AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1998
REGISTRATION STATEMENT NO. 333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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LOIS/USA INC.
(Name Of Small Business Issuer In Its Charter)
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Delaware 7311 13-3441962
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification Number)
of Incorporation or Classification Code
Organization) Number)
40 West 57th Street
New York, New York 10019
(212) 373-4700
(Address and Telephone Number of Principal Executive Offices)
(Address of Principal Place of Business or Intended Principal Place of
Business)
-----------------------------------
THEODORE VERU
CO-CHAIRMAN OF THE BOARD
LOIS/USA INC.
40 WEST 57TH STREET
NEW YORK, NEW YORK 10019
(212) 373-4700
(Name, Address and Telephone Number of Agent for Service)
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COPY TO:
JAMES R. TANENBAUM, ESQ.
STROOCK & STROOCK & LAVAN LLP
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4982
(212) 806-5400
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
Proposed Maximum Proposed Maximum
TITLE OF EACH CLASS OF Amount to Offering Aggregate Amount of
SECURITIES TO BE REGISTERED be Registered(1) Registered(1) Offering Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 332,714 shares $9.0625 shares $2,994,426 $883.36
=======================================================================================================================
(1) Represents the number of shares of Common Stock initially issuable upon
exercise of the Series A Convertible Preferred Stock, and dividends payable
in shares of the Company's Common Stock. This Registration Statement also
includes such indeterminable number of additional securities which may be
issued as a result of the fluctuation of the conversion price.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) based on the last reported trade as published by the
National Quotations Bureau on January 22, 1998.
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</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL , 1998
PROSPECTUS
LOIS/USA INC.
332,714 SHARES OF COMMON STOCK
This Prospectus is being used in connection with the offering (the
"Offering") from time to time of up to 332,714 shares of common stock, $0.01 par
value per share (the "Common Stock"), of Lois/USA Inc., a Delaware corporation
(the "Company"), by certain stockholders of the Company identified herein (the
"Selling Stockholders"). The shares of Common Stock will be issued to the
Selling Stockholders upon conversion of their Convertible Preferred Stock (as
hereinafter defined). See "Selling Stockholders."
The shares of Common Stock may be offered by the Selling Stockholders from
time to time on terms to be determined at the time of sale, in transactions in
the over-the-counter market, in negotiated transactions, or by a combination of
these methods, at fixed prices that may be changed, at market prices prevailing
at the time of the sale, at prices related to such market prices or at
negotiated prices. The Selling Stockholders may effect such transactions by
selling the shares of Common Stock to or through securities broker-dealers or
other agents, and such broker-dealers or other agents may receive compensation
in the form of discounts, concessions or commissions from the Selling
Stockholders and/or the purchasers of the Common Stock for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). Additionally, agents or dealers may acquire Common Stock
or interests therein as a pledgee and may, from time to time, effect
distributions of the Common Stock or interests in such capacity. See "Selling
Stockholders" and "Plan of Distribution." The Selling Stockholders and any
brokers, dealers or agents through whom sales of the Common Stock are made may
be deemed "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), and any profits realized by them on the sale of
the Common Stock may be considered to be underwriting compensation.
The Company is not selling any of the shares of Common Stock offered hereby
and will not receive any of the proceeds from sales of Common Stock by the
Selling Stockholders. The Company has agreed to bear all of the expenses in
connection with the registration and sale of the shares offered hereby by the
Selling Stockholders (other than underwriting discounts and selling
commissions).
Information concerning the Selling Stockholders may change from time to
time and will be set forth in supplements to this Prospectus.
SEE "RISK FACTORS" ON PAGES 5 TO 9 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------------------
The Company's Common Stock is included in the NASD over-the-counter
Bulletin Board (the "OTC Bulletin Board") under the symbol "LSUS." The last
reported trade, as reported on the "pink sheets" as published by the National
Quotations Bureau, on January 22, 1998 was at $9.0625 per share.
--------------------
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, registration statements, and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W. Room 1024, Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Northeast Regional Office, Seven
World Trade Center, Suite 1300, New York, New York 10048; and Midwest Regional
Office, Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661. Copies of such reports and other information may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, on payment of prescribed charges. In addition, such reports and
other information may be electronically accessed at the Commission's site on the
World Wide Web located at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
SB-2, of which this Prospectus forms a part (together with any amendments and
exhibits thereto, the "Registration Statement"), under the Securities Act in
respect of the shares of Common Stock offered hereunder. This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. Such additional information may be obtained from the public
reference room of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. Statements contained in this Prospectus or in any document incorporated
by reference herein or therein by reference are not necessarily complete, and in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement or such other document, each
such statement being qualified in all respects by such reference.
The Company will provide without charge to each prospective investor to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person, a copy of all of the documents which have been or may be
referred to in this Prospectus as well as copies of any other reports,
registration statements, proxy statements or other information filed by the
Company with the Commission. Requests for such copies should be directed to: 40
West 57th Street, New York, New York 10019, Attn.: Chief Operating Officer.
FORWARD LOOKING STATEMENTS
The matters discussed in this Prospectus under "Risk Factors," in addition
to certain statements contained elsewhere in this Prospectus or in the company's
filings under the Exchange Act, are "Forward-Looking Statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and are thus
prospective. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual future results or
trends to differ materially from future results or trends expressed or implied
by such forward-looking statements. The most significant of such risks,
uncertainties and other factors are discussed in this Prospectus under "Risk
Factors" and prospective investors are urged to carefully consider such factors.
Updated information will be periodically provided by the Company as required by
the Securities Act and the Exchange Act. The Company, however, undertakes no
obligation to publicly release the results of any revisions to such
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. CAPITALIZED TERMS USED BUT
NOT DEFINED IN THIS SUMMARY SHALL HAVE THE MEANINGS SET FORTH IN THIS
PROSPECTUS. THE TRANSACTION CONTEMPLATED HEREIN INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
THE COMPANY
Lois/USA Inc. (the "Company") is a full service advertising and marketing
communications company operating on a national basis through advertising
agencies located in Austin, Chicago, Dallas, Detroit, Houston, Los Angeles, New
York and Salt Lake City. Through 1995, the Company operated principally in New
York, through its Lois/USA New York, Inc. 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 ("Lois/Colby"), which was
owned by Lois/USA West, Inc. ("West"), a wholly owned subsidiary of the Company.
In 1996, the Company expanded its operations through the acquisition of Eisaman,
Johns, and Laws Advertising, Inc. ("EJL"), a full-service advertising agency
with offices in Chicago, Detroit, Houston and Los Angeles. 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 alliances. On December 31, 1997, the Company added a significant
southwestern United States presence through the acquisition of Fogarty & Klein,
Inc. ("F&K"), an advertising agency with offices in Austin, Dallas and Houston.
F&K will operate as an independent agency within the Company's network.
In addition to pursuing its strategy of expanding its operations through
acquisitions in 1997, the Company continued the cost and operating revisions
initiated in 1996 with EJL when it acquired that agency. As a result of these
measures, the Company's operating results improved in 1997, to an operating loss
of $816,000 compared to an operating loss of $4,598,000 in 1996. The Company
initiated additional cost reduction measures in the last quarter of 1997 and
plans further initiatives in 1998.
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 George Lois and Theodore Veru,
the Company's Co-Chairman, Co-Chief Executive Officer and President, established
the goal of building the Company into a national, full-service communications
company with broad-based management and creative capabilities. In late 1987, the
Company acquired the personnel, assets and accounts of the Chicago office of
Grey Advertising, Inc. and subsequently changed the name of that 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 it 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 services 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 the Company 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.
RISK FACTORS
In considering the proposed offering, prospective investors should consider
the risks associated therewith. See "Risk Factors."
SUMMARY FINANCIAL INFORMATION
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Selected Financial Information," and the Consolidated Financial Statements of
Lois/USA Inc. and related notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993 1994 1995 1996 1997
(in thousands except for per share amounts)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Commissions and Fees............................... $12,680 $15,048 $16,035 $23,067 $28,284
Operating Income................................... 536 1,446 1,302 (4,598) (816)
Income (Loss) Before Provision For Income Taxes.... (278) 773 1,108 (4,917) (1,384)
Provision (Benefit) For Income Tax................. 42 241 390 307 (3)
Net Income (Loss).................................. $(320) $532 $718 $(5,224) $(1,381)
Net Income (Loss) Per Common Share................. $(.18) $.30 $.33 $(2.09) $ (.57)
Shares Used In Earnings Per Share Calculations(1).. 1,775,000 1,775,000 2,175,000 2,496,928 2,439,259
</TABLE>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1997
Total Current Assets............. $24,527 $43,215
Total Current Liabilities........ 38,848 61,553
Total Assets..................... 43,996 70,262
Total Liabilities................ 49,891 75,657
Redeemable Warrants.............. ----- ----
Stockholders' Equity (Deficit)... (5,895) (7,555)
Working Capital (Deficit)........ (14,321) (18,338)
- -----------
(1) Adjusted to reflect a 23.67-for-1 stock split effected immediately prior to
the date of the Company's Public Offering (as defined).
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN EVALUATING THE
BUSINESS OF THE COMPANY AND AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
CHALLENGES OF BUSINESS INTEGRATION
The full benefits of the business combination with EJL and the more recent
F&K acquisition, which require the integration of administrative, finance, sales
and marketing organizations, the coordination of sales efforts and the
implementation of appropriate operational, financial and management systems and
controls have not yet been fully realized. Substantial attention from the senior
management team of the Company, which has limited experience integrating
operations the size of the businesses it has acquired, is still necessary. The
diversion of management attention, as well as any other difficulties which may
be encountered in the transition and integration process, could have an adverse
impact on the revenues and operating results of the Company. In addition, if the
contemplated organizational changes are not properly managed, there could be an
adverse effect on the Company's results of operations. There can be no assurance
that the Company will be able to fully integrate the operations of its acquired
businesses successfully. The Company recently reached a settlement with certain
EJL stockholders in connection with a purchase price adjustment for the earn-out
amounts to be paid in respect of the transaction. See "Business-Legal
Proceedings."
DEPENDENCE ON KEY OFFICERS
Historically, the Company has been heavily dependent on the services and
reputation of George Lois, its Co-Chairman and Co-Chief Executive Officer. The
Company also depends on the services of Theodore Veru, the Company's
Co-Chairman, Co-Chief Executive Officer and President, and Mike de Maio, the
Company's Executive Vice President and Chief Operating Officer. Both Messrs.
Lois and Veru are employed pursuant to employment contracts which expire on
December 31, 1999 and Mr. De Maio is employed pursuant to an employment contract
which expires on January 31, 2001, unless renewed by the parties. The loss of
the services of any of these officers for any reason would be likely to
adversely affect the future operations of the Company, and there can be no
assurance that an appropriate replacement for any such officer could be engaged
on terms satisfactory to the Company. In the event of such a loss, unless a
satisfactory replacement could be engaged, it would be difficult for the Company
to continue its operations as presently conducted. The Company will continue to
hold $2,000,000 and $1,000,000 key man life insurance policies on the lives of
Messrs. Lois and Veru, respectively; such policies having been assigned as
security for the Company's indebtedness under its credit facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation-Liquidity and Capital Resources" and "Management."
NATURE OF THE ADVERTISING INDUSTRY
The advertising industry is, by its nature, subject to various risks,
particularly in economic downturns. The success of an advertising agency, such
as the Company, may be generally affected by many factors that are beyond its
control, including economic conditions in the United States and internationally
which may influence advertising budgets of an agency's clients, the loss of
creative staff and other skilled personnel to competitors and the loss of
clients. Generally, the life cycle of an advertising agency may be relatively
short compared to other businesses. In addition, the most important asset of an
advertising agency is its creative staff and other personnel. While it is
believed that the Company will continue to provide its personnel with
competitive salaries and challenging work, there can be no assurance that the
Company will be able to retain such personnel.
