolidation of media buying in
Chicago has created a media buying department with substantial experience and
extensive knowledge of advertising markets across the United States.
Additionally, the consolidation of this function allows the Company to reduce
overhead. The Company's clients also benefit from this approach insofar as the
single group purchases a higher volume of media space than would be purchased
through media buying functions in individual agencies, as a result of which the
Company may at times be in a position to obtain more favorable space, time or
rates from print or broadcast media suppliers.
The media group has planning specialists who are assigned to individual
client accounts. After a thorough analysis of a client's business, the media
planners determine media objectives, develop media strategies to meet these
objectives and decide which media will best accomplish these objectives. Actual
media buying is performed by a national broadcast buyer, responsible for network
television, syndicated shows, cable television and national radio shows; local
broadcast buyers, each responsible for spot television, radio and print
advertising in individual markets throughout the country, and a support staff
with trained local broadcast buying assistants. The Company believes that by
having one buyer responsible for all purchases in a given market, the Company
generally is able to obtain highly sought-after advertising space and time for
its clients. The Company believes that its media buying service gives the
Company a competitive advantage over certain other advertising agencies which
may contract out media buying functions to an independent media buying service.
The Company's growth strategy includes the transformation of its media
buying department into a full-scale media-buying service, under the name
Lois/USA Media. This service will continue to perform the majority of the media
buying for the Company's advertising clients and will seek to develop its own
clients, which may include businesses(including advertising agencies that do not
ahve internal media buying functions) that otherwise are not clients of the
Company.
NEW INITIATIVES
The Company continuously attempts to develop new and innovative services to
offer its existing clients and to appeal to new clients. Many of these services
are interactive in nature and are designed to appeal to a broad range of actual
and potential clients. The following paragraphs describe services which the
Company has introduced since 1993.
YEAR 2K COMMUNICATIONS
In March 1997, the Company launched Year 2K Communications ("Year 2K").
Year 2K is a full-service marketing communications company specializing in
innovative strategies, "new media" and ongoing creative solutions.
Year 2K's services will include consumer product, destination and
image/brand marketing consultation and program development, sales promotions,
presence and event marketing, full public relations services, direct mail,
online/interactive site development and marketing, collateral and point-of-sale
development, plus a full art design and copy writing staff.
Year 2K is establishing strategic alliances with the entertainment industry
participants that will be used to generate attention for its clients' products
and services.
Current Year 2K clients include the Rio Suite Hotel & Casino Las Vegas, The
Gas Company in L.A., Kahlua - Allied Domecq, the Disney Company and the Academy
of Motion Picture Arts & Sciences.
LOIS/USA DIRECT!
In 1993, Lois/USA Direct! was formed as a division of the Company's New
York agency to design and implement the Company's direct marketing activities.
Such campaigns are undertaken for the dual purpose of generating sales and of
increasing consumer awareness of a client's name or products. To date, direct
response advertising campaigns have been successfully performed for clients in
the financial, hotel, publishing and wine industries.
ADART
In 1993, the Company established AdArt in its New York and Chicago
agencies. AdArt is a computer graphic center specializing in digital imaging of
art and advertising composition. The Company is in the process of expanding this
service in its Los Angeles office.
AdArt has enabled the Company to substantially reduce its use of outside
vendors for these composition services, thereby saving the Company's clients as
much as 50% of the cost of outside vendors while contributing to the Company's
revenues. AdArt has also reduced costs incurred by the Company in the
preparation of materials for presentations to prospective clients. The Company
intends to keep the AdArt facility current by maintaining state-of-the-art
digital imaging equipment which may require expenditures up to $100,000 each
year. The Company is also exploring the possibility of offering AdArt's services
to third party customers.
LOIS/USA VENTURES
The Company has developed a concept known as Lois/USA Ventures
(AVentures"). Ventures is made available to certain carefully selected clients
that are at an early development stage, during which advertising would be
strategically advantageous, but which lack sufficient cash resources to support
the desired level of advertising. Through Ventures, the Company provides its
creative services to such clients and receives an equity interest in the client
as a component of its fee arrangement. The Company's senior management,
including Messrs. Lois and Veru, determine whether a candidate qualifies under
the Ventures program, looking primarily at the client's potential for success.
The program requires clients to pay the Company in cash for all out-of-pocket
costs, including media and production costs. As the result of Ventures projects
the Company, in 1996, received approximately $15,000 in stock in a publicly
traded entity. During 1995, the Company received shares in a private licensing
company (valued at $100,000) in exchange for services performed.
THE NATIONAL BASKETBALL RETIRED PLAYERS ASSOCIATION
The Company has entered into an agreement with the National Basketball
Retired Players Association (the AAssociation") to represent the interests of
the Association in pursuing marketing and advertising opportunities. The
organization was founded by retired National Basketball Association players to
generate resources to help former professional basketball players in need of
financial or medical assistance, and to help promote basketball around the
world. Under this agreement, the Company is entitled to a percentage of the
revenues received by each licensing agreement or other agreement entered into by
the Association's members. The exact percentage of revenues to be received by
the Company is currently being negotiated with the Association. During 1996, the
Association provided members to be used in a promotional campaign for a major
drug maker.
COMPETITION
The advertising and marketing communications businesses in which the
Company is active are highly competitive. Clients may change advertising
agencies, generally on 90 days' notice, and may elect to reduce their
advertising expenditures at any time for any of many reasons. Advertising
agencies of all sizes strive to attract new clients or additional assignments or
accounts from existing clients. As a result, the Company must compete with
numerous full-service and specialty advertising agencies to maintain existing
client relationships and to obtain new clients. In addition, many companies have
in-house departments that may handle all or a portion of their advertising
requirements.
Competition in the advertising industry depends to a large extent on the
client's perception of the quality of an agency's creative product and media
buying capabilities. The Company seeks to develop new clients by presenting
examples of advertising campaigns created by the Company and by describing the
range of services offered by the Company.
As the Company has expanded its operations it has had to compete more
frequently against larger advertising agencies. The Company competes against
most of the 50 largest advertising agencies in the United States, including WPP
Group, The Interpublic Group, Omnicom, True North and Saatchi & Saatchi. These
larger agencies generally have substantially greater financial resources, more
personnel and more extensive facilities than the Company. In addition, many of
the agencies with which the Company competes are affiliated with large and
diversified multi-national communications firms, enabling them to offer their
clients a diverse portfolio of communication services around the world. The
Company believes that it has been able to compete effectively on the basis of
the quality of its creative product and media buying services, service, personal
relationships with clients and reputation. The Company also believes it can
compete effectively with larger agencies due in part to the strength of the
Company's research and media buying departments. However, there can be no
assurance that the Company will be able to maintain its competitive position in
the industry as it continues to expand its operations to new markets.
In some cases, an advertising agency's ability to compete for new clients
is affected by the industry policy, which many advertisers follow, of
prohibiting their agencies from representing competitors in the same business.
As a result, future growth of the Company's client base may have the effect of
limiting the Company's potential for securing certain new clients.
EMPLOYEES
As of May 30, 1997 the Company had 306 employees, including 274 full time
and 32 part-time employees. In addition, the Company hires consultants or
independent contractors on an as-needed basis. None of the Company's employees
is covered by a collective bargaining agreement. The Company believes its
relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company does not own any real property. All of the Company's existing
offices are located in leased premises. The Company considers its offices
adequate for its present needs. The following table provides data on the leased
offices of the Company:
Annual Approx. Expiration
Office Location Base Rent Sq. Ft. Date
New York 40 W. 57th St. $665,000(1) 22,000 April 30, 2001
Chicago 2200 $461,000(1) 32,600 March 31, 1998
Merchandise
Mart
Chicago 401 N. Michigan $554,000 21,400 November 30,
Avenue 2000
Los Angeles 5700 Wilshire $1,247,000 43,300
Blvd. (2) August 31, 2007
Houston 2121 Sage Road $196,000(3) 17,600 January 14, 1998
__________________
(1) Subject to escalation based upon the Company's proportionate share of
increases in property taxes and operating costs.
(2) At tenant's option, lease may be canceled August 1, 2000 with a
cancellation fee of $2,059,306.
(3) Represents the base annual rental for the space leased by the Houston
office, which the Company closed in 1996. The Company has reached an agreement
with the lessor whereby the rent payable by the Company over the remainder of
the lease term will be reduced as the unused space is occupied by another lessee
of the lessor. In connection with the closing of the Houston office the Company
accrued, in 1996, its estimate of the remaining lease payments net of estimated
sub-lease reductions. See Note 3 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently engaged in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
There is no current public trading market for the Company's common stock.
The Company's common stock has, from time to time, been traded in the
over-the-counter market, under the symbol LSUS, and, according to the OTC
Bulletin Board, the total volume of such trades in December 1996 was 370,000
shares (a total of 33 trades). The last reported trade, to the Company's
knowledge, was on June 11, 1997 at a price of $9.75 per share.
The Company believes that there are approximately 35 holders of record of
its Common Stock as of May 30, 1997.
The Company has never paid a dividend on its common stock and does not
expect to pay dividends in the near future. In addition, the terms of the
Company's bank credit facility prohibit the Company from paying dividends on its
Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion of the Company's historical financial condition
and results of operations should be read in conjunction with the historical
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere herein.
GENERAL
The level of an advertising agency's business depends not only on the
number of its client accounts but also on the volume of spending by each client.
During periods of economic difficulty, advertisers will tend to reduce their
advertising and marketing budgets, creating fewer revenue opportunities for
advertising agencies such as the Company.
Total United States advertising spending in 1996 increased by 7.6% over the
1995 level in part due to the effects on advertising spending of the
presidential election and the Summer Olympics in Atlanta. The 1996 increase
comes after increases of 7.7% in 1995 and 7.9% in 1994.
Commissions charged on media purchases for clients are the primary source
of revenues for the Company. Commission rates are not uniform and are negotiated
with each client. In accordance with industry practice, the media source
typically bills the Company for the time or space purchased and the Company
bills its client for this amount plus the commission. The Company then remits
the net media charge to the media source and retains the balance as its
commission. Some clients, however, prefer to compensate the Company on a fee
basis, under which the Company bills its clients for the actual charge billed by
the media source plus an agreed upon fee. The Company generally requires that
payment for media charges be received from the client before the Company will
make payments to the media. Occasionally the Company, like other advertising
agencies, is at risk in the event that its client is unable to pay the media
charges, as the Company may remain liable to the media source. To date, the
Company has not experienced any material losses due to failure of clients to pay
media charges.
The Company currently has approximately 70 clients. In 1996, the Company's
largest client represented 11.5% of the Company's consolidated commissions and
fees. During 1995, two clients represented 13% and 12%, respectively, of the
Company's consolidated fees and commissions. See "Business -- Clients."
The Company also receives fees from clients for research and for planning,
placing and supervising work done by outside contractors in the preparation of
finished print advertising and the production of television and radio
commercials. In these instances, the Company generally bills its clients for the
cost of production, plus a service fee. In addition, the Company derives income
from the creation and publication of brochures and similar collateral materials
for clients.
The Company's business operations are not seasonal; however, based upon
individual client expenditures, significant quarter to quarter fluctuations in
billings and operating results may occur.
The Company's growth strategy includes the acquisition of existing
advertising agencies (see "Business--Expansion Strategy.") In February 1996, the
Company acquired EJL, an advertising agency with offices in Los Angeles,
Chicago, Houston and Detroit. Cost savings from the combination of the EJL
agencies are being implemented, particularly in the areas of real estate leasing
and agency administration costs. However, the Company incurred non- recurring
charges of $3,583,000 in 1996, including costs resulting from closing of EJL's
Houston office due to the loss of a significant client, and salary expenses
related to excess staffing.
Prior to 1995, the Company's growth had been constrained by the need to pay
interest on the $3.2 million Subordinated Note. The net proceeds of the
Company's 1995 public offering, together with bank borrowings obtained by the
Company from Chase Bank concurrent with consummation of the offering, were used
to repay the Subordinated Note, easing the Company's debt service burden and
enabling management to take steps to implement the Company's expansion strategy.
The Company experienced a significant net loss in 1996, in part due to the
charges related to the EJL acquistion. At December 31, 1996, the Company had a
stockholders' deficit and negative working capital. However, in the first
quarter of 1997 the Company has operated profitably, due to an increase in
revenues from the addition of new clients and the reduction in operating costs
through the restructuring of the acquired EJL operations, and has reduced its
future obligations for payments to the former owners of that company.
Additionally, since December 31, 1996, the Company has obtained additional
working capital of approximately $2 million through the issuance of Series A
Convertible Preferred Stock and has obtained a replacement bank line of credit.
See "--Liquidity and Capital Resources."
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995.
The Company incurred a net loss of $5,224,000 for the year ended 1996
compared to net income of $718,000 for 1995. This loss is primarily attributed
to the effects of the EJL acquisition.
Revenues from commissions and fees were $23,067,000 in 1996 compared to
$16,035,000 during 1995. The $7,032,000 increase in revenue was principally
attributable to the inclusion of EJL's revenues from February 16, 1996, the date
of the purchase. EJL's revenues since that period were $9,251,000. In 1995, EJL
earned revenues of $16.4 million during the same period; the decline in 1996 is
attributable to the loss of clients, mainly the principal client of EJL's
Houston office. The decline in revenue of Lois is attributable to decreased
spending in 1996 by existing clients.
Total operating expenses increased from $14.7 million in 1995 to $27.7
million in 1996, and represented 91.9% of revenues in 1995 compared with 119.9%
of revenues in 1996. The principal reasons for the increase, in both dollars and
as a percentage of revenues, were the non-recurring EJL related charges of
$3,583,000 in 1996, and 1996 increases in depreciation and amortization
(including the amortization of goodwill) totaling $1,170,000. The higher
depreciation and amortization in 1996 is a direct result of the acquisition of
EJL.
Exclusive of non-recuring charges and the non-cash depreciation and
amortization, operating expenses were 98.0% of revenues in 1996 compared to
90.0% of revenues in 1995. The increase is primarily attributable to an increase
in salaries and related costs, from 62.3% of revenues in 1995 to 70.3% of
revenues in 1996. This increase reflects certain additional senior management
positions added after the EJL acquisitions.
Interest expense increased from $138,000 in 1995 to $232,000 in 1996 as the
result of higher levels of outstanding debt. The Company's total borrowing
increased in 1996 principally from the Company's use of bank borrowings to
obtain the net cash needed to complete the EJL acquisition.
The provision for income taxes fell to $307,000 for the year ended 1996 as
compared to $390,000 for the year ended 1995. The 1996 provision is comprised of
state and local taxes. No benefit was recorded for the Company's loss in 1996.
Approximately $5,000,000 of net operating loss carryforwards are available to
offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's 1996 net loss and its acquisition of EJL, caused an increase
in the Company's negative working capital, from $3,560,000 at December 31, 1995
to $14,321,000 at December 31, 1996. The increase in the working capital deficit
resulted principally from an increase in accounts payable, accrued expenses, and
advance billings, which result from the Company's operations, a bank overdraft,
which was used to finance a portion of the 1996 net loss and the cash EJL
acquisition payments, and increases in the short-term borrowings and lease
related accruals, which result from the financing or recording of the EJL
acquisition.
On January 3, 1995, the Company consummated a registered direct placement
public offering of 300,000 shares of Common Stock at a price of $6.00 per share.
The gross proceeds of $1,800,000 were reduced by seller's commissions of
$108,000 and other professional fees and expenses of $329,000. These net
proceeds, along with bank borrowing of $2,000,000, were used to repay, in full,
the Company's $3,200,000 Subordinated Loan.
Also in connection with the Company's 1995 direct public offering, the
Company established a $2 million reducing revolving credit facility under the
Reducing Revolving Credit Agreement with Chase Bank. Upon consummation of the
offering, the Company borrowed $2,000,000 under the Reducing Revolving Credit
Agreement. These funds, together with the net proceeds of the Offering, were
used to repay the Subordinated Note. Amounts outstanding under the Reducing
Revolving Credit Agreement bore interest at the highest rate determined with
reference to one of several fluctuating rate bases. The current interest rate
under the credit facility is 10%. In addition to quarterly amortization required
under the reducing revolving credit facility, the Company was required to prepay
amounts outstanding under the Reducing Revolving Credit Agreement equal to 100%
of Excess Cash Flow (as defined in the Reducing Revolving Credit Agreement) up
to $300,000 for any year and 50% of Excess Cash Flow above $300,000 for any
year. Excess Cash Flow is defined as the actual cash flow of the Company less
110% of debt amortization.
Borrowings under the Reducing Revolving Credit Agreement were secured by
all of the assets of the Company's operating subsidiaries, a pledge of all
shares of capital stock of the Company's operating subsidiaries held by the
Company, a pledge of all shares of the Company's capital stock held by Messrs.
Lois and Veru, and an assignment in favor of Chase of the key man life insurance
policies on Mr. Lois (in an amount not less than $2 million) and Mr. Veru (in an
amount not less than $1 million).
Concurrent with the acquisition of EJL in February 1996, the Company
entered into an amendment to the Reducing Revolving Credit Agreement with Chase
Bank. Under the amended Reducing Revolving Credit Agreement the loans which
originally matured on December 31, 1997, were extended to June 30, 1999. In
addition, the facility was increased to approximately $3.8 million. The February
1996 amendment required amortization payments to reduce the principal balance
and the amount available to be borrowed by approximately $250,000 each quarter
commencing in the second quarter of 1996.
At December 31, 1996, $1,253,000 of the credit facility was available. An
additional $2 million, of which $150,000 is being used to support a contingent
letter of credit securing the Company's New York lease, was available under a
separate line of credit obtained from Chase Bank. However, as the result of
certain defaults with respect to covenants in the agreements, Chase Bank had, at
December 31, 1996, suspended the Company's right to obtain additional borrowings
under the agreements. Subsequent to December 31, 1996 the Company repaid all
amounts outstanding, and in May 1997, Chase extended a new $2.5 million one-year
line of credit to the Company. See Note 6 of Notes to Consolidated Financial
Statements.
Concurrent with the issuance of the Subordinated Note in 1991, the Company
gave stock purchase warrants (the "Warrants") to Trigger Associates, the
purchaser of the Subordinated Note, and Sands Brothers, the placement agent,
(collectively the AWarrant Holders") which provide for the purchase of an
aggregate of 591,667 shares of the Company's common stock at an aggregate price
of $2,500 per share. The Warrants entitled the Warrant Holders to require the
Company to purchase all of the Warrants on December 31, 1996 for a purchase
price of $2,439,000. For accounting purposes, the purchase price was being
accreted over the life of the Warrants (5 years). In December 1994, the Company,
George Lois and Theodore Veru entered into an agreement (the ADecember
Agreement") with the Warrant Holders for the Company to purchase the Warrants
upon consummation of the Company's Offering for total consideration of 100,000
shares of Common Stock. In addition, the Company agreed to repay, and repaid,
the Subordinated Note upon consummation of the Company's offering. Under the
December Agreement, George Lois and Theodore Veru each agreed to transfer 62,500
shares of Common Stock to the Warrant Holders for total consideration of $1,250
upon consummation of the Company's Offering. The value of the Warrants exchanged
for a total of 225,000 shares (including the 125,000 shares to be transferred to
the Warrant Holders by Messrs. Lois and Veru) at $6.00 per share is $1,350,000.
This amount (which was fully accreted as of December 31, 1994) was reflected as
Additional Paid-in Capital as of the date of consummation of the Offering. The
transactions described above pursuant to the December Agreement were consummated
on January 3, 1995.
The Company acquired EJL in February 1996. Under the Original Agreement,
the Company was to be required through February 2001 to make annual additional
purchase price payments to the sellers equal to 5% of the revenues of the
acquired operations, subject to certain adjustments, up to a maximum of
$12,000,000. Payments were to be made 75% in cash and 25% through the issuance
of shares of the Company's common stock. A minimum payment of $1,750,000 was
required, and made, in 1996, the cash portion of which ($811,000) was financed
with the bank overdraft. In May 1997, the Company and the former owners of EJL
agreed to a revision to the Original Agreement. Under the Revised Agreement, the
total purchase price has been reduce to $9.6 million, of which $5.9 million has
been paid through December 31, 1996 through cash payments of $4.8 million and
the issuance of 189,183 shares of common stock, and the remaining $3.7 million
will be paid in cash in varying monthly installments from June 1999 through
March 2009. Accordingly, the acquisition of EJL will not place demands on the
Company's capital resources until 1999.
In May 1997, the Company raised additional capital of approximately $2
million through the private placement of 2,160 shares of Series A Convertible
Preferred Stock (the "Series A Stock"). The Series A Stock accrues annual
dividends of $100 per share, which will reduce the net income attributable to
the Company's common stock, and related earnings per share, beginning in the
second quarter of 1997. However, the holders of 1,375 shares of the Series A
Stock have elected to receive dividends, for the first year, in the form of
shares of the Company's common stock, valued at the rate of $6.50 per share.
Therefore, assuming no conversions, the Series A Convertible Preferred Stock
will only require cash dividends of approximately $393,000 in 1997. The Series A
Convertible Preferred Stock may be converted, at the Company's option, into
shares of the Company's common stock, at a conversion price of $6.50 per share,
beginning September 16, 1997.
The Company's growth strategy includes the acquisition of existing
advertising agencies. Although the Company currently has no specific acquisition
plans or commitments, any future acquisitions may require material capital
expenditures or commitments that could place significant constraints on future
working capital. As a result, and to reduce both the immediate cash needs and
the risk that the Company will significantly overpay for an acquisition, the
Company has, and will, generally attempt to negotiate acquisitions that involve
the payment of a portion of the total purchase price on a deferred basis based
on the post-acquisition performance of the acquired operations. Additionally,
the Company attempts to negotiate the payment of a portion of the acquisition
price in the form of the issuance of shares of the Company's common stock, and
will offer various forms of participation in the Company's Stock Option Plan to
key employees as a means of incentivizing future performance.