CLIENT TURNOVER; DEVELOPMENT OF NEW CLIENTS
The success of an advertising agency depends on its continuing ability to
attract and retain clients. An advertising agency's clients generally can
terminate their accounts on short notice, typically 90 days. For the years ended
December 31, 1996 and 1997, the Company had one client which accounted for 11%
and 16%, respectively, of the Company's revenues. No other client represented
more than 10% of the Company's total consolidated commissions and fees in 1996
or 1997. For the year ended December 31, 1995, the Company's two largest clients
accounted for 13% and 12%, respectively, of the Company's revenues. The loss of
this client or any one or more of the Company's other significant clients, if
not replaced by new client accounts or an increase in business from existing
clients, could have an adverse effect on the Company's operations. There can be
no assurance that the Company will be able to expand other existing client
accounts or add new client accounts to replace lost client accounts. There can
be no assurance that the Company will be able to gain new accounts as it
attempts to expand its business nor can there be any assurance that the Company
will be able to retain existing clients of EJL, F&K or any other agency that the
Company may acquire. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OUTSTANDING INDEBTEDNESS
In order to repay indebtedness evidenced by a subordinated note in the
amount of $3.2 million, issued to Trigger Associates, L.P. in connection with
the purchase by the Company of an investor's 80% equity interest in one of the
Company's subsidiaries (the "Subordinated Note"), the Company obtained a $2
million reducing revolving credit facility under a credit agreement (the
"Reducing Revolving Credit Agreement") with Chase Manhattan Bank ("Chase"). The
Company initially borrowed $2 million under the Reducing Revolving Credit
Agreement which it used, along with proceeds from its public offering of 300,000
shares of its Common Stock consummated on January 3, 1995 (the "Public
Offering"), to repay the Subordinated Note in full. In connection with the
acquisition of EJL, Lois entered into an Amended and Restated Credit Facility
(the "Amended and Restated Credit Facility") with Chase for a total of
$3,833,000, on essentially similar terms as the prior Reducing Revolving Credit
Agreement. The Amended and Restated Credit Facility was terminated in October
1997. The Company also had a $2 million revolving line of credit with Chase,
secured under the same agreements as the Reducing Revolving Credit Agreement.
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 prepaid 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 prime rate and expires in
June 1998.
In October 1997, the Company entered into a revolving credit facility with
Sanwa Business Credit Corporation ("Sanwa") which provides for borrowings up to
$25 million based on a specified percentage of eligible accounts receivable. The
Sanwa credit facility has a term of three years, with borrowings bearing
interest at 2.5% above the LIBOR rate. Borrowings are secured by essentially all
of the assets of the Company, including the common shares and assets of the
Company's subsidiaries. Upon the execution of the new facility, the Company
initially borrowed $2.5 million, which was used to repay amounts outstanding
under the Reducing Revolving Credit Facility, which was terminated. The $2.5
million initially borrowed under the Sanwa facility was subsequently repaid. As
of December 31, 1997, borrowings of $4,642,000 were outstanding under the Sanwa
facility and additional borrowings of $5,358,000 were available. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
ACQUISITION STRATEGY
A principal element of the Company's business strategy will be to continue
to expand through the creation or acquisition of agencies in new markets as well
as in markets already served by the Company. There can be no assurance, however,
that suitable acquisition candidates will be available, that financing for such
acquisitions will be obtainable on terms acceptable to the Company, that
additional acquisitions can be consummated, or that acquired agencies can be
integrated successfully and profitably into the Company's operations.
COMPETITION
The advertising industry and other marketing communications businesses are
highly competitive. The Company competes with other agencies and related service
businesses to maintain existing client relationships and to attract new clients.
Competition in the advertising industry depends to a large extent on the
client's perception of the quality of an agency's "creative product." As the
Company expands its operations it will have to compete more frequently against
larger advertising agencies. These larger agencies generally have substantially
greater financial resources, personnel and facilities than the Company and many
of them are diversified, multi-national corporations. Although the Company
believes it will be able to compete on the basis of the quality of its creative
product, service, personal relationships with clients and reputation, there can
be no assurance that the Company will be able to maintain its competitive
position in the industry as it endeavors to expand its operations.
IMPORTANCE OF ATTRACTING AND RETAINING QUALIFIED EMPLOYEES
The Company will pursue a program to expand its operations through the
acquisition or creation of additional advertising agencies. In order to
accomplish this program and otherwise expand its operations, the Company will
need to attract and retain qualified additional personnel at all levels of
operations who are capable of maintaining the same level of creativity, service
and quality control the Company currently offers its clients. There can be no
assurance that the Company will be able to attract or retain such additional
personnel.
CONTROL BY EXISTING STOCKHOLDERS
Mr. Lois and Mr. Veru collectively own 1,660,413 shares of Common Stock or
68.1% of the 2,439,861 shares of Common Stock outstanding. Since the Common
Stock does not have cumulative voting rights, Messrs. Lois and Veru will
continue to be in a position to elect a majority of the directors of the Company
and to control the outcome of all matters submitted to a vote of the Company's
stockholders.
FINANCING; FUTURE CAPITAL NEEDS
The Company may raise additional capital through the sale of equity. The
Company's business strategy will require the availability of substantial funds
to finance the continued development of its operations, including possible
acquisitions. The amount of capital required will depend on a number of factors,
including technological developments, marketing and sales expenses, competitive
conditions and acquisition strategy.
GOVERNMENT REGULATION; CLAIMS
The advertising industry is subject to extensive government regulation,
both domestic and foreign, with respect to the truth and fairness of
advertising. In addition, there has been an increasing tendency in the United
States on the part of businesses to resort to the courts to challenge
comparative advertising of their competitors on the grounds that the advertising
is false and deceptive. Although the Company will maintain errors and omissions
insurance with coverage of up to $15 million for any claim, there can be no
assurance that such coverage would adequately protect it in the event any such
claims are made against the Company or its clients by other companies or
governmental agencies. Some of the contracts that the Company will enter into
with its clients will require that the Company indemnify clients with respect to
any claims or actions brought by third parties which result from the use by the
client of materials furnished by the Company.
ABSENCE OF PUBLIC MARKET
An active trading market for the Common Stock does not exist. If an active
trading market does not develop for the Common Stock, investors have no
assurance of liquidity of their shares of Common Stock and investors may find it
extremely difficult to sell their Common Stock.
ABSENCE OF CASH DIVIDENDS
The revolving credit facility with Sanwa prohibits the Borrowers (as
defined therein) thereunder from paying dividends on their Common Stock. This
agreement specifically allows the Borrowers to make cash payments to the Company
in an amount not to exceed $216,000 in any fiscal year with respect to the
dividends payable on the Preferred Stock. The payments allowed under the
preceding sentence are permitted so long as no Default or Event of Default
(each, as defined therein) shall have occurred and be continuing (or will result
therefrom).
ABILITY OF THE COMPANY TO ISSUE ADDITIONAL SHARES OF COMMON STOCK
The Company has the ability to issue shares of Common Stock from time to
time without stockholder approval. The Company intends to raise additional
capital in one or more public or private equity offerings in the future. There
can be no assurance that the Company will be able to complete any such equity
offering. The Company has a total of 17 million shares of Common Stock
authorized but unissued.
<PAGE>
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock being offered and sold
for the accounts of the Selling Stockholders. The Company will not receive any
of the proceeds from the sale of the 332,714 shares of Common Stock offered by
the Selling Stockholders hereby. The Company will pay for certain expenses
related to the registration of the shares of Common Stock. See "Selling
Stockholders" and "Plan of Distribution."
MARKET INFORMATION
The Common Stock has been traded since January 3, 1995 on the NASD OTC
Bulletin Board under the symbol "LSUS." Currently, Cantor Fitzgerald is the only
market maker for the Common Stock. The last reported trade, as reported on the
"pink sheets" as published by the National Quotations Bureau, on January 22,
1998 was at $9.0625 per share. No assurance can be given as to the market price
of the Common Stock at any time hereafter.
As of March 16, 1998, there were approximately 50 holders of the Company's
Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Common Stock.
It is not expected that the Company will declare or pay cash dividends in the
foreseeable future. Moreover, the Company expects that the payment of future
dividends will be restricted or prohibited under the terms of the credit
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources."
<PAGE>
SELECTED FINANCIAL INFORMATION
THE FOLLOWING SELECTED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY HAS
BEEN DERIVED FROM ITS HISTORICAL FINANCIAL STATEMENTS AND SHOULD BE READ IN
CONJUNCTION WITH SUCH CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO
INCLUDED HEREIN.
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands except per share amounts)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Commissions and Fees....................... $ 12,680 $15,048 $ 16,035 $23,067 $28,284
Total Operating Expenses................... 12,144 13,602 14,733 27,665 29,100
---------------------------------------------------------------------
Operating Income........................... 536 1,446 1,302 (4,598) (816)
Interest Expense (Income)-Net.............. 326 307 138 232 170
Other Non-Operating Expenses............... 488 366 56 87 398
---------------------------------------------------------------------
Income (Loss) Before Provision For
Income Taxes............................. (278) 773 1,108 (4,917) (1,384)
Provision For Income Taxes-Current......... 42 241 390 307 (3)
---------------------------------------------------------------------
Net Income (Loss).......................... $ (320) $ 532 $ 718 $ (5,224) (1,381)
========= =========== =========== ========== =======
Net Income (Loss) Per Common Share......... $(.18) $.30 $ .33 $ (2.09) $ (.57)
Shares Used In Earnings Per Share
Calculations(1).......................... 1,775,000 1,775,000 2,175,000 2,496,928 2,439,259
</TABLE>
At December At December
31, 1996 31, 1997
BALANCE SHEET DATA:
Total Current Assets............. $24,527 $43,215
Total Current Liablities......... 38,848 61,553
Total Assets..................... 43,996 70,262
Total Liabilities................ 49,891 75,657
Redeemable Warrants.............. --- ----
Stockholders' Equity (Deficit)... (5,895) (7,555)
Working Capital (Deficit)........ (14,321) (18,338)
- -----------
(1) Adjusted to reflect a 23.67-for-1 stock split effected immediately prior to
the date of the Company's Public Offering.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING IS A DISCUSSION OF THE CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY FOR THE THREE YEARS ENDED DECEMBER 31,
1997, 1996 AND 1995. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH
THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS, THE NOTES THERETO AND THE OTHER
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS.
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 1997 increased by 6.7% over the
1996 level. The 1997 increase comes after increases of 7.6% in 1996 and 7.7% in
1995. The 1997 increase in United States advertising expenditures was greater
than the general rate of economic growth, indicating increased emphasis on
advertising. However, there can be no assurance that the economy, or advertising
expenditures, will continue to grow at similar rates, or at all.
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 a 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 90 clients. In 1997 and 1996, the
Company's largest client represented 16% and 11% of the Company's consolidated
commissions and fees, respectively. During 1995, two clients represented 13% and
12%, respectively, of the Company's consolidated fees and commissions. See
"Business-Clients" herein.
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 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." Prior to 1995, the
Company's growth had been constrained by the need to pay interest on its $3.2
million Subordinated Note. Concurrent with the 1995 public offering, the Company
secured from Chase Bank a new three-year reducing revolving credit facility, and
an increase in its line of credit. The $1,363,000 net proceeds of the Company's
1995 public offering, together with the newly available bank borrowings were
used to repay the Subordinated Note, which reduced the Company's debt service
burden and allowed management to begin to take steps to implement the Company's
expansion strategy.
In 1997, the Company obtained approximately $2.2 million of additional
capital through the private placement of shares of Series A Convertible
Preferred Stock. The additional capital was used to offset the working capital
absorbed by the Company's 1996 net loss. In October 1997, the Company replaced
the Chase borrowings with a new revolving credit facility from Sanwa, which
provides for borrowings up to $25 million based on a specific percentage of
accounts receivable. The additional capital available under the agreement with
Sanwa will allow the Company to pursue its acquisition growth strategy.