The Company believes that cash flows from operations, together with funds
available under the Company's credit facility with Chase Bank, and the working
capital obtained from the issuance of the Series A Stock will be sufficient to
meet the Company's cash needs for its existing business and any potential
acquisitions over the next twelve months.
OTHER
Inflation has not had any material impact on the commissions and fees of
the Company for the years ended December 31, 1994, 1995, or 1996.
The Company does not utilize futures, options or other derivative financial
instruments.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements are submitted in Item 13 on this Form 10-K.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following set forth the executive officers and directors of the
company:
NAME Age Title
George Lois 65 Co-Chairman of the Board,
Co-Chief Executive Officer and
Director
Theodore Veru 69 Co-Chairman of the Board,
Co-Chief Executive Officer,
President and Director
Dennis Coe 49 Executive Vice President and
Director
Mike de Maio 43 Executive Vice President and
Chief Operating Officer
Edwin Holzer 63 Chairman and Chief Executive
Officer of Lois/EJL Chicago
Dean Laws 52 Executive Vice President
Robert Stewart 42 Chief Financial Officer,
Treasurer and Secretary
John Hatsopoulos 62 Director
David DeBusschere 56 Director
Dennison Veru 36 Director
The Company's Amended and Restated By-laws provide that directors are to be
elected to serve until the next annual meeting of stockholders and until their
respective successors have been elected and qualified. The board currently
consists of five members. The Company has established an Audit Committee and a
Compensation Committee. A majority of the directors on each such committee are
disinterested persons.
GEORGE LOIS is Co-Chairman of the Board of Directors, Co-Chief Executive
Officer and Worldwide Creative Director of Lois/USA Inc. and holds similar
positions in all of the Company's agencies. Mr. Lois is regarded as one of the
premier art directors in the United States. He is the founder of the Company and
a member of the Art Directors Hall of Fame and Creative Hall of Fame. Prior to
forming the Company in 1978, he was a principal of the Lois Holland Calloway
agency for ten years. He has authored several books, one of which, THE ART OF
ADVERTISING, has been frequently cited as an authoritative text on the subject
of mass communication.
THEODORE (TED) VERU is Co-Chairman of the Board of Directors and Co- Chief
Executive Officer and is charged with overseeing all business aspects of the
Company and its subsidiaries. Mr. Veru has been associated with the Company
since 1985. He holds similar positions in all of the Company's agencies. Prior
to joining the Company, he held various executive positions with Publicker
International, Schenley and Lever Brothers.
DAVID DEBUSSCHERE became a Director of the Company in August 1994. Mr.
DeBusschere is currently Executive Vice President, Corporate Development of
Williamson, Picket, Gross, Inc., a real estate company. Mr. DeBusschere is the
former Executive Vice President of the New York Knicks and former Commissioner
of the American Basketball Association. As a professional basketball player, Mr.
DeBusschere was voted to the NBA's All-Defensive Team for six years and to the
NBA's All-Star Team for eight years.
JOHN HATSOPOULOS became a Director of the Company in August 1994. Mr.
Hatsopoulos has been Chief Financial Officer and Executive Vice President of
Thermo Electron Corporation since 1988. He is also Vice President and Chief
Financial Officer of the following of Thermo Electron Corporation's public
subsidiaries: Thermedics Inc., Thermo Fibertek Inc., Thermo Instrument Systems
Inc., Thermo Power Corp., Thermo Process Systems, Inc., ThermoTrex Corp., Thermo
Remediation Inc., and Thermo Cardiosystems Inc. Mr. Hatsopoulos is also a member
of the board of directors for Thermo Instrument Systems Inc., Thermo Power
Corp., ThermoTrex Corp., Thermo Process Systems Inc., and Thermo Fibertek Inc.
In addition, Mr. Hatsopoulos is a director of Lehman Brothers Fund, Inc., a
member of the Board of Directors of the American Stock Exchange, Inc. and a
member of the Board of Governors of the Regency Whist Club in New York.
DENNISON VERU became a Director of the Company in August 1994. Since
November 1992, Mr. Veru has been associated with Awad & Associates, an
investment management firm, and was recently appointed President of Awad &
Associates. Prior to that time, he was Executive Vice President with Smith
Barney Harris Upham from February 1990 to November 1992. From December 1984 to
February 1990 he held various positions with Drexel Burnham Lambert, including
Vice President. Dennison Veru is the son of Theodore Veru.
DENNIS R. COE is an Executive Vice President and Director of Lois/USA Inc.
and is President and Chief Executive Officer of Lois/EJL Los Angeles. Mr. Coe
joined EJL's marketing department in 1974 and served as a Divisional President
from 1985 to 1990. Mr. Coe has been a member of EJL's Board of Directors since
1987. Mr. Coe was elected Corporate Co-President of EJL in May 1990.
MICHELE (MIKE) DE MAIO is an Executive Vice President and Chief Operating
Officer of Lois/USA Inc. and is President
of Lois/EJL Chicago. Mr. de Maio joined EJL as an account executive in the
Chicago office and has been General Manager of EJL Chicago since 1984.
EDWIN HOLZER is Chairman and Chief Executive Officer of Lois/EJL Chicago.
He has served as President and Managing Director of Lois/USA Chicago since 1987
when the Company acquired the agency, and had held the same position with the
agency under its control by Grey Advertising since 1971.
DEAN R. LAWS is an Executive Vice President and Director of Lois/USA Inc.
and Chairman of Lois/EJL Los Angeles. Mr. Laws joined ELJ in 1973 and became
Corporate Co-President in 1990. He has been a member of the EJL Board of
Directors since 1987
ROBERT K. STEWART is an Executive Vice President and the Chief Financial
Officer, Treasurer and Secretary of the Company, positions he has held since he
joined the Company in 1992. He is a Certified Public Accountant.
PART III
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth certain information regarding compensation
paid to the Company's Co-Chief Executive Officers and to each of the most highly
compensated executive officers of the Company whose salary and bonus for 1996
exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Principal Salary Bonus All Other
Position Year ($) ($) Compensation
George Lois 1996 325,000 - 26,233(1)
Co-Chief Executive 1995 295,000 26,233(1)
Officer 1994 350,000 -(2)
Theodore Veru 1996 325,000 - 45,005(1)
Co-Chief Executive 1995 275,000 45,005(1)
Officer, President 1994 250,000 -(2) 45,005(1)
and Secretary
Edwin Holzer 1996 300,000 50,000 54.923(1)(3)
President/Managing 1995 275,000 50,000 54,923(1)(3)
Director of 1994 250,000 - 54,923(1)(3)
Lois/USA Chicago
Dean Laws 1996(4) 325,000 - 60,435(5)
Executive Vice
President
Dennis Coe
Executive Vice 1996(4) 325,000 - 56,235(5)
President
- -------------------------
(1) Includes in 1994, 1995 and 1996, $3,501, $40,005, and $21,233,
respectively, of insurance premiums paid by the Company on behalf of
each of Messrs. Lois, Veru and Holzer, respectively, and $5,000 in
medical expenses paid by the Company in each year on behalf of each of
Messrs. Lois, Veru and Holzer.
(2) Both of Messrs. Lois and Veru waived bonuses of $25,000 which each was
entitled to receive in 1994, under his respective employment agreement.
(3) Includes payments of $46,422 in each of 1994, 1995 and 1996
pursuant to a plan created for Mr. Holzer.
(4) Messrs. Law and Coe joined the Company in February 1996, prior to which
both were principals of EJL. Each has a five-year employment agreement
at a salary of $325,000 per annum.
(5) Other compensation consists of medical expenses, life insurance and car
allowances paid on behalf of each individual.
Prior to 1997, the Company did not pay cash compensation to its
non-employee directors. However, such directors were entitled to reimbursement
of expenses for attending Board meetings. Effective April 1997, each
non-employee director will receive $1,000 for each Board meeting attended, as
well as $500 for each committee meeting (Compensation and Audit Committees).
Executive Compensation
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Mr. Lois
and Mr. Veru. Each of the original employment agreements expires on December 31,
1999 and provides for an option to renew the employment agreement for an
additional five years at the discretion of the Board of Directors. Each
employment agreement provides that upon termination of the agreement, other than
for cause, the Company will enter into a consulting arrangement with Mr. Lois
and Mr. Veru, as applicable, for a period of five years, pursuant to which each
of Mr. Lois and Mr. Veru will be paid 50% of his previous base salary.
As compensation for the services to be rendered under their employment
agreements, for 1997 Mr. Lois and Mr. Veru are each currently paid an annual
base salary of $350,000. Under each agreement, the Board of Directors is to
review the employee's salary at least annually and the salary amounts may be
increased at its discretion. Each of Messrs. Lois and Veru may receive an annual
bonus to be determined by the Board of Directors based upon financial objectives
set by the Board. Each employment agreement (i) includes a three- year
non-competition provision and (ii) provides that, in the event of the employee's
death, in addition to all compensation earned by the employee, the employee's
beneficiary will receive monthly payments for one year thereafter based on the
employee's annual compensation at the rate in effect at the time of death. In
addition, Mr. Lois is provided with limousine service or other ground
transportation and Mr. Veru is provided with a car. The Board of Directors of
the Company recently voted to extend the Company's employment agreements with
Messrs. Veru and Lois to December 31, 2001.
Edwin Holzer has entered into an employment agreement with Lois/USA Chicago
effective as of January 1, 1995. The employment agreement currently expires on
December 31, 1999. Lois/USA Chicago has the right to renew the agreement for
additional one-year terms by giving Mr. Holzer written notice of its intention
to renew not later than 120 days prior to the end of the initial term or any
renewal term. Mr. Holzer is paid an annual base salary of $300,000. In addition,
Mr. Holzer will receive compensation of $150,000 to be earned in three equal
annual installments beginning January 1, 1995. Mr. Holzer may request an
advancement of such $150,000 prior to it being earned. In the first year of the
agreement, Mr. Holzer received an option to purchase a minimum of 5,000 shares
of the Company's Common Stock at $6.00 per share, the initial offering price in
the Company's 1995 offering. Mr. Holzer is entitled to receive an annual car
allowance of $10,000, annual club membership dues of $3,000 and the annual cost
of the Company's executive medical plan not to exceed $4,000 per annum. The
employment agreement includes a two-year non-competition provision.
In addition, as part of Mr. Holzer's compensation the Company created a
plan only for Mr. Holzer's benefit under which payments totaling $185,686 vested
in Mr. Holzer as of December 31, 1992. Under the plan, the Company paid Mr.
Holzer four payments of $46,422 each, with the final annual installment under
this plan paid in March 1996.
Concurrent with the acquisition of EJL, the Company entered into five- year
employment agreements with four of the senior EJL executives. These agreements
provide for compensation of $325,000 per year for each of Dean Laws and Dennis
Coe, $300,000 per year for Mike de Maio, and $215,000 per year for Mike
Waterkotte. The agreements are renewable upon the mutual agreement of the
parties. Bonuses are discretionary. Upon termination of the employment
agreements with Messrs. Laws, Coe and de Maio each will enter into consulting
agreements, which require minimum service to be provided for a five year term,
with compensation to each executive of $100,000 per year.
401(K) PLAN
The Company has established the Lois/USA Inc. 401(k) Profit Sharing Plan
(the A401(k) Plan"). The 401(k) Plan is a qualified profit sharing plan and
salary deferral program under the Federal tax laws and is administered by the
Company. Individuals who were employed by the Company on the effective date of
the 401(k) Plan and who had attained age 21 were immediately eligible to
participate; other employees of the Company and its participating subsidiary
corporations are eligible to participate in the 401(k) Plan on the first January
1 or July 1 following completion of one year of service and attainment of age
21. Participants may defer from 1% to 12% of their total salary (including
bonuses and commissions) each pay period through contributions to the 401(k)
Plan. The Company may, at its discretion, make contributions to the 401(k) Plan
each year which match in whole or in part the salary deferral contributions of
the participants for such year. To date the Company has made no contributions to
the 401(k) Plan. All salary deferral and Company matching contributions are
credited to separate accounts maintained in trust for each participant and are
invested, at the participant's directive, in one or more of the investment funds
available under the 401(k) Plan. All account balances are adjusted at least
annually to reflect the investment earnings and losses of the trust fund.
Each participant is fully vested in his or her accounts under the 401(k)
Plan. Distributions may be made from a participant's account upon termination of
employment, retirement, disability, death or in the event of financial hardship
(with a 10% penalty) or attainment of age 59-1/2. Participants may also obtain
loans from the 401(k) Plan secured by their account balances. Distribution of
accounts are in the form of a lump-sum payment.
The Company also maintains the 401(k) plan and a non-contributory profit
sharing plan for the benefit of the former EJL employees. The Company, under the
terms of the 401(k) plan, is required to match 25% of employee contributions.
These amounts vest over a six-year period. During 1996, the amount of Company
contributions were $98,733. Management of the Company is currently in the
process of combining the Lois and EJL plans.
STOCK OPTION PLAN FOR EXECUTIVE OFFICERS AND DIRECTORS
The Company's 1994 Stock Option Plan for Executive Officers and Directors
of Lois/USA Inc. (the AStock Option Plan") was adopted by the Company's Board of
Directors in December 1994. A total of 200,000 shares of Common Stock have been
reserved for issuance under the Stock Option Plan. Options may be granted under
the Stock Option Plan to executive officers of the Company or any of its
subsidiary. As of May 30, 1997, 130,250 options are outstanding under the Stock
Option Plan.
The Stock Option Plan is administered by the Compensation Committee, which
consists of at least two disinterested directors. The Stock Option Plan requires
that the members of the Stock Option Committee be Adisinterested persons" within
the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as from time
to time amended, under the Exchange Act. The Compensation Committee has the
authority, within limitations as set forth in the Stock Option Plan, to
establish rules and regulations concerning the Stock Option Plan, to determine
the persons to whom options may be granted, the number of shares of Common Stock
to be covered by each option, and the terms and provisions of the option to be
granted. In addition, the Compensation Committee has the authority, subject to
the terms of the Stock Option Plan, to determine the appropriate adjustments in
the terms of each outstanding option in the event of a change in the Common
Stock or the Company's capital structure.
Options granted under the Stock Option Plan may be either incentive stock
options (AISO's") within the meaning of Section 422 of the Internal Revenue
Code, or non-qualified stock options (ANQSO's"), as the Stock Option Committee
may determine. The exercise price of an option will be fixed by the Compensation
Committee on the date of grant, except that (i) the exercise price of an ISO
granted to any individual who owns (directly or by attribution) shares of Common
Stock possessing more than 10% of the total combined voting power of all classes
of outstanding stock of the Company (a A10% Owner") must be at least equal to
110% of the fair market value of the Common Stock on the date of grant and (ii)
the exercise price of an ISO granted to any individual other than a 10% Owner
must be at least equal to the fair market value of the Common Stock on the date
of the grant. Any options granted must expire within ten years from the date of
grant (five years in the case of an ISO granted to a 10% Owner). Shares subject
to options granted under the Stock Option Plan which expire, terminate or are
canceled without having been exercised in full become available again for option
grants. No options shall be granted under the Stock Option Plan more than ten
years after the adoption of the Stock Option Plan.
Options are exercisable by the holder subject to terms fixed by the
Compensation Committee. No option can be exercised until at least six months
after the date of grant. However, an option will be exercisable immediately upon
the happening of any of the following (but in no event during the six-month
period following the date of grant or subsequent to the expiration of the term
of an option): (i) the holder's retirement on or after attainment of age 65;
(ii) the holder's disability or death; (iii) the occurrence of such special
circumstances or events as the Compensation Committee determines merits special
consideration. Under the Stock Option Plan, a holder may pay the exercise price
in cash, by check, by delivery to the Company of shares of Common Stock already
owned by the holders or with respect to NQSOs and, subject to approval of the
Compensation Committee, in shares issuable in connection with the options, or by
such other method as the Compensation Committee may permit from time to time.
Options granted under the Stock Option Plan will be non-transferable and
non-assignable; provided, however, that the estate of a deceased holder may
exercise any options held by the decedent. If an option holder terminates
employment with the Company or service as a director of the Company while
holding an unexercised option, the option will terminate immediately, but the
option holder will have until the end of the tenth business day following his or
her termination of employment or service to exercise the option. However, all
options held by an option holder will terminate immediately if the termination
is for cause.
The Stock Option Plan may be terminated and may be modified or amended by
the Compensation Committee or the Board of Directors at any time; provided,
however, that (i) no modification or amendment either increasing the aggregate
number of shares which may be issued under options, increasing materially the
benefits accruing to participants under the Stock Option Plan, or materially
modifying the requirements as to eligibility to receive options will be
effective without stockholder approval within one year of the adoption of such
amendment and (ii) no such termination, modification or amendment of the Stock
Option Plan will alter or affect the terms of any then outstanding options
without the consent of the holders thereof. The Compensation Committee may
cancel or terminate an outstanding option with the consent of the holder and
grant an option for the same number of shares to the individual based on the
then fair market value of the Common Stock, which may be higher or lower than
the exercise price of the canceled option.
DIRECTORS' PLAN
The Company's Non-Qualified Stock Option Plan for Non-Employee Directors
(the ADirectors' Plan") was adopted in December 1994. A total of 100,000 shares
of Common Stock has been reserved for issuance under the Directors' Plan. The
Directors' Plan provides for the automatic one-time grant of non-qualified
options to non-employee directors. Under the Directors' Plan, a non-qualified
stock option to purchase 10,000 shares of Common Stock is automatically granted
to each non-employee director of the Company, in a single grant effective as of
January 3, 1995 (the date of consummation of the Company's Offering) or, if
later, the time the director first joins the Board of Directors. The Directors'
Plan authorizes grants of options up to an aggregate of 100,000 shares of Common
Stock. The exercise price per share is the fair market value of the Company's
Common Stock on the date on which the option is granted (the AGrant Date"),
which equals $6.00 per share in the case of the initial grants to Mr.
Hatsopoulos, Mr. DeBusschere and Mr. Dennison Veru. The options granted pursuant
to the Directors' Plan vest at the rate of one-third each year from the date
elected to the Board. Options granted pursuant to the Directors' Plan expire ten
years from their Grant Date. The Directors' Plan is administered by the
Compensation Committee. The Compensation Committee has the authority, subject to
the terms of the Directors' Plan, to determine the appropriate adjustments in
the event of a change in the Common Stock or the Company's capital structure,
and to perform other administrative functions. The Director's Plan permits the
exercise of options upon the occurrence of certain events and upon termination
of a director's service as a director (other than for cause), without regard to
the three year schedule described above, under circumstances similar to those
provided in the Stock Option Plan. The Directors' Plan may be terminated, under
circumstances similar to those provided in the Stock Option Plan.
The following table shows the number of shares as to which options were
granted in 1996 to each director or executive officer under the Stock Option
Plan and the Directors' Plan:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
<S> <C> <C> <C> <C>
George Lois 50,000 41.58% $6.00 June 4, 2006
Co-Chief Executive
Officer and Co-
Chairman of the Board
Theodore D. Veru 50,000 41.58% $6.00 June 4, 2006
Co-Chief Executive
Officer, Co-Chairman
of the Board,
President and Secretary
Robert Stewart 5,000 4.16% $6.00 June 4, 2006
Executive Vice
President and
Assistant Secretary
</TABLE>
<TABLE>
<CAPTION>
AGGRREGATED FISCAL YEAR SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of
Securities
Underlying
Unexercised
Options at Value of Unexercised in-
Fiscal Year- the-Money Options at
End (#) Fiscal Year-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable(1)
<S> <C> <C> <C> <C>
George Lois 0 $ 0 50,000/0 200,000/0
Theodore D. Veru 0 0 50,000/0 200,000/0
Robert Stewart 0 0 5,000/5,000 20,000/20,000
Edwin Holzer 0 0 3,333/1,667 13,332/6,668
- ----------------------------
(1) Value at December 31, 1996 based upon the last reported trade of $10
per share. See AMarket for Common Equity and Related Matters."
</TABLE>
ITEM 14. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of May 30, 1997, (i) by
each person who is known by the Company to own beneficially more than five
percent of the Company's Common Stock, (ii) by each of the Company's current
directors, (iii) by each of the executive officers named in the Summary
Compensation Table above and (iv) by all current directors and executive
officers as a group. Unless otherwise indicated, the address of each beneficial
owner is 40 West 57th Street, New York New York
SHARES BENEFICIALLY OWNED
Amount and
Nature of
Beneficial Percent of
Name Ownership Class
George Lois 875,000(1) 34.62%
Theodore D. Veru 885,000(1) 35.02%
Dean Laws 55,816 2.21%
Dennis Coe 55,816 2.21%
Mike de Maio 31,819 1.26%
Robert Stewart 10,000(3) *
David DeBusschere 10,000(2) *
John Hatsopoulos 10,000(2) *
Dennison Veru 20,000(2) *
Edwin Holzer 5,000(3) *
Trigger Associates, L.P. 162,500 6.43%
All directors
and executive 1,957,191 77.45%
officers as group (10 persons)
- ------------------------------
* Less than 1%
(1) Includes 50,000 shares issuable upon exercise of options to purchase
shares of Common Stock granted under the Stock Option Plan.
(2) Represents shares issuable upon exercise of options to purchase 10,000
shares of Common Stock granted under the Director's Plan.
(3) Represents shares issuable upon exercise of options to purchase shares
of Common Stock granted under the Stock Option Plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements. The financial statements required to be filed
by Item 8 herewith are as follows:
INDEX Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS F-2
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT) F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-20
(a)(2) Exhibits. Reference is made to the Exhibit Index, which is found on
page __ of this Form 10-KSB.
(b) Reports on Form 8-K.