In February 1996, the Company acquired EJL, an advertising agency with
offices in Chicago, Detroit, Houston and Los Angeles. Cost savings from the
combination of the EJL agencies were implemented, 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 the
closing of EJL's Houston office due to the loss of a significant client, and
salary expenses related to excess staffing.
The Company experienced a significant net loss in 1996, in part due to the
charges related to the EJL acquisition. In 1997, the Company continued the cost
and operating revisions at EJL initiated in connection with the 1996
acquisition. As a result of these measures, the Company's operating results
improved in 1997, to an operating loss of $816,000 compared to an operating loss
of $4,598,000 in 1996. The Company was profitable during the first half of 1997,
and net loss for the year results principally from losses in the Company's
EJL/Los Angeles operation, and to a lesser extent, fourth quarter declines in
revenues elsewhere. The Company initiated additional cost reduction measures in
Los Angeles during the last quarter of 1997, and plans further initiatives in
1998.
On December 31, 1997, the Company acquired F&K for a total purchase price
of $10.8 million. The purchase price includes an initial cash payment of $3.5
million, the issuance of 50,000 shares of the Company's Common Stock and
warrants to purchase an additional 39,000 shares of the Company's Common Stock,
obligations to issue on each of December 31, 1998, 1999 and 2000 an aggregate of
100,000 additional warrants to purchase shares of the Company's Common Stock and
cash payments totaling $5.5 million, subject to adjustment, and a portion of the
salaries to be paid to the three senior officers of F&K over the next five years
under employment contracts entered into in connection with the acquisition. See
"Business-Acquisition of Fogarty & Klein, Inc." and Note 2 of Notes to
Consolidated Financial Statements. The acquisition of F&K was accounted for as a
purchase, consisting of cash payments, delivery of additional shares
of Common Stock and warrants to purchase additional shares of Common Stock, and
through employment agreements recorded at their present value (the "Deferred
Purchase Price"). Additional cash payments are to made on December 31, 1998,
1999 and 2000 and warrants to purchase additional shars of Common Stock will be
issued on December 31, 1998 and 1999. As a result, the assets and liabilities of
F&K are included in the consolidated balance sheet as of December 31, 1997, but
its results of operations are not included in the statement of operations for
1997. The recording of the acquisition of F&K on December 31, 1997 causes the
consolidated balance sheet as of the end of 1997 to lack comparability to the
consolidated balance sheet as of December 31, 1996 and to the results of
operations and cash flows for 1997.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
The Company incurred a net loss of $1,381,000 for the year ended 1997
compared to a loss of $5,224,000 for the prior year. The improvement in earnings
was primarily the result of increased fees and commissions from new and existing
clients, as well as the result of its cost consolidation efforts from the
acquisition of EJL.
Revenues from commissions and fees increased $5,217,000, or 22.6%, to
$28,284,000 in 1997 from revenues of $23,067,000 for 1996. Consolidated revenues
increased in each quarter in 1997 compared to 1996, except for the third
quarter, when the loss of several clients in the Company's Los Angeles office
caused revenues to decline compared to 1996. The overall increase in revenues
results both from assignments from new clients, including Valvoline, Turtle Wax,
Orthodontics Centers of America, Proscape Technologies and Decibel, and from
increases in advertising projects and spending by existing clients. Although
consolidated revenues increased in the fourth quarter of 1997, as compared to
1996, the Company's Los Angeles office continued to operate at a significant
loss due to continuing declines in revenues. The Company cannot predict when, or
if, the Los Angeles office will obtain new clients or assignments to replace the
lost revenues. In October 1997, the Company began staffing reductions in Los
Angeles to bring costs in line with revenues with additional reductions, and
other cost restructuring initiatives planned for 1998.
Total operating expenses increased from $27,665,000 in 1996 to $29,100,000
and represented 102.9% of revenues in 1997 compared to 119.9% of revenues in
1996. The increase of $1,435,000 was primarily in salaries and related costs,
representing a higher level of other operating expenses and staffing (primarily
in the Chicago office) needed for the maintenance of greater revenue. The
previously discussed decline in revenues in the third quarter, and slower than
anticipated revenue growth in the fourth quarter, caused operating expenses to
be above the desired levels relative to revenues. In particular, the levels of
occupancy costs (rent, etc.) and administrative expenses were higher than
supportable at the current level of revenue, and the Company is examining these
costs in relation to its revised projections of revenues and growth.
Amortization of financing costs increased to $398,000 as a result of the
write-off of the unamortized costs related to the Chase facilities, which were
charged to expense when those facilities were replaced by the Sanwa facility.
Interest expense declined from $232,000 in 1996 to $170,000 in 1997 as average
outstanding borrowings were reduced during the first six months of 1997.
The provision for income taxes decreased from $307,000 for the year ended
1996 to a benefit of $3,000. No benefit was recorded for the Company's loss in
1997. Approximately $7,000,000 of net operating loss carry forwards are
available to offset future taxable income.
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 income of $718,000 for 1995. This net loss is primarily attributable
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 revenues was principally
attributable to the inclusion of EJL's revenues from February 16, 1996. EJL's
revenues for that period were $9,251,000. In 1995, EJL earned revenues of $16.4
million during the same period; the decline in 1996 was attributable to the loss
of clients, mainly the principal client of EJL's Houston office.
Total operating expenses increased from $14.7 million in 1995 to $27.7
million in 1996, and represented 119.9% of revenues in 1996 compared to 91.9% of
revenues in 1995. 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 increases in depreciation and amortization (including
the amortization of goodwill) in 1996 totaling $1,170,000. The higher
depreciation and amortization in 1996 was a direct result of the acquisition of
EJL.
Exclusive of non-recurring 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 excess staffing levels which
existed until the acquired EJL operations were fully assimilated and cost
restructured.
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 cash needed to complete the EJL acquisition.
The provision for income taxes fell to $307,000 for the year ended 1996
compared to $390,000 for the year ended 1995. The 1996 income tax provision is
comprised of state and local taxes. No tax benefit was recorded for the
Company's loss in 1996.
LIQUIDITY AND CAPITAL RESOURCES
On January 3, 1995, the Company consummated a 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. In connection with the Company's
1995 public offering, the Company established a $2.0 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. In addition
to quarterly amortization required under the Reducing Revolving Credit
Agreement, 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.
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 Bank of the key man life
insurance policies on Mr. Lois (in an amount not less than $2.0 million) and Mr.
Veru (in an amount not less than $1.0 million).
The Company acquired EJL in February 1996. Under the Original Agreement,
the Company was 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
million. 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 a bank overdraft. In May 1997, the Company and the former owners of EJL
agreed to amend the Original 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, 1997 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.
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 Reducing Revolving Credit Agreement, as amended, the loans which
originally matured on December 31, 1997, were extended to March 31, 1999. The
February 1996 amendment required amortization payments to reduce the principal
balance outstanding and the amount available to be borrowed by approximately
$250,000 each quarter, commencing in the second quarter of 1996.
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 resulted from the Company's operations, a bank overdraft
which was used to finance a portion of the 1996 net loss and the EJL acquisition
cash payments, and increases in the short-term borrowings and lease related
accruals which resulted from the financing or recording of the EJL acquisition.
In May 1997, the Company raised additional capital of approximately $2.2
million through the private placement of 2,160 shares of Series A Convertible
Preferred Stock. The Series A Convertible Preferred Stock requires annual
dividends of $100 per share ($216,000 in the aggregate), which dividends will
reduce the net income attributable to common stock and related earnings per
share. However, the holders of 1,375 shares of the Series A Convertible
Preferred Stock have elected to receive the dividends for the first year in the
form of shares of the Company's Common Stock, valued at $6.50 per share.
Therefore, assuming no conversions, the Series A Convertible Preferred Stock
will only require cash dividends of $78,500 in 1998. The Series A Convertible
Preferred Stock may be converted into shares of the Company's Common Stock at a
conversion price of $6.50 per share.
In October 1997, the Company entered into a revolving credit facility with
Sanwa which provides for borrowings up to $25 million based on a specified
percentage of eligible accounts receivable. The Sanwa credit facility has a term
of three years, with borrowings bearing interest at 2.5% above the London
Interbank Offered Rate ("LIBOR"). Borrowings are secured by essentially all of
the assets of the Company, including the common stock and assets of the
Company's subsidiaries. Upon the execution of the new facility, the Company
initially borrowed approximately $2.5 million, which was used to repay amounts
outstanding under the Chase Bank Reducing Revolving Credit Agreement, which was
terminated. As of December 31, 1997, borrowings of $4,642,000 were outstanding
under the Sanwa facility and additional borrowings of $5,358,000 were available.
On December 31, 1997, the Company acquired all of the outstanding common
stock of F&K. The aggregate purchase price was $10.8 million. The Company made
an initial payment of $4,103,000, comprised of a cash payment of $3,500,000, and
the issuance of 50,000 shares of the Company's common stock and warrants for the
purchase of 39,000 shares of the Company's Common Stock, exercisable through
December 31, 2000 at an exercise price of $10.00 per share.
The F&K Agreement requires that the Company make additional purchase price
payments on the first, second and third anniversaries of the acquisition. On
December 31, 1998, the sellers will receive an additional cash payment of
$1,125,000, and warrants for the purchase of 50,000 shares of the Company's
common stock exercisable through December 31, 2001 at an exercise price of
$11.00 per share. On December 31, 1999, the Company is required to make a cash
payment of $1,125,000 and to issue an additional 50,000 warrants, exercisable
through December 31, 2002 at an exercise price of $12.25 per share. Finally, on
December 31, 2000, the Company must make a final cash payment of $3,250,000,
which may be increased or decreased by up to $450,000 for 15% of the difference
between $42 million and the actual commissions and fees of F&K for the three
years ending December 31, 2000, from clients existing at the time of the
acquisition. Concurrent with the acquisition of F&K, the Company entered into
certain employment contracts with the three senior officers of F&K that provide
for aggregate compensation of $4,950,000 over the next three years. See
"Executive Compensation-Employment Contracts." Of that amount, $1,200,000 has
been treated as a component of the purchase price. The Company currently
anticipates that the cash payments required at December 31, 1998, 1999 and 2000
will be funded from the Sanwa credit facility.
At December 31, 1997, the Company had a working capital deficit of
$18,338,000, reflecting an increase in the working capital deficit of $4,017,000
caused principally by $3,500,000 borrowed under the Sanwa line of credit to fund
the cash portion of the initial payment for the acquisition of F&K. Current
assets and current liabilities increased by $18.7 million and $22.7 million from
December 31, 1996 to December 31, 1997, due mostly to increases in accounts
receivable, accounts payable and accrued expenses. The increases in those
working capital items is in large part due to the inclusion of the assets and
liabilities of F&K at December 31, 1997, which accounted for $16.6 million,
$15.6 million and $2.8 million of the increases in accounts receivable, accounts
payable and accrued expenses, respectively.
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 creating an incentive for future performance.
The Company believes that cash flows from operations, together with funds
available under the Company's credit facility with Sanwa will be sufficient to
meet the Company's cash needs for its existing business and any potential
acquisitions over the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes a requirement to display the
components and total of comprehensive income in a financial statement with equal
prominence as the other financial statements included in a full set of general
purpose financial statements. Comprehensive income includes net income and items
of gain or loss that, under generally accepted accounting principles, are
excluded from net income and charged or credited directly to stockholders'
equity. SFAS No. 130 is effective for years beginning after December 15, 1997.
The Company has completed its analysis of the requirements of SFAS No. 130. The
implementation of the requirements of this statement, however, will not affect
the Company's net income, cash flows or financial position.
In June 1997 the FASB also issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 is effective for years
beginning after December 15, 1997 and replaces the requirements of SFAS No. 14
concerning the manner in which an enterprise defines its reportable business
segments and the nature of the information about business and geographic
segments disclosed in the annual and interim financial statements of public
companies. The Company has not yet completed its analysis of the requirements of
SFAS No. 131. The implementation of the requirements of this statement will not
have any material impact on the Company's consolidated financial statements.