None
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of Lois/USA Inc.:
We have audited the accompanying consolidated balance sheets of Lois/USA Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1996 and 1995 as
restated - see Note 2, and the related consolidated statements of operations,
changes in stockholders' equity (deficit) and cash flows for each of the two
years in the period ended December 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 financial statements referred to above present fairly, in
all material respects, the financial position of Lois/USA Inc. and subsidiaries
as of December 31, 1996 and 1995 as restated, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
New York, New York
June 17, 1997
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(000'S OMITTED, EXCEPT FOR SHARE DATA)
ASSETS (As Restated)
December 31, December 31,
1995 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,729 $ 567
Accounts receivable, net 19,527 21,788
Expenditures billable to clients 1,388 1,702
Other current assets 626 470
TOTAL CURRENT ASSETS 23,270 24,527
PROPERTY AND EQUIPMENT, AT COST: 2,079 2,948
Less-accumulated depreciation and (1,747) (2,112)
amortization
NET PROPERTY AND EQUIPMENT 323 836
OTHER ASSETS:
Deferred financing costs, net 212 350
Goodwill, net 325 18,118
Other assets 51 165
TOTAL OTHER ASSETS 588 18,633
Total assets $ 24,190 $ 43,996
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank overdraft $ - $ 2,865
Accounts payable 26,609 29,285
Accrued expenses 221 1,423
Bank loan - 1,580
Advanced billings - 2,362
Lease related reserves - current - 1,333
TOTAL CURRENT LIABILITIES 26,830 38,848
OTHER LIABILITIES:
Deferred payouts 46 -
Lease related reserves - 4,834
Equity subject to put rights - 270
Deferred purchase price - 5,939
TOTAL LIABILITIES 26,876 49,891
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $.01 per - -
share: 1,000,000 shares
authorized; no shares issued and
outstanding
Common stock, par value $.01 per share: 22 26
20,000,000 shares authorized; 2,175,000
and 2,555,875 issued and outstanding in 3,746 5,757
1995 and 1996, respectively (6,454) (11,678)
Additional paid-in capital
Accumulated deficit
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (2,686) (5,895)
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 24,190 $ 43,996
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(000'S OMITTED, EXCEPT FOR SHARE DATA)
1995 1996
<S> <C> <C>
REVENUE:
Commissions and fees $ 16,035 $ 23,067
OPERATING EXPENSES:
Salaries and related costs, net 9,986 16,218
Unusual costs - 3,583
Client services 1,387 1,934
Rent and related charges 1,334 1,702
Amortization of goodwill 88 1,032
Depreciation and amortization 215 441
Other operating expenses 1,723 2,755
TOTAL OPERATING EXPENSES 14,733 27,665
OPERATING INCOME (LOSS) 1,302 (4,598)
NONOPERATING EXPENSES:
Interest, net 138 232
Amortization of deferred
financing costs 56 87
TOTAL NONOPERATING EXPENSES 194 319
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 1,108 (4,917)
PROVISION FOR INCOME TAXES 390 307
NET INCOME (LOSS) $ 718 $ (5,224)
NET INCOME (LOSS) PER COMMON SHARE $ .33 $ (2.09)
WEIGHTED AVERAGE NUMBER OF COMMON 2,175,000 2,496,928
SHARES OUTSTANDING
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(000'S OMITTED EXCEPT PER SHARE DATA)
Common Commonn Additional
Stock Stock Paid-in Accumulated
Shares Par Value CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1,775 $18 $ 1,029 $(5,176) $(4,129)
1994, AS PREVIOUSLY REPORTED
Prior period adjustment - Note 2 - - - (1,996) (1,996)
BALANCE AS RESTATED, 1,775 18 1,029 (7,172) (6,125)
DECEMBER 31, 1994
Conversion of Redeemable 81 1 1,357 - 1,358
Warrants
Issuance of common shares 300 3 1,360 - 1,363
Net income - - - 718 718
BALANCE AS RESTATED, 2,156 22 3,746 (6,454) (2,686)
DECEMBER 31, 1995
Issuance of common shares 400 4 2,011 - 2,015
Net loss - - - (5,224) (5,224)
BALANCE, DECEMBER 31, 1996 2,556 $ 26 $5,757 $(11,678) $(5,895)
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(000'S OMITTED)
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 718 $ (5,224)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 215 441
Loss on disposals of fixed assets - 254
Amortization of deferred financing costs 56 87
Bad debt expense 72 60
Amortization of goodwill 88 1,032
Deferred taxes 390 76
Decrease in lease - (1,278)
related reserves
(Increase) decrease in accounts (5,635) 7,653
receivable
(Increase) decrease in expenditures billable to clients (514) 196
(Increase) decrease in other (450) 528
current assets
Decrease in other assets - (89)
Increase in bank overdraft - 2,865
Increase (decrease) in accounts payable 7,198 (7,362)
(Decrease) in accrued expenses - (1,174)
Increase in advanced billings - 1,884
(Decrease) in deferred payouts (47) (46)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,091 (97)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (72) (185)
Cash paid for acquisition costs - (347)
Cash paid for acquisition, net of cash acquired - (1,888)
NET CASH (USED IN) INVESTING ACTIVITIES (72) (2,420)
CASH FLOWS FROM FINANCING ACTIVITIES:
Costs and net proceeds of public 1,665 -
offering
Subordinated debt redemption (3,200) -
Proceeds from borrowings under - 1,580
credit facility
(Increase) in deferred financing costs (212) (225)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,747) 1,355
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 272 (1,162)
CASH AND CASH EQUIVALENTS, beginning of year 1,457 1,729
CASH AND CASH EQUIVALENTS, end of year $ 1,729 $ 567
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 138 $ 297
Income taxes 270 140
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lois/USA Inc. ("Lois/USA" or the "Company") is a holding company
established in 1991 to acquire certain predecessor companies controlled by
Lois/USA stockholders. Lois/USA conducts its operations through subsidiaries.
All significant intercompany balances and transactions have been eliminated.
The Company is a full service advertising and marketing communications
company operating on a national basis through its three advertising agencies
located in New York, Chicago and Los Angeles. In addition to the planning,
creating and placement of advertising, the Company offers its clients a broad
range of other marketing communication services, including marketing
consultation, consumer market research, direct mail advertising, merchandising
design and corporate identification services.
The Company's business operations are not seasonal; however, based upon
individual client expenditures, significant quarter-to-quarter fluctuations in
billings and net income may occur.
The key element of the Company's strategic plan is to evaluate for
acquisition, advertising agencies which would be complementary to the Company's
current business activities. Financing for acquisitions will vary upon the
economics of each situation, however, the Company's acquisition financing
strategy is likely to include issuances of securities and deferred contingent
payments as part of the purchase price. The ability to consummate future
acquisitions may require material capital expenditures or commitments that could
place significant constraints on future working capital. In addition, the bank
credit agreement discussed in Note 6 contains covenants restricting the Company
from making capital expenditures in excess of specified amounts. Furthermore,
issuances of securities, either to consummate acquisitions or to obtain
operating working capital, could dilute existing shareholders.
FINANCIAL STATUS
The Company experienced a significant net loss in 1996, in part as the
result of its February 1996 acquisition of Eisaman, Johns & Laws Advertising,
Inc. ("EJL") (see Note 3). At December 31, 1996 the Company has a stockholders'
deficit and negative working capital. However, in the first quarter of 1997 the
Company has operated profitably, due to increases in revenue from the addition
of new clients and the reduction in operating costs through the restructuring of
the acquired EJL operations, and has reduced its future obligations for payments
to the former owners of that company. Additionally, since December 31, 1996 the
Company obtained additional working capital of approximately $2 million through
the issuance of Series A Convertible Preferred Stock (see Note 11) and obtained
a replacement bank line of credit (see Note 6).
RECOGNITION OF COMMISSIONS AND FEES
Commissions and fees represent the principal source of income and are
derived from placing client advertising with various forms of media. Commissions
on media placements and production and fee billings are recognized at the time
such services are rendered to clients in the normal course of business.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The Company arranges for the placement of media with various providers.
These providers bill the Company and the Company bills its clients. Accordingly,
balances of accounts receivable and accounts payable will be disproportionate to
the Company's revenue, which only includes fees and commissions derived from
clients. Included in accounts receivable at December 31, 1995 and 1996 are
allowances for uncollectable accounts of $413,000, and $823,000, respectively.
CASH AND CASH EQUIVALENTS
Cash includes cash on hand and in banks. The Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
EXPENDITURES BILLABLE TO CLIENTS
Expenditures billable to clients represent unbilled external production
costs on work in progress. Revenue is recognized when the project is completed
and subsequently billed. Amounts will be realized during the normal operating
cycle of the Company through billing and collection.
INVESTMENTS
The Company has developed a concept known as Lois/USA Ventures which is
made available to certain carefully selected clients that are at an early
development stage during which advertising would be strategically advantageous,
but which lack sufficient cash resources to support the desired level of
advertising and creative talent. The Company provides its creative services to
such clients and receives an equity interest in the client as a component of its
fee arrangement; clients are required to pay the Company cash for all
out-of-pocket costs, including media and production costs. Equity investments
are carried at their cost, which approximates market value, and are included in
other current assets on the accompanying consolidated balance sheet. During
1995, the Company performed services for and received shares in a private
license company. In the absence of a readily ascertainable market value, the
value ascribed to this equity interest was $100,000 which represents a
significant discount to the value of the services rendered to the client.
Management periodically evaluates the fair value of this security and does not
believe that its value has significantly changed from the initial value
ascribed.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation for both book and
tax purposes is computed using the straight-line method over the estimated
useful lives of the related assets ranging from 5 to 7 years. Leasehold
improvements are amortized over the lives of the respective leases. At the time
of retirement or other disposition of properties, the cost and accumulated
depreciation are removed from the accounts and gains and losses are reflected in
income.
GOODWILL
Goodwill represents the excess of the acquisition costs over the fair value
of the net tangible assets acquired. Goodwill recorded in connection with the
acquisition of the Chicago office and EJL (see Note 3) is being amortized on a
straight-line basis over 10 years and 20 years, respectively. At December 31,
1995 and 1996, accumulated amortization of goodwill amounted to $586,000, and
$1,618,000, respectively. Management periodically evaluates goodwill for
impairment on the basis of a comparison of the future estimated undiscounted
cash flows arising from the acquired business to the related unamortized
goodwill.
DEFERRED FINANCING COSTS
Deferred financing costs represent financing costs incurred in connection
with the debt obligation discussed in Note 6 and the debt associated with the
acquisition EJL discussed in Note 3. These costs are being amortized on a
straight-line basis over five years.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement
establishes financial accounting and reporting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets, and for assets to be disposed of. The adoption of this statement
had no effect on the consolidated financial statements.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." Under APB No. 25, the Company determines compensation cost
for stock-based employee compensation plans using the intrinsic value method.
During 1996, SFAS No. 123, "Accounting for Stock Based Compensation,"
became effective for the Company. SFAS No. 123 encourages, but does not require
companies to record such compensation costs at fair value as determined using
specified valuation models. The Company has elected to continue to account for
stock-based compensation using the intrinsic value method. For companies that
choose to continue applying the intrinsic value method, SFAS No. 123 mandates
certain pro forma disclosures as if the fair value method had been utilized. See
Note 8.
INCOME TAXES
The Company provides for taxes at the federal, state and local levels.
Deferred taxes are provided for differences between the financial accounting and
income tax basis of assets and liabilities in accordance with SFAS No. 109.
DEFERRED PAYOUTS
Deferred payouts, which arose in 1992 and which were payable pursuant to
the employment agreement with Mr. Holzer discussed in Note 9, were recorded at a
present value reflecting an 11.0% per annum discount rate. Interest expense in
1995 and 1996 was $11,700 and $6,200 respectively. As of December 31, 1996, all
of the deferred payouts to Mr. Holzer have been made.
SEVERANCE AGREEMENTS
Arrangements with certain employees provide for continuing payments for
periods after cessation of their full time employment in consideration for
agreements by the employees not to compete and to render consulting services in
the post-employment period. Such payments, which are determined, subject to
certain conditions and limitations, by earnings in subsequent periods, are
expensed in such periods.
CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company had one client from whom revenues exceeded 10% of consolidated
revenues in the year ended December 31, 1996. Two other clients accounted for
revenues in excess 10% of consolidated revenues for the year ended December 31,
1995. The following table sets forth the revenues by client and the percentage
of consolidated revenue of which this represents.
CLIENT 1 Client 2 Client 3
1996:
Revenue $2,654,000
% Revenue 11.00%
1995:
Revenue $2,107,000 $2,030,000
% REVENUE 13.00% 12.00%
As of December 31, 1996, and 1995, the aggregate amounts due from clients
which accounted for 10% or more of revenues in each applicable year and included
in accounts receivable were $6,004,865 and $1,831,064, respectively.
Substantially all of these receivables have since been collected.
Financial instruments that subject the Company to concentrations of credit
risk include cash and accounts receivable. The Company maintains its cash in
bank accounts and short-term overnight investments, which at times, may exceed
federally insured limits. Other than accounts receivable due from significant
customers as discussed above, the majority of the Company's receivables are due
from geographically dispersed clientele, principally in the consumer products
industry.
The Company's debt obligations bear interest at floating interest rates.
Accordingly, recorded amounts are substantially equivalent to fair market value.
EARNINGS PER SHARE
Earnings per share have been computed using the weighted average number of
shares of common stock outstanding. The dilutive effect of employee and director
stock options (which aggregate 40,000 options) was not significant in 1995. With
respect to 1996, such options were antidilutive. The warrants discussed in Note
7 were antidilutive for all periods presented during which they were
outstanding.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share". Under SFAS NO. 128, Basic and Diluted Earnings Per
Share will replace the presentation of Primary and Fully Diluted Earnings Per
Share. Adoption of SFAS No. 128 is required for periods ending after December
15, 1997, at which time restatement for prior periods will be necessary. This
Company does not expect the adoption of this statement to have a material effect
on the reported earnings per share.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires the use of certain estimates
by management in determining 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 reported
period. Although these estimates are based on management's knowledge of current
events and actions it may undertake in the future, they may ultimately differ
from actual results.
CASH FLOWS
The following supplemental schedule summarizes the fair value of non-cash
assets acquired, cash paid, common shares issued and the liabilities assumed in
conjunction with the acquisition of equity interests in subsidiaries for each of
the two years ended December 31:
(Dollars in thousands)
1996 1995
Fair value of non-cash $30,794 $ -
assets acquired
Cash paid, net of cash (2,235) -
acquired
Common shares (2,015) -
Liabilities assumed $26,544 $ -
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
2. RESTATEMENT OF FINANCIAL STATEMENTS
In connection with the closing of its books and records as of December 31,
1996, the Company determined that as of December 31, 1995 and 1994 it had
understated its accounts payable and accumulated deficit by approximately $2
million. The Company's consolidated balance sheets as of December 31, 1995 and
1994 have been restated to reflect an increase in current liabilities and a
corresponding increase in accumulated deficit by $2 million. Such adjustment is
presented in the accompanying consolidated financial statements as an adjustment
to the December 31, 1994 accumulated deficit as set forth on the consolidated
statements of changes in stockholders' equity (deficit).
3. ACQUISITION OF EISAMAN, JOHNS & LAWS ADVERTISING, INC.
On February 12, 1996, Lois/USA acquired all of the outstanding shares of
Eisaman, Johns & Laws Advertising, Inc. ("EJL"), a national advertising agency
established in 1959, with its principal advertising offices in Los Angeles,
Chicago, Houston and Detroit. For its fiscal years ended February 28, 1993, 1994
and 1995, EJL had unaudited commission and fee revenues of $19,087,000,
$18,151,000 and $17,011,000, respectively, and unaudited net income (loss) of
$18,000, ($5,000) and ($788,000), respectively.
Pursuant to the Original Stock Purchase Agreement (the "Original
Agreement"), between the Company and the shareholders of EJL (the "Sellers"),
the Company made an initial cash payment of $4,000,000 and issued to the Sellers
333,333 shares of the Company's common stock, par value $.01 per share, ("Common
Stock") which were valued at $6.00 per share.
The Original Agreement provided that the Sellers were to receive as
additional purchase price, an amount equal to the lesser of 5% of the combined
revenue of Lois/USA and EJL, as defined in the Original Agreement, or
$12,000,000 (the "Additional Purchase Price") over a period of five years from
the date of the acquisition. Payments were to be made in the ratio of 75% cash
and 25% in Common Stock, valued at $6.00 per share for the first four quarters
and thereafter valued at the fair market value of the Common Stock as defined in
the Original Agreement. At least $1,750,000 of Additional Purchase Price was
payable for the year ending December 31, 1996. Additionally, the Original
Agreement provided that the Sellers would receive minimum Additional Purchase
Price cash payments of $6,000,000. If, by December 31, 1999, the Sellers had not
received such cash payments, the difference between the $6,000,000 amount and
the cash paid through that date was to be paid to the Sellers by (i) first,
allowing the Sellers to require the Company to repurchase, or "put" to the
Company, shares of Common Stock issued to them as Additional Purchase Price (but
not the 333,333 shares of Common Stock issued at the initial closing), on a last
issued first repurchased basis, at the per share values at which the shares were
issued, and (ii) second, if such repurchases do not cause the total cash
Additional Purchase Price payments to equal $6,000,000, making a cash payment to
the Sellers of the remaining difference. The Sellers were also to receive a
final payment, payable in shares of Common Stock, of $750,000, in 2001; that
$750,000 is not a component of the calculations above.
The Company accounted for the acquisition using the purchase method of
accounting, and since February 12, 1996, the Company's consolidated financial
statements have included EJL's assets, liabilities and results of operations. At
the date of acquisition the minimum guaranteed Additional Purchase Price of
$6,750,000 was recorded as a liability on the Company's consolidated balance
sheet (which was reduced to $5,939,000 as of December 31, 1996 as the result of
payments made through that date) and the excess of the minimum guaranteed
purchase price of $12,750,000 over the fair market value of the net assets
acquired and liabilities assumed was reflected in the Company's consolidated
financial statements as goodwill. This purchase resulted in recording goodwill
in the amount of $18,825,064. The goodwill is being amortized on a straight-line
basis over a period of 20 years. None of the recorded goodwill will be
deductible for income tax purposes. As a result of the non- deductibility of
goodwill, the Company's effective tax rate will be adversely impacted.
In May 1997, the Company and the Sellers agreed to revise the terms of the
Original Agreement. Under the revised terms, the Sellers will receive a total of
$9,646,000, comprised of (i) the $4,000,000 cash paid at the closing, (ii) cash
payments of $811,000 made during fiscal 1996, (iii) $1,135,000 through the
retention of 189,183 shares (of the total of 378,366 shares) of common stock
issued to them through December 31, 1996 under the Original Agreement (the
remaining 189,183 shares to be returned to the Company), and (iv) future cash
payments totaling $3,700,000, payable $135,000 quarterly commencing June, 1999
through March 2004 and then $50,000 quarterly commencing June 2004 through March
2009. The revised purchase price, with the future payments discounted at a rate
of 6.5% per annum, is $8,612,000, which is $4,408,000 less than the purchase
price recorded under the Original Agreement. The recording of the effects of the
revisions of the terms of the acquisition, which will be reflected in the
Company's consolidated financial statements in the second quarter of fiscal
1997, will have the effects, relative to December 31, 1996 amounts, of (i)
reducing goodwill by $4,408,000, (ii) reducing the liability for the future
payments by $3,273,000, (iii) eliminating the $270,000 for redeemable common
stock, and (iv) reducing stockholders' equity by $865,000. The reduction in
goodwill will reduce the annual amortization by $220,000.
The Company closed the EJL Houston office as of December 31, 1996 due to
the loss of that office's only client. Losses attributable to the Houston office
in 1996 of $1.7 million in addition to severance and other redundant costs
associated with post combination operations have been classified as Unusual
Costs on the accompanying consolidated statement of operations for the year
ended December 31, 1996.
The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1995 and 1996 are presented as if the EJL
acquisition had been made on the terms in the Original Agreement at the
beginning of each period presented. As the acquisition occurred on February 12,
1996, the results for 1996 are not materially different from the Company's
consolidated results and as such have not been adjusted. The unaudited pro forma
information is not necessarily indicative of either the results of operations
that would have occurred had the purchase been made during the periods presented
or the future results of the combined operations under the ownership and
management of the Company.
(In thousands except per share 1995 1996
amounts)
Commissions and fees 32,474 23,067
Net loss (191) (5,224)
Net loss per common share $(.09) $(2.09)
4. PROPERTY AND EQUIPMENT
Fixed assets as of December 31, 1995 and 1996 are summarized as follows
(000's omitted):
1995 1996
Equipment $1,464 $1,342
Furniture and fixtures 303 759
Leasehold improvements 182 474
Autos - 55
Computers 130 318
2,079 2,948
Less- Accumulated depreciation
and amortization 1,747 2,112
$ 332 $ 836
5. THE COMPANY'S OFFERING
On January 3, 1995, the Company consummated a registered direct placement
of 300,000 shares of common stock at a price of $6.00 per share (the
"Offering"). The gross proceeds of $1,800,000 were reduced by seller's
commissions of $108,000 and other professional fees and expenses of
approximately $329,000. These net proceeds, together with the borrowings
discussed in Note 6, were used to repay, in full, the Company's outstanding
$3,200,000 subordinated loan payable which was due on December 31, 1994 (Note
7).
Concurrent with the Offering, the Company and Messrs. Lois and Veru (the
Company's then principal stockholders and chief executive and chief operating
officers) entered into an agreement with the holders of the Company's then
outstanding warrants, as discussed in Note 7, whereby the Company agreed to
issue the warrant holders 100,000 newly issued common shares and Messrs. Lois
and Veru each agreed to transfer 62,500 common shares owned by them to the
warrant holders. The value of the 225,000 shares, valued at $6.00 per share, for
a total of $1,350,000, was reflected as additional paid-in capital upon
completion of the Offering. The full $1,350,000 value of the warrants was
charged to expense during 1991 through 1994.