YEAR 2000
A significant portion of the Company's data processing is performed through
the use of hardware and software supplied by an independent data processing
service. The Company has been informed by the independent service that its
systems are Year 2000 compliant. The Company has reviewed its remaining data
processing functions and has determined that they are either Year 2000
compliant, or that the costs to make them Year 2000 compliant will not be
material.
OTHER
Inflation has not had any material impact on the commissions and fees of
the Company for the years ended December 31, 1995, 1996, or 1997.
The Company does not utilize futures, options or other derivative financial
instruments.
<PAGE>
BUSINESS
GENERAL
Lois/USA Inc. (the "Company") is a full service advertising and marketing
communications company operating on a national basis through advertising
agencies located in Austin, Chicago, Dallas, Detroit, Houston, Los Angeles, New
York and Salt Lake City. Through 1995, the Company operated principally in New
York, through its Lois/USA New York, Inc. 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 ("Lois/Colby"), which was
owned by Lois/USA West, Inc. ("West"), a wholly owned subsidiary of the Company.
In 1996, the Company expanded its operations through the acquisition of Eisaman,
Johns, and Laws Advertising, Inc. ("EJL"), a full-service advertising agency
with offices in Chicago, Detroit, Houston and Los Angeles. 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 alliances. On December 31, 1997, the Company added a significant
southwestern United States presence through the acquisition of Fogarty & Klein,
Inc. ("F&K"), an advertising agency with offices in Austin, Dallas and Houston.
F&K will operate as an independent agency within the Company's network.
In addition to pursuing its strategy of expanding its operations through
acquisitions in 1997, the Company continued the cost and operating revisions
initiated in 1996 with EJL when it acquired that agency. As a result of these
measures, the Company's operating results improved in 1997, to an operating loss
of $816,000 compared to an operating loss of $4,598,000 in 1996. The Company
initiated additional cost reduction measures in the last quarter of 1997 and
plans further initiatives in 1998.
From 1991 to 1994, the Company's growth was constrained by the need to pay
interest on a $3.2 million subordinated note (the "Subordinated Note"). On
January 3, 1995 the Company received $1,363,000 in net proceeds from a public
offering by the Company of 300,000 shares of common stock (the "Offering").
Concurrent with consummation of the Offering, Chase Manhattan Bank, N.A. ("Chase
Bank") provided the Company with a secured three-year reducing revolving credit
facility (the "Reducing Revolving Credit Agreement") of $2.0 million and
increased its line of credit to the Company from $1.0 million to $2.0 million.
The Company used the proceeds of the Offering and the newly available bank
financing to repay the Subordinated Note, which reduced the Company's debt
burden and allowed management to begin to take steps to implement the Company's
expansion strategy. 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 $2.2 million through the private placement
of shares of Series A Convertible Preferred Stock. In October 1997, the Company
replaced the Chase Bank borrowings with a new revolving credit facility from
Sanwa Business Credit Corporation ("Sanwa") which provides for borrowings of up
to $25 million based on a specific percentage of the Company's accounts
receivable balance. The additional capital available under the agreement with
Sanwa will allow the Company to continue to pursue it acquisition growth
strategy.
George Lois, the Company's Co-Chairman and Co-Chief Executive Officer, is a
widely respected creative innovator in the field of advertising with over 30
years of experience in the business. Among the successful slogans Mr. Lois has
created during his career in advertising are slogans used by the MTV cable
television network ("I want my MTV"), TIME magazine ("Make Time for Time") and
Reebok athletic footwear and clothing ("Pump 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 "Lean
Cuisine") and the other for the newspaper USA Today-among a list of thirteen
marketing "milestones" of the 1980's. 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.
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 Company into a national, full-service communications
company with broad-based management and creative capabilities. In late 1987, the
Company acquired the personnel, assets and accounts of the Chicago office of
Grey Advertising, Inc. and subsequently changed the name of that 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 it 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 services 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 the Company 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 "Original Agreement")
between the Company and the shareholders of EJL. The Original Agreement provided
for the acquisition of all of the shares of the common stock of EJL for an
initial payment of $6.0 million, comprised of $4.0 million in cash and $2.0
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 EJL operations over the next five years, subject to
certain adjustments. These payments were to be made partly in cash and partly
through the issuance of additional shares of the Company's Common 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 amend the
Original Agreement (the "Revised Agreement"). Under the Revised Agreement, the
total purchase price was reduced to $9.6 million, of which $5.9 million has been
paid through December 31, 1997, 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 the Consolidated Financial
Statements.
ACQUISITION OF FOGARTY & KLEIN, INC.
On December 31, 1997, the Company completed its purchase of all of the
outstanding shares of common stock of Fogarty & Klein, Inc. and its
subsidiaries, pursuant to a Stock Purchase Agreement between the Company and the
stockholders of F&K (the "F&K Agreement"). The aggregate purchase price was
$10.8 million. The Company made an initial payment of $4.036 million, comprised
of a cash payment of $3.5 million, and the issuance of 50,000 shares of the
Company's Common Stock and warrants for the purchase of 39,000 shares of the
Company's Common Stock, exercisable through December 31, 2000 at an exercise
price of $10.00 per share.
The F&K Agreement requires that the Company make additional purchase price
payments on the first, second and third anniversaries of the acquisition. On
December 31, 1998, the sellers will receive an additional cash payment of $1.125
million, and warrants for the purchase of 50,000 shares of the Company's Common
Stock exercisable through December 31, 2001, at an exercise price of $11.00 per
share. On December 31, 1999, the Company is required to make a cash payment of
$1.125million and to issue an additional 50,000 warrants, exercisable through
December 31, 2002, at an exercise price of $12.25 per share. Finally, on
December 31, 2000, the Company must make a final cash payment of $3.25 million,
which may be increased or decreased by up to $450,000 for 15% of the difference
between $42 million and the actual commissions and fees of F&K for the three
years ending December 31, 2000, from clients existing at the time of the
acquisition. Concurrent with the acquisition of F&K the Company entered into
certain employment contracts with the three senior officers of F&K that provide
for aggregate compensation of $4,950,000 over the next five years. See
"Executive Compensation-Employment Contracts." Of that amount $1.2 million has
been treated as a component of the purchase price.
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 service them. An
acquisition may also add 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, personnel from the various agencies will
interact on client marketing and advertising projects.
The Company's expansion strategy was initially focused on Chicago, Los
Angeles and New York. The Company believes that these markets have significant
growth potential and that acquisitions in these locations would add both 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 the Company's existing operations. 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 Los Angeles
office acquired from 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 is taking advantage of economies of scale through shared
infrastructure.
The Company continued to implement its expansion strategy in 1997 with its
acquisition of F&K. F&K will operate as a separate network within the Company,
and its offices in Austin, Dallas and Houston will provide the Company with
reentry to and a significant presence in the southwestern United States.
Management believes that the Company's expansion strategy will 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 "Lois" 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 investigating a potential acquisition, the Company, after identifying
the opportunity, will study the agency's business to determine if it is
complementary with 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 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 of an acquired
company as a means of creating an incentive for future performance.
There can be no assurance that the Company will be able to successfully
complete additional acquisitions. Additionally, although the Company attempts to
study all potential acquisitions carefully 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 1997 increased by 6.7% over the
1996 level. The 1997 increase in United States advertising expenditures has been
greater than the general rate of economic growth, indicating increased emphasis
on advertising. However, there can be no assurance that the economy, or
advertising expenditures, will continue to grow at similar rates, or at all. The
1997 increase came after increases of 7.6% in 1996 and 7.7% in 1995.
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 completion of the EJL acquisition and the
subsequent assimilation of its operations and implementation of cost reduction
steps. The Company has reemphasized client growth and has acquired several new
clients. 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. New client growth continued in 1997, including
the addition of assignments for Orthodontics Centers of America, Turtle Wax,
Valvoline, Proscape and Decibel.
THE COMPANY'S CREATIVE STRATEGY
In its creative approach, the Company attempts to distinguish itself from
other full service advertising agencies by its relentless pursuit of the "big
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 "big 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 "big 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 "big 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 clientele 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 Corporation, American Drug Stores, Car-X
Muffler & Brake Shops, Orthodontics Centers of America, Pendleton Woolen Mills,
Price Pfister, Sandoz Crop Protection, Southern California Gas Company, Turtle
Wax, Valvoline 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 90 clients. In 1997 and 1996,
Alberto-Culver Corporation represented 16% and 11%, respectively, of the
Company's consolidated commissions and fees. During 1995, American Drug Stores
and Minolta, represented 13% and 12%, respectively, of the Company's
consolidated commissions and fees.
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 lost clients 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
Company closing that office.
SOLICITATION OF NEW BUSINESS
The Company generally obtains new clients through referrals, by identifying
prospects through researching 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 its review of credentials submitted by
several agencies, followed by meetings between the prospective client and one or
more of these agencies. In most cases, potential clients 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 "expenditures 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 a client's perceived creative and marketing needs while
remaining within the client's budget, 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 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. The Company may, in some circumstances, employ outside contractors
to perform photography necessary for a client's print advertisement. When the
Company directs the work of an outside producer or photographer the Company's
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 commission 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 its media buying 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 media
buying 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, 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 have 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 to 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 the full-service marketing communications division of Lois/USA West
which specializes in innovative strategies, "new media" and ongoing creative
solutions. Year 2K's services include consumer product, destination and
image/brand marketing consultation and program development, sales promotions,
presence and event marketing, full public relations services, direct mail,
on-line/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 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. Revenue for Year 2K was
$1,962,000 for 1997.
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 purposes of generating sales and
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 graphics 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 reduce its use of outside vendors
substantially 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
("Ventures"). 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 a result of Ventures projects,
in 1996, the Company received approximately $15,000 in stock in a publicly
traded entity. In 1997, the Company received options valued at approximately
$118,000 in two other entities.
THE NATIONAL BASKETBALL RETIRED PLAYERS ASSOCIATION
The Company has entered into an agreement with the National Basketball
Retired Players Association (the "Association") 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
pharmaceutical manufacturer.
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 reason. 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.
The expansion of the Company's operations has increased, and will continue
to increase, the frequency with which the Company must compete with the larger,
national advertising agencies to obtain client assignments. The Company competes
against most of the 50 largest advertising agencies in the United States,
including WPP Group, The Interpublic Group, Omnicom Group Inc., True North and
Saatchi & Saatchi. Such 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 multi-national communications firms, enabling them to offer
their clients a diverse portfolio of communications 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 March 16, 1998, the Company had 408 employees, including 385
full-time and 23 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.
PROPERTIES
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:
<TABLE>
<CAPTION>
Annual Approx.
OFFICE LOCATION BASE RENT SQ. FT. EXPIRATION DATE
<S> <C> <C> <C> <C>
New York 40 West 57th St. $665,000(1) 22,000 April 30, 2001
Chicago 401 N. Michigan Avenue $554,000 21,400 November 30, 2000
Chicago 111 East Wacker Dr. $930,000 41,923 February 28, 2010
Los Angeles 5700 Wilshire Blvd. $1,247,000(2) 43,300 August 31, 2007
Houston 7155 Old Katy Road $606,000 41,813 July 15, 2001
Austin Tejas/Conti Bldg $42,000 3,000 March 31, 1999
Dallas 3232 McKinney Ave. $53,252 3,042 October 31, 2001
- ---------------
(1) Subject to escalation based upon the Company's proportionate share of
increases in property taxes and operating costs.
(2) At the Company's option, the lease may be canceled August 1, 2000 for a
cancellation fee of $2,059,306.
</TABLE>
LEGAL PROCEEDINGS
The Company is not currently engaged in any legal proceedings. The Company
is involved in various legal proceedings from time to time incidental to the
conduct of its business. In the opinion of management, any ultimate liability
arising out of such proceedings will not have a material adverse effect on the
financial condition or results of operations of the Company.
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table lists the names and ages of all executive officers or
directors of the Company.
NAME AGE TITLE
George Lois 66 Co-Chairman of the Board, Co-Chief
Executive Officer and Director
Theodore Veru 70 Co-Chairman of the Board, Co-Chief
Executive Officer, President and
Director
Dennis Coe 50 Executive Vice President
Mike de Maio 44 Executive Vice President and Chief
Operating Officer
Edwin Holzer 64 Chairman and Chief Executive
Officer of Lois/EJL Chicago
Dean Laws 53 Executive Vice President
Robert Stewart 43 Chief Financial Officer, Treasurer
and Secretary
John Hatsopoulos(1)(2) 63 Director
David DeBusschere(1)(2) 57 Director
Dennison Veru 37 Director
- -------------------------
(1) Member of Board of Directors' Audit Committee.
(2) Member Board of Directors' Compensation Committee.
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. Mr. Lois has been a Director of the Company since 1991.
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 and has been a Director of the Company since 1991. 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 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 became a member of EJL's Board of Directors in 1987. Mr.
Coe was elected Corporate Co-President of EJL in May 1990. He received his BA
degree in Operations Research and Statistics from California State University,
Long Beach in 1970 and an MA in Marketing from Pepperdine University in 1974.
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. He received his BA degree from Yale University in 1975 and a
J.D. degree from DePaul University in 1978.
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 EJL in 1973 and became
Corporate Co-President in 1990. He has been a member of the EJL Board of
Directors since 1987. Mr. Laws earned his BA degree in English literature from
the University of Redland in 1967 and an MBA from the University of Southern
California in 1969.
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 and received his
Masters of Business Administration degree from New York University.
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information for the years ended
December 31 in each of 1995, 1996 and 1997 concerning compensation paid or
accrued for the Co-Chief Executive Officers and to each of the other four most
highly compensated executive officers of the Company serving at December 31,
1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
All Other
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($)
<S> <C> <C> <C> <C>
George Lois 1997 $347,917 - $30,580(1)
Co-Chief Executive Officer 1996 325,000 - 26,233(1)
1995 295,000 - 26,233(1)
Theodore Veru 1997 $347,917 - $71,600(1)
Co-Chief Executive Officer and 1996 325,000 - 45,005(1)
President 1995 275,000 - 45,005(1)
Edwin Holzer 1997 $300,000 $75,000 $ 8,501(1)
Chief Executive Officer 1996 300,000 50,000 54,923(1)(2)
Lois/EJL Chicago, Inc. 1995 275,000 50,000 54,923(1)(2)
Dean Laws 1997 $322,465 - $18,525(4)
Executive Vice President 1996(3) 325,000 - 62,745(4)
Dennis Coe 1997 $322,864 - $34,009(4)
Executive Vice President 1996(3) 325,000 - 58,545(4)
Mike de Maio 1997 $300,000 $10,000 $7,528(4)
Executive Vice President 1996(3) 300,000 - 8,255(4)
Chief Operating Officer
(1) Includes in 1997, 1996 and 1995, $21,233, $40,005, and $3,501,
respectively, of insurance premiums paid by the Company on behalf of
Messrs. Lois, Veru and Holzer, respectively, and $5,000 in medical expenses
paid by the Company on behalf of each of Messrs. Lois, Veru and Holzer in
1997, 1996 and 1995. During 1997, insurance premiums paid on behalf of
Messrs. Lois, Veru and Holzer were $25,580, $66,600 and $3,501,
respectively.
(2) Includes payments of $46,422 in each of 1996 and 1995 pursuant to a plan
created for Mr. Holzer.
(3) Messrs. Laws, Coe and de Maio joined the Company in February 1996, prior to
which all were principals of EJL. Each has a five year employment agreement
at a salary of $325,000, $325,000 and $300,000, respectively, per annum.
(4) Other compensation consists of medical expenses, life insurance, matching
contributions to 401(k) plans and car allowances paid on behalf of each
individual.
</TABLE>
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 received $1,000 for each Board meeting attended, as well
as $500 for each committee meeting (Compensation and Audit Committees).
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Mr. Lois
and Mr. Veru. Each of the 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, 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 totaling 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. Effective January 1, 1998, the base salaries have been
increased to $450,000.
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 received compensation of $150,000 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 Dean Laws and Dennis Coe,
$300,000 per year for Mike de Maio, and $225,000 per year for Mike Waterkotte.
The agreements are renewable upon the mutual agreement of the parties. Bonuses
are discretionary and 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.
Concurrent with the December 31, 1997 purchase of all the outstanding
shares of F&K, the Company entered into employment agreements with three of
F&K's senior executives. These agreements provide base compensation of $450,000
per year for each William H. Fogarty, Richard E. Klein and Thomas Monroe. The
term of the agreements for each of Messrs. Fogarty and Klein is for a period of
three years and the term of Mr. Monroe's agreement is for a period of five
years. In addition to the base compensation, each of Messrs. Fogarty, Klein and
Monroe are also eligible to participate in an annual bonus pool.
401(K) PLAN
The Company has established the Lois/USA Inc. 401(k) Profit Sharing Plan
(the "401(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 and 1997, the amount of
Company contributions were $98,737 and $76,502, respectively. 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 "Stock Option Plan") was adopted by the Company's Board of
Directors in December 1994. Initially, a total of 200,000 shares of Common Stock
have been reserved for issuance under the Stock Option Plan. The amount has been
increased to 500,000 effective March 20, 1998 through a shareholders' vote.
Options may be granted under the Stock Option Plan to executive officers of the
Company or a subsidiary. As of March 16, 1998, 182,000 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
the members of the Compensation Committee to be "disinterested persons" within
the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as from time
to time amended. 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 ("ISO's") within the meaning of Section 422 of the Internal Revenue
Code, or non-qualified stock options ("NQSO'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 "10% 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, 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 "Directors' 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 Public 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 equals $6.00 per share in the case of the initial grants to
Mr. Hatsopoulos, Mr. DeBusschere and Mr. Dennison Veru. The options granted
pursuant to the Directors' Plan vest at the rate of one-third each year from the
date elected to the Board. Options granted pursuant to the Directors' Plan
expire ten years from their Grant Date. The Directors' Plan is administered by
the Compensation Committee. The Compensation Committee has the authority,
subject to the terms of the Directors' Plan, to determine the appropriate
adjustments in the event of a change in the Common Stock or the Company's
capital structure, and to perform other administrative functions. The Director's
Plan permits the exercise of options upon the occurrence of certain events and
upon termination of a director's service as a director (other than for cause),
without regard to the three year schedule described above, under circumstances
similar to those provided in the Stock Option Plan. The Directors' Plan may be
terminated, under circumstances similar to those provided in the Stock Option
Plan.
The following table shows the number of shares as to which options were
granted in 1997 to each director or executive officer under the Stock Option
Plan and the Directors' Plan:
OPTION/SAR GRANTS IN LAST FISCAL YEAR FROM 1994 STOCK OPTION PLAN
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
INDIVIDUAL GRANTS ASSUMED APPRECIATION FOR
OPTION TERM
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Edwin Holzer 5,000 42.55% $9.00 August 24, $33,400 $79,800
2007
</TABLE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR FROM DIRECTORS PLAN
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Dennison Veru 5,000 33.33% $10.00 August 24, 2007 $28,400 $74,800
John 5,000 33.33% $10.00 August 24, 2007 $28,400 $74, 800
Hatsopolous
Dave 5,000 33.33% $10.00 August 24, 2007 $28,400 $74, 800
DeBusschere
</TABLE>
The following table illustrates stock option awards exercised or
exercisable by the named executive officers during 1997 and the aggregate
amounts realized by each such officer. The table also shows the aggregate number
of unexercised options that were exercisable and unexercisable at December 31,
1997 which represents the positive difference between the market price of the
Company's Common Stock and the exercise price of such options.
<TABLE>
<CAPTION>
AGGREGATED OPTION FISCAL YEAR /SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF VALUE OF
SECURITIES UNEXERCISED IN-THE-
UNDERLYING MONEY OPTIONS AT
SHARES ACQUIRED UNEXERCISED FISCAL YEAR-END($)
NAME ON EXERCISE(#) VALUE REALIZED ($) OPTIONS AT FISCAL EXERCISABLE/
YEAR-END(#) UNEXERCISABLE(1)
EXERCISABLE/
UNEXERCISABLE
<S> <C> <C> <C> <C>
George Lois 0 $ 0 50,000/0 182,250/0
Theodore D. Veru 0 0 50,000/0 182,250/0
Robert Stewart 0 0 6,667/3,333 24,168/12,082
Edwin Holzer 0 0 5,000/5,000 18,125/3,125
- ----------------------------
(1) Value at December 31, 1997 based upon the last reported trade of $9 5/8
per share.
</TABLE>
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 16, 1998, (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
NAME OWNERSHIP PERCENT
OF CLASS
George Lois 875,413(1)(2) 32.90%
Theodore Veru 885,000(1) 33.26%
Dean Laws 55,816 2.10%
Dennis Coe 55,816 2.10%
Mike de Maio 31,819 (2) 1.20%
Robert Stewart 10,310(2)(4) *
David DeBusschere 15,103(2)(3) *
John Hatsopoulos 15,000(3) *
Dennison Veru 25,413(2)(3) *
Edwin Holzer 10,000(4) *
All directors
and executive 1,979,690 74.40%
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) In addition, Messrs. Lois, de Maio, Stewart, DeBusschere and Dennison
Veru own Series A Convertible Preferred Stock in the amount of 100, 50,
75, 25, and 100 shares, respectively. Each share of Series A
Convertible Preferred Stock is convertible into approximately 154
shares of Common Stock.
(3) Includes shares issuable upon exercise of options to purchase 15,000
shares of Common Stock granted under the Director's Plan.
(4) Includes shares issuable upon exercise of options to purchase 10,000
shares of Common Stock granted under the Stock Option Plan.
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Under the Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), the Company is authorized to issue 20,000,000
shares of Common Stock, par value $.01 per share, and 1,000,000 shares of
Preferred Stock, par value $.01 per share.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. The holders of Common Stock do not have
pre-emptive, conversion, redemption or cumulative voting rights. Upon
liquidation, each such holder is entitled to share ratably in all assets
available for distribution after payment of all debts and liabilities and after
satisfaction of the liquidation preference of any Preferred Stock.
Holders of Common Stock are entitled to receive such dividends, if any, as
may be declared by the Board of Directors out of funds legally available
therefor.
PREFERRED STOCK
The Board of Directors is empowered to issue Preferred Stock from time to
time in one or more series, without stockholder approval, and with respect to
each series to determine, subject to limitations prescribed by law, (i) the
number of shares constituting such series, (ii) the dividend rate on the shares
of each series, whether such dividends shall be cumulative and the relation of
such dividends to the dividends payable on any other class of stock, (iii)
whether the shares of each series shall be redeemable and the terms thereof,
(iv) whether the shares shall be convertible into Common Stock and the terms
thereof, (v) the amount per share payable on each series or other rights of
holders of such shares on liquidation or dissolution of the Company, (vi) the
voting rights, if any, of shares of each series, and (vii) generally any other
rights and privileges not in conflict with the Certificate of Incorporation or
the Delaware General Corporation Law ("DGCL") for each series and any
qualifications, limitations or restrictions thereof.
The issuance of additional shares of Preferred Stock by action of the Board
of Directors could adversely affect the voting power, dividend rights and other
rights of holders of the Common Stock. Issuance of another series of Preferred
Stock also could, depending on the terms of such series, either impede or
facilitate the completion of a merger, tender offer or other takeover attempt.