6. REDUCING REVOLVING CREDIT FACILITY
Concurrent with the Company's Offering in January 1995 and the repayment of
the subordinated loan discussed in Note 7, the Company entered into a $2 million
reducing revolving credit facility (the "Reducing Revolving Credit Agreement")
with Chase Manhattan Bank ("Chase"). Upon consummation of the Company's
Offering, the Company borrowed $2 million under the Reducing Revolving Credit
Agreement which, when added to the net proceeds of the Company's Offering,
enabled the Company to repay the subordinated loan. Amounts outstanding under
the Reducing Revolving Credit Agreement bear interest at the highest rate
determined with reference to one of several fluctuating rate bases. The 1995 and
1996 interest rates under the credit facility were 10% and 9.7%, respectively.
The Reducing Revolving Credit Agreement contains certain affirmative and
negative covenants customary in an agreement of this nature. The terms of the
Reducing Revolving Credit Agreement prohibit the Company from paying dividends
on its common stock.
Borrowings under the Reducing Revolving Credit Agreement are secured by (a)
all of the assets of the Company's operating subsidiaries, (b) a pledge of all
shares of capital stock of the Company's operating subsidiaries held by the
Company, (c) a pledge of all shares of the Company's capital stock held by
Messrs. Lois and Veru, and (d) an assignment in favor of Chase of the key man
life insurance policies on Mr. Lois (in an amount not less than $2 million) and
Mr. Veru (in an amount not less than $1 million).
Concurrent with the acquisition of EJL in February 1996, Chase amended the
January 1995 Reducing Revolving Credit Agreement to increase the facility to
$3,833,000, extend the maturity date through June 30, 1999 and require quarterly
amortization of $250,000 commencing March 31, 1996. The Company will be required
to prepay amounts outstanding under the Reducing Revolving Credit Agreement
equal to 100% of Excess Cash Flow (as defined in the Reducing Revolving Credit
Agreement) up to $300,000 for any year and 50% of Excess Cash Flow above
$300,000 for any year. Excess Cash Flow is defined as actual cash flow of the
Company less 110% of debt amortization. For the year ended December 31, 1995,
this requirement was waived. At December 31, 1996 the balance outstanding under
this agreement is $1,580,000 and an additional $1,253,000 was available.
However, as a result of defaults with respect to other covenants in the
agreement, at December 31, 1996 Chase had suspended the Company's right to
obtain additional borrowings. Subsequent to year end the Company repaid all
amounts outstanding under the Reducing Revolving Credit Agreement. In May 1997,
Chase extended to the Company a new $2.5 million line of credit, to replace the
Reducing Revolving Credit Agreement, having collateral terms essentially the
same as those of the Reducing Revolving Credit Agreement. The replacement line
of credit bears interest at the rate of 2% above Chase's prime rate and expires
in June 1998.
In 1995 and 1996, the Company had a $2 million uncommitted line of credit.
There were no borrowings outstanding as of December 31, 1995 and 1996. Of this
facility, $150,000 has been set aside for a contingent letter of credit in favor
of the landlord of the office space leased in New York which would be payable in
an event of default. Amounts borrowed will bear interest at a rate to be
negotiated upon borrowing.
There were approximately $268,000 in fees and expenses incurred in
connection with the initial Reducing Revolving Credit Agreement. These costs are
being amortized over the initial three-year period of the loan. Costs to extend
the facility of approximately $175,000 will be amortized over the period from
1996 through 1999.
7. SUBORDINATED LOAN PAYABLE
In 1991, the Company borrowed $3,200,000, at an interest rate of 11% per
annum, payable semiannually. The subordinated loan was due on December 31, 1994
and was collateralized by the Company's receivables. As discussed in Note 6,
this note was paid in January 1995.
Pursuant to the terms of the subordinated debt agreement, the Company
issued stock purchase warrants to the subordinated debt holder, and to the
placement agent for the subordinated debt (collectively "Warrant Holders"),
which provided for the purchase of an aggregate of 591,667 shares of the
Company's common stock to be exercised at an aggregate price of $2,500. The
Warrant Holders had the right to require the Company to purchase all of the
warrants on December 31, 1996 for a purchase price of $2,439,000 and the Company
had a right to require the Warrant Holders to sell such warrants on December 31,
1998 for the same amount and could have elected to pay for such warrants under
an installment agreement over 12 months with interest at the prevailing prime
rate. The Company was accreting the value of these redeemable warrants from
their date of issuance through December 31, 1996. In December 1994, the Company
and Messrs. Lois and Veru entered into an agreement with the Warrant Holders to
purchase the outstanding warrants, whereby the Company issued the Warrant
Holders 100,000 shares of common stock and Messrs. Lois and Veru each agreed to
transfer 62,500 shares of common stock owned by them to the Warrant Holders. The
value of the 225,000 shares, valued at $6.00 per share for a total of
$1,350,000, was reflected as Additional Paid-in Capital upon completion of this
transaction in January 1995 (see Note 5).
8. STOCK OPTION PLAN FOR EXECUTIVE OFFICERS AND DIRECTORS
The Company's 1994 Stock Option Plan for Executive Officers and Directors
of Lois/USA (the "Stock Option Plan") was adopted by the Company's Board of
Directors in December 1994. A total of 200,000 shares of common stock have been
reserved for issuance under the Stock Option Plan. Options may be granted under
the Stock Option Plan to executive officers of the Company or a subsidiary. To
date, 130,250 options have been granted under the Stock Option Plan.
The Company's Nonqualified Stock Option Plan for Nonemployee Directors (the
"Directors' Plan") was adopted in December 1994. The Directors' Plan provided
for the automatic one time grant of nonqualified options to nonemployee
directors. Under the Directors' Plan, a nonqualified stock option to purchase
10,000 shares of common stock was automatically granted to each nonemployee
director of the Company, in a single grant effective as of the date of the
Offering or, if later, the time the director first joins the Board of Directors.
The Directors' Plan authorizes grants of options up to an aggregate of 100,000
shares of common stock. The exercise price per share is the fair market value of
the Company's common stock on the date on which the option is granted (the
"Grant Date"), which was equal to the Offering price in the case of the initial
grants to outside Directors. The options granted pursuant to the Directors' Plan
vest at the rate of one-third each year from the date elected to the Board,
subject to certain holding periods required under rules of the Securities and
Exchange Commission. Options granted pursuant to the Directors' Plan expire ten
years from their Grant Date. The Directors' Plan is administered by the Stock
Option Committee of the Board of Directors. The Stock Option Committee has the
authority, subject to the terms of the Directors' Plan, to determine the
appropriate adjustments in the event of a change in the common stock or the
Company's capital structure, and to perform other administrative functions. The
Directors' Plan permits the exercise of options upon the occurrence of certain
events and upon termination of a director's service as a director (other than
for cause), without regard to the three-year schedule described above.
The following sets forth the activity for the Stock Option Plan and the
Directors' Plan for the years ended December 31, 1995 and 1996:
Weighted
Number Averge
of Exercise
shares Price
Outstanding -
at December
31, 1994
Granted 40,000 $6.00
Exercised -
Forfeited -
Outstanding 40,000 6.00
at December
31, 1995
Granted 120,250 6.00
Exercised -
Forfeited -
Outstanding 160,250 $6.00
at December
31, 1996
Options exercisable 146,917 $6.00
at December
31, 1996
<PAGE>
The Company has adopted the disclosure only provisions of SFAS No. 123 (see
Note 1) and is continuing to recognize compensation expense using the intrinsic
value method under APB No. 25. Had compensation expense for the Company's stock
options been recognized based on the fair market value at the grant date for
awards in 1995 and 1996, as determined consistent with the provisions of SFAS
No. 123, the Company's net income (loss) and net income (loss) per share would
have been as follows:
1996 1995
Net Income (Loss) as reported $ (5,224) $718
Net Income (Loss) pro forma $ (5,625) 678
Net Income (Loss) as reported
per Share: $ (2.09) $ .33
Net Income (Loss) pro forma
per Share: (2.25) $ .31
This pro forma impact only takes into account options granted since January
1, 1995. The SFAS No. 123 fair value of each option granted was estimated on the
date of grant using a number of factors that resulted in a net value of
approximately 50% of the stock price on the grant date.
9. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Mr. Lois and Mr.
Veru to serve as Co-Chairman of the Board/Chief Executive Officer and
Co-Chairman of the Board/President/Chief Operating Officer/ Secretary,
respectively. Each of the employment agreements, as amended in January 1996,
expires on December 31, 2000 and provides for an option to renew the employment
agreement for an additional five years at the discretion of the Board of
Directors. Each employment agreement provides that upon termination of the
agreement, other than for cause, the Company will enter into a consulting
arrangement with Mr. Lois and Mr. Veru, as applicable, for a period of five
years, pursuant to which each of Mr. Lois and Mr. Veru, for specific services to
be rendered, would be paid 50% of his previous base salary. As compensation for
services rendered under their employment agreements, Mr. Lois was paid an annual
base salary of $295,000 and $325,000 for 1995 and 1996, respectively, and Mr.
Veru was paid an annual base salary of $275,000 and $325,000 for 1995 and 1996,
respectively.
On January 1, 1995 Lois/USA Chicago entered into an employment agreement
with Edwin Holzer to serve as Managing Director. This agreement was amended
March 1, 1996 to extend the expiration of this agreement to December 31, 1999.
Lois/USA Chicago has the right to renew the agreement for additional one-year
terms by giving Mr. Holzer written notice of its intention to renew not later
than 120 days prior to the end of the initial term or any renewal term. Under
this agreement Mr. Holzer's annual base salary was to be $275,000, for the first
three years, and $300,000, for the remaining two years. During 1996, the
Compensation Committee accelerated this schedule and Mr. Holzer received a base
salary of $300,000. In addition, Mr. Holzer received compensation in the amount
of $150,000 which was originally recorded as a prepaid and is amortized as it is
earned in three equal annual installments beginning January 1, 1995.
Compensation expense relating to this additional compensation was $50,000 in
1995 and 1996. In addition, the Company created a deferred compensation plan
only for Mr. Holzer's benefit under which payments totaling $185,686 vested in
Mr. Holzer as of December 31, 1992. Under the plan, the Company paid Mr. Holzer
$46,422 on March 31, 1993, 1994, 1995 and 1996.
On January 1, 1995 the Company entered into an employment agreement with
Robert Stewart to serve as Chief Financial Officer, Treasurer, Assistant
Secretary and Executive Vice President for a period of three years. This
agreement provides for an annual base salary of $150,000 per year. The Company
has the right to renew this agreement for additional one-year terms by giving
Mr. Stewart written notice of its intention to renew not later than 120 days
prior to the end of the initial term or any renewal term.