Although the Board of Directors is required to make a determination as to the
best interests of the stockholders of the Company when issuing Preferred Stock,
the Board of Directors could act in a manner that would discourage an
acquisition attempt or other transaction that some, or a majority, of the
stockholders might believe to be in the best interests of the Company or in
which stockholders might receive a premium for their stock over the then
prevailing market price. Although there are currently no plans to issue
additional shares of Preferred Stock or rights to purchase such shares,
management believes that the availability of the Preferred Stock will provide
the Company with increased flexibility in structuring possible future financings
and acquisitions and in meeting other corporate needs that might arise. The
authorized shares of Preferred Stock are available for issuance without further
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange on which the Common Stock may
then be listed.
SERIES A CONVERTIBLE PREFERRED STOCK
GENERAL. Pursuant to the Series A Convertible Preferred Stock Certificate
of Designations (the "Series A Certificate of Designations"), dated June 23,
1997 (the "Closing"), the Company issued 2,160 shares of Convertible Preferred
Stock. The holders of Convertible Preferred Stock are entitled to the rights,
preferences and privileges set forth below (which do not purport to be complete
and are qualified in their entirety by reference to the Series A Certificate of
Designations).
DIVIDENDS. Holders of Convertible Preferred Stock are entitled to receive a
cumulative quarterly dividend payment of $25 per Preferred Share (equal to ten
percent (10%) on an annual basis of the per share Purchase Price (as defined in
the Series A Certificate of Designations). Dividends are payable either in
Dividend Shares at the then current Conversion Price or in cash, at the option
of the Company. The Dividend Shares (as defined in the Series A Certificate of
Designations) and the Conversion Shares (as defined in the Series A Certificate
of Designations) will be registered for resale pursuant to the terms of the
Registration Rights Agreement. Dividends on the Convertible Preferred Stock will
be cumulative from the date of original issuance. As long as any Convertible
Preferred Stock shall be outstanding, the Company shall not declare, pay, or set
aside for payment any dividend or declare or make any distribution upon or
purchase, redeem or otherwise acquire Common Stock or any other series of
preferred stock.
VOTING RIGHTS. The holders of Convertible Preferred Stock have the right to
vote on all matters on which the holders of Common Stock have the right to vote,
and each Preferred Share shall be entitled to a number of votes equal to the
number of Conversion Shares and Dividend Shares into which it is then
convertible at the Conversion Price then in effect. The holders of Convertible
Preferred Stock shall vote together as one class with the holders of Common
Stock, except as otherwise required by Delaware law. The Company shall not
amend, alter or repeal any of the provisions of its Certificate of Incorporation
or bylaws so as to affect adversely the powers, preferences, qualifications,
limitations or rights of the holders of the Convertible Preferred Stock.
LIQUIDATION RIGHTS. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of
Convertible Preferred Stock are entitled to receive out of the assets of the
Company available for distribution to shareholders, before any distribution is
made on any other stock of the Company, $1,000.00 per Preferred Share in cash,
plus accumulated and unpaid dividends, which dividends in the case of
liquidation, dissolution or winding-up shall be payable in cash. If upon any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the amounts payable with respect to the Convertible Preferred Stock are not paid
in full, the holders of the Convertible Preferred Stock will share ratably in
any distribution of assets of the Company in proportion to the full respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the holders
of Convertible Preferred Stock will not be entitled to further participation in
any distribution of assets by the Company. A consolidation or merger of the
Company with or into one or more corporations where the Company is not the
surviving corporation, a sale or transfer of all or substantially all of the
assets of the Company for cash or securities or a Change of Control (as defined
in the Series A Certificate of Designations) shall be deemed to be a
liquidation, dissolution or winding up of the Company.
CONVERSION. The Convertible Preferred Stock is convertible into Conversion
Shares on or after December 22, 1997. The Conversion Price per share will be
equal to the average closing bid price of the Common Stock as calculated over
the five trading-day period ending on the last trading day prior to June 23,
1997, except as may be adjusted pursuant to the Series A Certificate of
Designations. Each Preferred Share will be convertible into the number of
Conversion Shares determined by dividing the Purchase Price by the Conversion
Price in effect on the date the Conversion Notice is received by the Company. No
fractional shares will be issued, and in lieu of any fractional share, an
adjustment in cash will be made based on the market price of the Common Stock on
the last trading day prior to the date of conversion.
The Conversion Price is subject to adjustment upon the occurrence of
certain events, including: the issuance of capital stock of the Company as a
dividend or distribution on any shares of Common Stock; subdivisions,
combinations and reclassifications or recapitalizations of the Common Stock; the
issuance by the Company (to all holders of Common Stock or otherwise) of Common
Stock, or of rights, warrants or convertible securities entitling the holder to
subscribe for or purchase Common Stock, at less than the current market price
(as calculated in the Series A Certificate of Designations); and the combination
of the Company's shares of Common Stock into a larger number of shares. No
adjustment in the Conversion Price is required unless such adjustment would
require a change of at least 5% in the price then in effect, but any adjustment
that would otherwise be required to be made shall be carried forward and taken
into account in any subsequent adjustment. Before taking any action which would
cause an adjustment effectively reducing the Conversion Price below the par
value of the Common Stock, the Company will take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and non-assessable shares of Common Stock
at the Conversion Price as so adjusted.
OPTIONAL REDEMPTION The Company may, at its option, at any time prior to
the second anniversary of the Closing, redeem the Convertible Preferred Stock in
whole, or from time to time in part, at a redemption price of $1,200 per share
in cash, together with all accrued and unpaid dividends through the date fixed
for redemption. The Company may, at its option, at any time subsequent to the
second anniversary of the Closing, redeem the Convertible Preferred Stock in
whole, or from time to time in part, at a redemption price of $1,000 per share
in cash, together with all accrued and unpaid dividends through the date fixed
for redemption (the amounts referred to in the immediately preceding sentence
and in this sentence, collectively, the "Redemption Payment"). The entire
Redemption Payment shall be paid in cash. The Company shall not be permitted to
redeem any Preferred Share for which it shall have received on or prior to the
close of business on the date fixed for redemption a duly executed Conversion
Notice. The Company shall not be required to notify holders of Convertible
Preferred Stock of the redemption thereof prior to the date fixed for
redemption.
MATURITY. On the fifth anniversary of the Closing (the "Maturity Date"),
each Preferred Share then outstanding shall automatically be redeemed by the
Company, at a redemption price of $1,000 per share in cash, together with all
accrued and unpaid dividends thereon.
REGISTRATION RIGHTS. The Company has agreed to prepare and file and use its
best efforts to cause the Registration Statement to become effective within 180
days after the Closing. The Company shall use its best efforts to keep the
Registration Statement effective until the 30th month after the closing.
If at any time during the three-year period following the Closing a
registration statement under the Securities Act covering the Common Stock is not
effective, the Common Stock may not be sold or otherwise transferred except in
accordance with an exemption from, or otherwise in a transaction not subject to,
the registration requirements of the Securities Act.
EJL REGISTRATION RIGHTS
As a condition to the EJL acquisition, the Company agreed to grant to the
stockholders of EJL certain rights with respect to the registration under the
Securities Act of shares of Lois Common Stock received pursuant to the
acquisition.
If the Company at any time (other than pursuant to demand and other
registration rights discussed herein) proposes to file a Registration Statement
with respect to any class of equity securities under the Securities Act in a
primary registration on behalf of the Company and/or in a secondary registration
on behalf of holders of such securities (except with respect to registration
statements on Forms S-4 and S-8 or another form not available for registering
shares for sale to the public for cash), at any time within the period
commencing one year after the date of consummation of the stock purchase and
ending three months from the end of the Earn-Out Period (as defined in the
Revised Agreement), the Company will give prompt written notice to the holders
of Registrable Securities (defined as all shares issued to the EJL stockholders
under the terms of the acquisition) of its intent to file the Registration
Statement and will offer to include in such Registration Statement to the
maximum extent possible any Registrable Securities for which the Company has
received requests for inclusion, provided, among other conditions, that the
managing underwriter, if any, of any such offering has the right, subject to
certain conditions, to limit the number of shares requested to be included in
the registration.
The EJL registration rights further provide that upon the written request
of the holders of 50% of the aggregate of the Registrable Securities issued and
outstanding on the date of such request, made at any time within the period
commencing one year after the date of consummation of the stock purchase and
ending three months from the end of the Earn-Out Period, the Company will file
as promptly as practicable and, in any event, within 60 days of receipt of the
written request, a registration statement on Form SB-2 (or any other available
form) qualifying the Registrable Securities for sale. These demand registration
rights may be exercised twice during the registration period. However, the
Company shall not be obligated to file a registration statement provided that an
opinion of counsel is received which states that the shares may be disposed of
pursuant to the provisions of Rule 144 under the Securities Act or, if in the
good faith judgment of the Board of Directors, there is a material development
relating to the Company which has not been disclosed to the general public, in
which case, registration may be delayed until such disclosure is made in the
Company's Annual Report on Form 10-K or its Quarterly Report on Form 10-Q.
In general, all fees, costs and expenses of any such registration (other
than underwriting discounts and selling commissions applicable to the sale of
shares and counsel fees to the holders of Registrable Securities) will be borne
by the Company, and the Company has agreed to pay counsel's fees up to an amount
of $10,000 in connection with registrations other than those pursuant to the
demand right.
F&K REGISTRATION RIGHTS
As a condition to the F&K acquisition, the Company granted to the
stockholders of F&K certain rights with respect to the registration under the
Securities Act of shares of Lois Common Stock received pursuant to the
acquisition, including both shares issued directly to the stockholders of F&K as
partial consideration for the acquisition and shares issued upon exercise of
warrants issued to the stockholders of F&K as partial consideration for
acquisition (the "F&K Registrable Securities"). These registration rights are
only exercisable until such securities are either registered pursuant to Section
5 of the Securities Act and disposed of in accordance with the Registration
Statement or distributed to the public pursuant to Rule 144 (or similar
provisions then in force).
If the Company, at any time within the period ending six months after the
second anniversary of the consummation of the stock purchase, proposes to file a
Registration Statement with respect to any class of equity securities under the
Securities Act in a primary registration on behalf of the Company, which
includes a secondary registration on behalf of holders of such securities or in
a secondary registration solely on behalf of holders of such securities, and the
registration form to be used may be used to register the F&K Registrable
Securities (which explicitly excludes registration statements on Forms S-4 and
S-8 or any successor forms thereto), the Company will give prompt written notice
to the holders of the F&K Registrable Securities of its intent to file the
Registration Statement and will offer to include in such Registration Statement,
to the maximum extent possible, such number of F&K Registrable Securities with
respect to which the Company has received written requests for inclusion therein
within twenty days after the giving of notice by the Company, provided, among
other conditions that the underwriters on any such offering have the right,
subject to certain conditions, to limit the number of shares requested to be
included in the registration.
In general, all fees, costs and expenses of any such registration (other
than underwriting discounts and selling commissions applicable to the sale of
F&K Registrable Securities and counsel fees to the holders of Registrable
Securities) will be borne by the Company, and the Company has agreed to pay
counsel's fees of the holders of F&K Registrable Securities up to an amount of
$15,000 in the aggregate.
ANTI-TAKEOVER EFFECTS OF CERTAIN CERTIFICATE OF INCORPORATION
AND BYLAW PROVISIONS
The Company's Certificate of Incorporation 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 preferred stock could
adversely affect the voting power, dividend rights and other rights of holders
of the Common Stock. Issuance of a series of preferred stock also could,
depending on the terms of such series, either impede or facilitate the
completion of a merger, tender offer or other takeover attempt. The Company's
Certificate of Incorporation and Bylaws also contain certain other provisions
that would likely have an effect of delaying or deterring a change in control of
the Company, including (i) a vote of at least 75% of the voting securities to
amend certain provisions of the Certificate of Incorporation and Bylaws, (ii)
advance notice procedures with respect to nomination of directors or other
matters to be voted on by stockholders other than by or at the direction of the
Board of Directors, (iii) the taking of action by the Company's stockholders
only at a duly called annual or special meeting, which may only be called by the
Co-Chairmen of the Board or a majority of the directors, (iv) the sole power to
fill vacancies on the Board of Directors and (v) the ability to remove directors
only for "cause," as defined in the Certificate of Incorporation.