Effective March 1, 1994, Richard Colby entered into an employment agreement
with Lois, Colby/LA to serve as Chairman/Chief Executive Officer/Creative
Director. The employment agreement currently expires on February 28, 1999. Mr.
Colby is paid an annual base salary of $150,000 and is entitled to receive an
annual bonus of $25,000. Mr. Colby is entitled to receive certain incentive
compensation tied to net income for each year of the employment agreement. The
employment agreement includes a one-year noncompetition provision.
Concurrent with the acquisition of EJL, the Company entered into five year
employment agreements expiring February 13, 2001 with four senior executives of
EJL. Pursuant to these agreements, Mr. Laws and Mr. Coe will serve as Chairman
of Lois/EJL Los Angeles, and President and Chief Executive Officer of Lois/EJL
Los Angeles, respectively, and will each receive a base salary of $325,000 per
year. Michele de Maio will serve as President of Lois/EJL Chicago and will
receive an annual base salary of $300,000. Upon expiration of these employment
agreements, Mr. Laws, Mr. Coe, and Mr. de Maio shall enter into a five year
consulting agreements providing for payment of $100,000 per year. The Company
entered into an employment agreement with Michael Waterkotte to serve as
Executive Vice President and Creative Director of Lois/EJL Chicago for an annual
base salary of $215,000. At the discretion of the Board of Directors, this
agreement may be extended for an additional agreed upon period if the Board
notifies Mr. Waterkotte within 60 days of the expiration of the initial term or
any renewal term.
LEASES
The Company has entered into noncancellable operating leases for office
space in New York, Chicago, Houston and Los Angeles. The following are the
future minimum annual rental payments under those leases (000's omitted):
1997 $3,250
1998 2,686
1999 2,660
2000 2,604
2001 1,477
Thereafter 7,066
$19,743
In connection with the acquisition of EJL (see Note 3) the Company
recognized an acquisition date liability for excess space in Los Angeles and
Chicago (net of anticipated sub-lease income) and for the excess of the lease
cost for the Los Angeles lease over current fair market value. This reserve is
included on the accompanying consolidated balance sheets as lease related
reserves.
DEFINED CONTRIBUTION PLANS
The Company is the sponsor of a 401(k) Profit Sharing Plan for employees,
who were not associated with the EJL acquisition, which provides for deferred
contributions by plan participants. The Company may at its discretion make
contributions that match in whole or part the participants' contributions. To
date no Company contributions have been made under this plan. In connection with
the EJL acquisition, discussed in Note 3, the Company also sponsors a 401(k)
Defined Contribution Plan for former EJL employees which provides for deferred
contributions by plan participants. The Company will match 25% of the employee
contributions. This employer contribution which vests over a six year period was
$98,737 in 1996.
ISSUANCE OF ADDITIONAL SHARES OF STOCK
The Company has the ability to issue shares of common stock from time to
time without stockholder approval and may elect to issue additional shares in
one or more public or private offerings. The Company's Certificate of
Incorporation also authorizes the Board of Directors to issue "blank check"
preferred stock from time to time in one or more series, without stockholder
approval. The issuance of such preferred stock could adversely affect the voting
power, dividend rights and other rights of holders of the common stock.
It is management's belief that it is unlikely the Company will declare any
dividends in the near future.
10. INCOME TAXES
The Company, organized under the laws of Delaware, is subject to state and
local taxes where it does business. The Company files a consolidated federal
income tax return with its subsidiaries and is able to offset income and losses
of the consolidated group to reduce federal taxable income. The individual
subsidiaries, however, are subject to state and local taxes based on their
respective incomes and minimum franchise taxes.
The components of provision for income taxes for the years ended December
31, 1995 and 1996 are as follows (000's omitted):
1995 1996
Current:
Federal $ - $ -
State and local 89 231
Total current 89 231
Deferred:
Federal 256 -
State and local 45 76
Total deferred 301 76
Total $ 390 $ 307
The current provision for 1995 includes the effect of the utilization of
the Company's existing net operating loss carryforwards ("NOLs") to reduce taxes
currently payable by approximately $250,000. The future benefit of those NOLs
had previously been recorded, for financial reporting purposes, as a component
of the Company's deferred tax asset, and the 1995 deferred provision reflects
the elimination of that future benefit asset as the result of the current
utilization.
<PAGE>
The net deferred tax asset as of December 31, 1995 and 1996 consists of the
following amounts (000's omitted):
1995 1996
Net operating loss carryforwards $ 322 $ 1,900
Deferred compensation 20 -
Bad debt reserve - 337
Lease related reserves - 2,528
Severance accruals - 62
Valuation allowance (266) (4,827)
Deferred tax asset $ 76 $ -
The valuation allowance was increased in 1996, to fully reserve the
deferred tax assets, reflecting management's belief that the 1996 operating
losses and other factors made future realization of those assets not
sufficiently assured. Certain additions to the deferred tax assets, and the
valuation reserve, resulted from differences between the financial reporting and
income tax bases of the assets acquired and liabilities assumed in the
acquisition of EJL, and were recorded at the time of the acquisition.
Reconciliation of the differences between income taxes computed at the
federal statutory rate and consolidated/combined provisions for income taxes are
as follows (000's omitted):
1995 1996
Income taxes computed at federal $ 377 $(1,672)
statutory rate of 34%
State taxes, net of federal benefit 89 231
Non-deductible goodwill amortization - 387
Non-deductible costs 40 50
Adjustments of prior year accruals and - -
other, including changes in the (116) 1,311
valuation allowance
Provision for income taxes $ 390 $ 307
11. SUBSEQUENT EVENTS
In May 1997, the Company privately offered and sold 2,160 shares of 10%
Series A Convertible Preferred Stock (the "Series A Preferred Stock") at $1,000
per share. Net proceeds to the Company, after the payment of placement agent
fees and offering costs, were approximately $2 million.
The Series A Preferred Stock is convertible, by the holders, into shares of
the Company's common stock, at a conversion price of $6.50 per share beginning
September 16, 1997. The Company is required to redeem the Series A Preferred
Stock, if not earlier converted or redeemed, for $1,000 per share on May 19,
2002.
Dividends on the Series A Preferred Stock are payable quarterly at a rate
of $25 per share. Holders were given the right to elect to receive the first
four dividend payments in the form of shares of the Company's common stock,
valued at $6.50 per share, and the holders of 1,375 shares of the Series A
Preferred Stock have so elected. Thereafter, all dividends are payable in cash.
In May 1997, the Company obtained a replacement line of credit from Chase
Manhattan Bank. See Note 6.
In May 1997, the Company and the former stockholders of EJL agreed to
revisions to the terms of the Company's acquisition of EJL. See Note 3.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
LOIS/USA INC.
By: /S/ THEODORE D. VERU
Theodore D. Veru
Co-Chairman of the Board,
Co-Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
SIGNATURE Title Date
/S/ GEORGE LOIS Co-Chairman of the Board, June __, 1997
George Lois Co-Chief Executive Officer and
Director
/S/ THEDORE D. VERU Co-Chairman of the Board, June __, 1997
Theodore D. Veru Co-Chief Executive Officer
President, and Director
/S/ ROBERT K. STEWART Executive Vice President, June __, 1997
Robert K. Stewart Chief Financial Officer,
Robert K. Stewart Treasurer and Secretary
(Principal Financial Officer
and Principal Accounting
Officer)
/S/ DENNIS COE Executive Vice President, June __, 1997
Dennis Coe Director
/S/ JOHN N. HATSOPOULOS Director June __, 1997
John N. Hatsopoulos
/S/ DAVID DEBUSSCHERE Director June __, 1997
David DeBusschere
/S/ DENNISON T. VERU Director June __, 1997
Dennison T. Veru
<PAGE>
EXHIBIT INDEX
The following exhibits, unless otherwise indicated, were filed as part of
the Company's Registration Statement on Form SB-2 (33-83894-NY) declared
effective by the Commission on December 29, 1994 and herein incorporated by
reference.
*2.1 Stock Purchase Agreement dated as of February 12,
1996, by and among the shareholder of Eisaman, Johns &
Laws Advertising, Inc. and Lois/USA Inc.
3.1 Form of Amended and Restated Certificate of Incorporation
of Lois/USA to be filed with the Delaware Secretary of
State.
3.2 Form of Amended and Restated By-Laws of Lois/USA.
+9.1 Shareholders' Agreement dated as of February 14, 1996,
by and among each of Dennis Coe, Dean Laws, Michele de
Maio and Michael Watterkotte, selling shareholders of
Eisaman, Johns & Laws Advertising, Inc. and Theodore Veru
and George Lois, shareholders of the Company.
10.1 Form of Employment Agreement between Lois/USA and
George Lois.
10.2 Form of Employment Agreement between Lois/USA and
Theodore D. Veru.
10.3 Form of Employment Agreement between Lois/USA and
Edwin Holzer.
10.4 Employment Agreement dated as of March 1, 1994 between
Lois/USA and Richard Colby.
10.5 Note and Warrant Purchase Agreement dated December 10,
1991 between Lois/USA and Trigger Associates, L.P.
10.7 Form of Stock Option Plan for Executive Officers.
10.8 Form of Non-qualified Stock Option Plan for
Non-Employee Directors.
10.10 Agreement dated December 18, 1991 between Sands
Brothers and the Company.
10.11 Warrants issued to Trigger Associates.
10.12 Warrants issued to Sands Brothers.
10.13 Promissory Note dated December 18, 1991 issued to
Trigger Associates.
10.14 Pledge and Security Agreement dated as of December 18,
1991 among the Company, Lois/GGK Inc., Lois/GGK Chicago,
Inc., Lois/GGK New York, Inc. and Trigger.
10.15 Lease for Lois/USA New York, Inc.
10.16 Lease for Lois/USA Chicago, Inc.
10.17 Lease for Lois/USA West, Inc.
10.18 Letter to Edwin Holzer regarding the senior management
incentive plan for Edwin Holzer.
10.19 Letter dated July 22, 1993 to the Company from the
XNBA.
10.20 Employment Agreement dated December 18, 1991, between
the Company and George Lois.
10.21 Employment Agreement dated December 18, 1991, between
the Company and Theodore D. Veru.
10.22 Draft of Commitment Letter from Chemical Bank for the
Reducing Revolving Credit Agreement dated December 12,
1994.
10.23 Draft of Letter from Chemical Bank increasing line of
credit from $1 million to $2 million.
10.24 Letter Agreement dated December 9, 1994 among Lois/USA, Sands
Brothers and Trigger Associates.
10.25 Executed Credit Agreement for the Reducing Revolving
Credit Agreement.
**16.0 Letter on change in certifying accountant.
21.1 List of subsidiaries.
H23.1 Consent of Independent Public Accountants.
- -----------------------
* Incorporated by reference herein from the Company's Amended Current
Report on Form 8-K 1A, dated as of February 12, 1996.
** Incorporated by reference herein from the Company's Current Report on
Form 8- K, dated March 8, 1995.
+ Filed with the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995.
H Filed concurrently with this report.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SECHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31 1996, CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
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0
0
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