SELLING STOCKHOLDERS
The 332,714 shares of Common Stock covered by this Prospectus are those
issuable upon conversion of the Convertible Preferred Stock. The shares are
offered by the Selling Stockholders identified in the table below. It is unknown
if, when, or in what amounts a Selling Stockholder may offer the Shares for
sale. There is no assurance that the Selling Stockholders will sell any or all
of the shares offered hereby.
Because the Selling Stockholders may offer all or some of the shares
pursuant to the Offering, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the shares
that will be held by the Selling Stockholders after completion of the Offering,
no estimate can be given as to the amount of the shares that will be held by the
Selling Stockholders after completion of the Offering. The following table sets
forth: (i) the names of the Selling Stockholders; (ii) the aggregate principal
amount of Convertible Preferred Stock owned by each Selling Stockholder as of
the date of this Prospectus; and (iii) the number of shares of Common Stock
issuable upon conversion of the Convertible Preferred Stock.
NUMBER OF SHARES
OF COMMON STOCK
AGGREGATE PRINCIPAL ISSUABLE UPON
AMOUNT OF CONVERSION OF
CONVERTIBLE CONVERTIBLE
NAME OF SELLING STOCKHOLDER PREFERRED STOCK PREFERRED STOCK
JAMES O'DONNELL 100 15,384
BRADLEY AND MARY JO RAZOOK JTTEN 25 3,846
ROBERT AND CLAUDIA STEWART JTTEN 75 11,538
KAREN BERKENFELD 10 1,538
DENNIS MEHIEL 25 3,846
JORDAN H. REDNOR 15 2,307
N.J. NICHOLAS JR. 25 3,846
ANNE T. KAVANAGH 100 15,384
TMOI INC 200 30,769
EDWARD STEWART REVOCABLE 50 7,692
GEORGIA VERU 150 23,076
PETER T. VERU 150 23,076
DENNISON T. VERU 100 15,384
GEORGE AND ROSEMARY LOIS JTTEN 100 15,384
DAVE DEBUSSCHERE 25 3,846
MICHELE T. DE MAIO 50 7,692
RON HOLLAND ADVERTISING INC. 200 30,769
NANETTE SCOFIELD 150 23,076
PETER T. SIDOTI 25 3,846
SANTANDER - LOIS 100 15,384
JOINT VENTURE
BRUCE E. TOLL 100 15,384
ALBERT AUBURN &
MARION RAE AUBURN (JTWROS) 15 2,307
PAUL BERKMAN & JUDITH BERKMAN (JTWROS) 50 7,692
GERALD FELDMAN 100 15,384
THEOBOLD M. KARCH TTEE, THEOBOLD M.
KARCH REVOCABLE TRUST U/A/D 1/11/94 10 1,538
MORRIS RUBIN & ELAINE RUBIN (JTWROS) 25 3,846
KANTER FAMILY 50 7,692
MARIA LA ROSE KARCH, FBO MARIA LA ROSA
KARCH REVOCABLE TRUST 7-24-95
MARIA LA ROSA
KARCH REVOCABLE TRUST 7-24-95 10 1,538
EDWARD A. SWEENEY 10 1,538
YIANNIS MONOVOUKAS 15 2,307
YISKA MOSER 50 7,692
SOLOMON & CAROLE BLISKO JTTEN 25 3,846
WILLIAM FLANNERY 25 3,846
-----------------------
2,160 332,293
==========================
<PAGE>
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from the sale of the
Common Stock offered hereby. The Selling Stockholders may sell all or a portion
of the shares of Common Stock which may be issued to them from time to time
while the registration statement of which this Prospectus is a part remains
effective. To the extent required, the number of shares of Common Stock to be
sold, the names of the Selling Stockholders, the purchase price, the name of any
agent or dealer and any applicable commissions with respect to a particular
offer will be set forth in an accompanying supplement to this Prospectus. The
aggregate proceeds to the Selling Stockholders from the sale of Common Stock
offered hereby will be the prices at which such securities are sold, less any
commissions. There can be no assurance that the Selling Stockholders will
convert any of their Convertible Preferred Stock nor sell any of the shares of
Common Stock issuable upon their conversion.
The Common Stock may be sold by the Selling Stockholders upon conversion in
transactions on the over-the-counter market, in negotiated transactions, or by
a combination of these methods, at fixed prices that may be changed, at market
prices prevailing at the time of sale, at prices related to such market prices
or at negotiated prices. A Selling Stockholder may elect to engage a broker or
dealer to effect sales in one or more of the following transactions: (a) block
trades in which the broker or dealer so engaged will attempt to sell the
converted shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction, (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus, and (c) ordinary brokerage transactions and transactions in which
the broker solicits purchasers. In effecting sales, brokers and dealers engaged
by Selling Stockholders may arrange for other brokers or dealers to participate.
Brokers or dealers may receive commissions or discounts from Selling
Stockholders in amounts to be negotiated (and, if such broker-dealer acts as
agent for the purchaser of such shares, from such purchaser). Broker-dealers may
agree with the Selling Stockholders to sell a specified number of such shares at
a stipulated price per share, and, to the extent such broker-dealer is unable to
do so acting as agent for a Selling Stockholder, to purchase as principal any
unsold shares at the price required to fulfill the broker-dealer commitment to
such Selling Stockholder. Broker-dealers who acquire shares as principal may
thereafter resell such shares from time to time in transactions (which may
involve crosses and block transactions and sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market or otherwise at prices and on terms then prevailing at
the time of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such shares commissions as described above. The
Selling Stockholders may also pledge such shares to banks, brokers or other
financial institutions as security for margin loans or other financial
accommodations that may be extended to such Selling Stockholders, and any such
bank, broker or other institution may similarly offer, sell and effect
transactions in such shares.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in sales of shares of Common Stock may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares of Common Stock purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act.
Under the securities laws of certain states, the Common Stock may be sold
in such states only through registered or licensed brokers or dealers. In
addition, in certain states the shares of Common Stock may not be sold unless
such shares have been registered or qualify for sale in such state or an
exemption from registration or qualification is available and is complied with.
The Company has agreed to indemnify the Selling Stockholders against certain
liabilities under the Securities Act.
The Company shall use its best efforts to maintain the effectiveness of the
Registration Statement for a period of thirty months through the preparation and
filing with the SEC of such amendments and post-effective amendments to the
Registration Statement, and such supplements to the Prospectus, as may be
required by the rules, regulations or instructions applicable to the use of Form
SB-2 by the Securities Act or rules and regulations thereunder or otherwise
necessary to keep the Registration Statement effective and will cause the
Prospectus as so supplemented to be filed pursuant to Rule 424 under the
Securities Act.
The Company will pay all expenses incident to the offering and sale of the
Common Stock to the public other than underwriting discounts and selling
commissions.
LEGAL MATTERS
Certain legal matters, including the legality of the issuance of the shares
of Common Stock, are being passed upon for the Company by Stroock & Stroock &
Lavan LLP, New York, New York 10038.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and for each of the years in the three year period ended December 31, 1997,
have been included herein and in the registration statement in reliance upon the
report of Arthur Andersen LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
LOIS/USA INC.
CONSOLIDATED ANNUAL AUDITED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report........................................F-2
Consolidated Balance Sheet at December 31, 1996 and 1997............F-3
Consolidated Statements of Operations
for the years ended December 31, 1995, 1996 and 1997................F-4
Consolidated Statements of Changes in Stockholders'
Deficit for the years ended December 31, 1995, 1996 and 1997........F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1996 and 1997................F-6
Notes to Consolidated Financial Statements..........................F-8
<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, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' deficit
and cash flows for each of the three years in the period ended December 31,
1997. 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 consolidated financial position of Lois/USA Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
New York, New York
March 12, 1998
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(000'S OMITTED, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
ASSETS December 31, December 31,
1996 1997
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 567 $ 3,218
Accounts receivable, net 21,788 38,475
Expenditures billable to clients 1,702 764
Other current assets 470 758
----------- ------------
TOTAL CURRENT ASSETS 24,527 43,215
--------- ----------
PROPERTY AND EQUIPMENT, AT COST: 2,948 4,503
Less-accumulated depreciation and amortization (2,112) (2,470)
----------- ------------
Net property and equipment 836 2,033
----------- ------------
OTHER ASSETS:
Deferred financing costs, net 350 747
Goodwill, net 18,118 23,816
Other assets 165 451
------------ ------------
TOTAL OTHER ASSETS 18,633 25,014
------------ ------------
Total assets $ 43,996 $ 70,262
============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft $ 2,865 $ -
Accounts payable 29,285 48,789
Accrued expenses 1,423 4,713
Bank loan 1,580 4,642
Advance billings 2,362 1,787
Lease related reserves - current 1,333 1,622
------------ ------------
TOTAL CURRENT LIABILITIES 38,848 61,553
------------ ------------
OTHER LIABILITIES:
Lease related reserves 4,834 4,854
Equity subject to put rights 270 -
Deferred purchase price 5,939 9,250
------------ ------------
TOTAL LIABILITIES 49,891 75,657
------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK - 2,160
STOCKHOLDERS' 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: 26 24
20,000,000 shares authorized; 2,555,875
and 2,439,861 issued and outstanding in
1996 and 1997, respectively.
Additional paid-in capital 5,757 5,537
Accumulated deficit (11,678) (13,116)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (5,895) (7,555)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 43,996 $ 70,262
======== =========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(000'S OMITTED, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ----
REVENUE:
<S> <C> <C> <C>
Commissions and fees $ 16,035 $ 23,067 $ 28,284
----------- ----------- ---------
OPERATING EXPENSES:
Salaries and related costs 9,986 16,218 19,143
Unusual costs - 3,583 -
Client services 1,387 1,934 2,578
Rent and related charges 1,334 1,702 1,686
Amortization of goodwill 88 1,032 1,044
Depreciation and amortization 215 441 350
Other operating expenses 1,723 2,755 4,299
----------- ----------- ---------
TOTAL OPERATING EXPENSES 14,733 27,665 29,100
----------- ----------- ---------
OPERATING INCOME (LOSS) 1,302 (4,598) (816)
NONOPERATING EXPENSES:
Interest, net 138 232 170
Amortization of deferred
Financing costs 56 87 398
----------- ----------- ---------
TOTAL NONOPERATING EXPENSES 194 319 568
----------- ----------- ---------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES 1,108 (4,917) (1,384)
PROVISION(BENEFIT) FOR INCOME TAXES 390 307 (3)
----------- ----------- ---------
NET INCOME (LOSS) $ 718 $ (5,224) $ (1,381)
=========== =========== ==========
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ .33 $ (2.09) $ (.57)
=========== =========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 2,175,000 2,496,928 2,439,259
=========== =========== ==========
OUTSTANDING
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(000'S OMITTED)
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL
STOCK STOCK PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 1,775 $ 18 $ 1,029 $ (7,172) $ (6,125)
Conversion of Redeemable Warrants 81 1 1,357 - 1,358
Issuance of common shares 300 3 1,360 - 1,363
Net income - - - 718 718
----- ----- ------- -------- ----------
BALANCE, DECEMBER 31, 1995 2,156 22 3,746 (6,454) (2,686)
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)
EJL settlement - return of shares (189) (2) (863) - (865)
Acquisition of Fogarty & Klein, Inc.
Issuance of shares 50 - 481 - 481
Issuance of warrants - - 122 - 122
Shares issued for acquisition costs 23 - 164 - 164
Stock dividends on redeemable preferred - - 37 - 37
stock
Net issuance costs - - (161) - (161)
Dividends on redeemable preferred stock - - - (57) (57)
Net loss - - - (1,381) (1,381)
----- ----- ------- -------- ----------
BALANCE, DECEMBER 31, 1997 2,440 $ 24 $5,537 $(13,116) $(7,555)
===== ====== ======= ========= ==========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(000'S OMITTED)
<TABLE>
<CAPTION>
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 718 $ (5,224) $ (1,381)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Present value interest on Deferred Purchase Price - - 140
Depreciation and amortization 215 441 350
Loss on disposals of fixed assets - 254 41
Amortization of deferred financing costs 56 87 398
Bad debt expense 72 60 127
Amortization of goodwill 88 1,032 1,044
Deferred taxes 390 76 -
Decrease in lease related reserves - (1,278) (1,611)
Other - - 100
(Increase) decrease in accounts receivable (5,635) 7,653 (267)
(Increase) decrease in expenditures billable to clients (514) 196 1,372
(Increase) decrease in other current assets (450) 528 (293)
Decrease in other assets - (89) -
Increase (decrease) in bank overdraft - 2,865 (2,865)
Increase (decrease) in accounts payable 7,198 (7,362) 3,879
Increase (decrease) in accrued expenses - (1,174) 366
Increase (decrease) in advanced billings - 1,884 (1,459)
Decrease in deferred payouts (47) (46) (250)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,091 (97) (309)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (72) (185) (268)
Cash paid for acquisitions, net of cash acquired of $3,101 in 1997 - (1,888) (399)
Acquisition costs - (347) (618)
NET CASH (USED IN) INVESTING ACTIVITIES (72) (2,420) (1,285)
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred dividends - - (21)
Cash paid for fees on secured credit agreement - - (161)
Proceeds from redeemable preferred stock - - 2,160
Proceeds from borrowings under credit facility - 1,580 3,062
Net proceeds of public offering 1,665 - -
Subordinated debt redemption (3,200) - -
Increase in deferred financing costs (212) (225) (795)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,747) 1,355 4,245
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 272 (1,162) 2,651
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,457 1,729 567
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,729 $ 567 $3,218
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION 1995 1996 1997
CASH PAID DURING THE PERIOD FOR:
Interest $ 138 $ 297 $ 110
Income taxes 270 140 37
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 four advertising agencies located in
New York, Chicago, Los Angeles, Houston, Austin and Dallas. 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.
A 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.
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 commissions and fees derived from
clients. Included in accounts receivable at December 31, 1996 and 1997 are
allowances for uncollectible accounts of $823,000 and $1,087,000, 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 1997, the Company
received options in two companies under this program. Such options were valued
at $118,000, representing the value of the underlying stock over the exercise
price at the date of grant.
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, EJL (see Note 3) and Fogarty & Klein, Inc.
(see Note 2) is being amortized on a straight-line basis over 10 years, 20 years
and 20 years, respectively. At December 31, 1996 and 1997, accumulated
amortization of goodwill amounted to $1,618,000 and $2,662,000, 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 at December 31, 1997 represent financing costs incurred
in connection with a new credit facility obtained in October 1997, as discussed
in Note 6. These costs are being amortized on a straight-line basis over three
years. Prior to 1997, deferred financing costs represented financing costs
incurred in connection with the acquisition of EJL. These costs were written off
in 1997 when the new credit facility was obtained.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted the requirements of 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 measures compensation expense related to the grant of stock options
and stock-based awards to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, under which compensation
expense, if any, is based on the difference between the exercise price of an
option, or the amount paid for an award, and the market price or fair value of
the underlying common stock at the date of the award or at the measurement date
for variable awards. Stock-based compensation arrangements involving
non-employees are accounted for under SFAS No. 123, under which such
arrangements are accounted for based on the fair value of the option or award.
As required by SFAS No. 123, the Company discloses pro forma net income and net
income per share information reflecting what the effect of applying SFAS No. 123
fair measurement to employee arrangements would be. See Note 9.
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.
SEVERANCE AGREEMENTS
Arrangements with certain employees provide for continuing payments for periods
after cessation of their full time employment in consideration of 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 years ending December 31, 1997 and 1996. Two other clients
accounted for revenues in excess of 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 which this represents.
CLIENT 1 CLIENT 2 CLIENT 3
---------------------------------------------------
1997:
REVENUE 4,407,000
% Revenue 16.00%
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, 1997, 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 $1,454,320, $1,831,064 and $6,004,865, 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
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share",
effective December 31, 1997. As required by SFAS No. 128, earnings per share
amounts for prior years have been restated; the restatement did not have a
material effect on the previously reported amounts.
Basic earnings per share excludes any dilution for common stock equivalents and
is computed on the basis of net income or loss, adjusted for the dividend
requirement on the Company's Series A Convertible Preferred Stock , divided by
the weighted average number of common shares outstanding during the relevant
period.
Diluted earnings per share reflects the potential dilution that could occur if
options or other securities or contracts entitling the holder to acquire shares
of common stock were exercised or converted, resulting in the issuance of
additional shares of common stock that would then share in earnings. Diluted
earnings per share is also computed on the basis of the weighted average number
of common shares outstanding during the relevant periods as the consideration of
stock options and warrants would be anti-dilutive.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires the use of certain estimates
made 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 three years ended December 31:
1995 1996 1997
Fair value of non-cash assets acquired $ - $30,794 $ 18,681
Cash paid, net of cash acquired - (2,235) (399)
Common shares - (2,015) (2,500)
------- --------- ----------
Liabilities assumed $ - $ 26,544 $ 15,782
======= ========= ==========
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes a requirement
for the display of the components and total of comprehensive income in a
financial statement having equal prominence to the other financial statements
included in a full set of general purpose financial statements. Comprehensive
income includes net income and items of gain or loss that, under generally
accepted accounting principles, are excluded from net income and charged or
credited directly to stockholders' equity. SFAS No. 130 is effective for years
beginning after December 15, 1997. The Company has completed its analysis of the
requirements of SFAS No. 130. The implementation of the requirements of this
statement, however, will not affect the Company's net income, cash flows or
financial position.
In June 1997 the FASB also issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS No.131 is effective for years
beginning after December 15, 1997 and replaces the requirements of SFAS No. 14
concerning the manner in which an enterprise defines its reportable business
segments and the nature of the information about business and geographic
segments disclosed in the annual and interim financial statements of public
companies. The Company has not yet completed its analysis of the requirements of
SFAS No. 131. The implementation of the requirements of this statement will not
have any material impact on the Company's consolidated financial statements.
2. ACQUISITION OF FOGARTY & KLEIN, INC.
On December 31, 1997, the Company acquired all of the outstanding common stock
of Fogarty & Klein, Inc. and its subsidiaries ("F&K"). The Company made an
initial payment comprised of cash of $3,500,000, and the issuance of 50,000
shares of the Company's common stock and warrants for the purchase of 39,000
shares of the Company's common stock, exercisable through December 31, 2000 at
an exercise price of $10.00 per share.
The F&K Agreement requires the Company to make additional purchase price
payments on the first, second and third anniversaries of the acquisition. On
December 31, 1998 the sellers will receive an additional cash payment of
$1,125,000 and warrants for the purchase of 50,000 shares of the Company's
common stock exercisable through December 31, 2001 and an exercise price of
$11.00 per share. On December 31, 1999, the Company is required to make a cash
payment of $1,125,000 and to issue an additional 50,000 warrants, exercisable
through December 31, 2002 at an exercise price of $12.25 per share. Finally, on
December 31, 2000, the Company must make a final cash payment of $3,250,000,
which may be increased or decreased by up to $450,000 for 15% of the difference
between the actual commissions and fees of F&K for the three years ending
December 31, 1999, from clients existing at the time of the acquisition and $42
million. Concurrent with the acquisition of F&K, the Company entered into
certain employment contracts with the three senior officers of F&K that provide
for aggregate compensation of $4,950,000 over the next five years. Of that
amount, $1,200,000 has been treated as a component of the purchase price. The
Company also incurred transaction costs of $665,000 in connection with the
transaction.
The acquisition has been accounted for as a purchase, with the amounts payable
during 1998, 1999 and 2000 included in the determination of the purchase price
at their present value (aggregating $5,827,000) and included in the consolidated
balance sheet as Deferred Purchase Price. The aggregate purchase price, at its
present value of $10,594,000 was allocated to the assets acquired and
liabilities assumed based on their fair values, with the remainder of $8,244,000
recorded as goodwill. The goodwill recorded as a result of the acquisition of
F&K is being amortized over 20 years. None of the goodwill recorded will be
deductible for tax purposes; as a result, the Company's effective tax rate will
be adversely impacted.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1996 and 1997 are presented as if the acquisition of
F&K had been made on January 1, 1996. 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 operations under the ownership and management of the Company.
(In thousands except per share amounts) 1996 1997
------------------ ---------------
Commissions and fees 35,176 43,459
Net (loss) income (3,745) 576
Net (loss) income per common share $ (1.47) $ .60
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 a 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 $4,480,000 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 is reflected in the Company's
consolidated financial statements in the second quarter of fiscal 1997, had the
effects, relative to December 31, 1996 amounts, of (i) reducing goodwill by
$4,480,000, (ii) reducing the liability for the future payments by $3,345,000,
(iii) eliminating the $270,000 for redeemable common stock, and (iv) reducing
stockholders' equity by $865,000. In connection with the revision of the terms
of and the accounting for the acquisition, the Company accrued as a portion of
the purchase price approximately $900,000 of future compensation payable under
employment contracts with former EJL shareholders, and a liability of $1.9
million for unfavorable lease terms.
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.
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 amounts) 1995 1996
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, 1996 and 1997 are summarized as follows (000's
omitted):
1996 1997
---- ----
Equipment $1,342 $2,161
Furniture and fixtures 759 917
Leasehold improvements 474 869
Autos 55 47
Computers 318 509
--------
2,948 4,503
Less- Accumulated depreciation
and Amortization 2,112 2,470
------- -----
$ 836 $2,033
======= ======
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 8).
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 8, 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 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. CREDIT FACILITIES
Concurrent with the Company's Offering in January 1995 and the repayment of the
subordinated loan discussed in Note 8, 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 (see Note 8). 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 1995 and 1996 interest rates under the credit facility were 10% and 9.7%,
respectively. The Reducing Revolving Credit Agreement contained certain
affirmative and negative covenants customary in an agreement of this nature. The
terms of the Reducing Revolving Credit Agreement prohibited the Company from
paying dividends on its common stock, and borrowings under the Reducing
Revolving Credit Agreement were 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 was also
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. At December 31, 1996, the balance outstanding
under this agreement was $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.
In October 1997, the Company entered into a revolving credit facility with Sanwa
Business Credit Corporation ("Sanwa") which provides for borrowings up to $25
million based on a specified percentage of eligible accounts receivable. The
Sanwa credit facility has a term of three years, with borrowings bearing
interest at 2.5% above the London Interbank Offered Rate ("LIBOR"). Borrowings
are secured by essentially all of the assets of the Company, including the
common shares and assets of the Company's subsidiaries. Upon the execution of
the new facility, the Company borrowed approximately $2.5 million, which was
used to repay amounts outstanding under the Reducing Revolving Credit Agreement,
as amended, which was then terminated. As of December 31, 1997, borrowings of
$4,642,000 were outstanding and additional borrowings of $5,358,000 were
available under the Sanwa facility.
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 were being
amortized over the initial three-year period of the loan. Costs to extend the
facility of approximately $175,000 and the unamortized fees from the initial
loan were written off as of December 31, 1997.
7. SERIES A PREFERRED STOCK
In May 1997, the Company raised additional capital of approximately $2.2 million
through the private placement of 2,160 shares of Series A Convertible Preferred
Stock. The Series A Preferred Stock is convertible by the holders thereof 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.
8. 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 loan
was repaid 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 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).
9. 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, 137,000 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, 1996 and 1997:
Weighted
Number Average
of Exercise
shares Price
--------------- ----------------
Outstanding at December 31, 1994 -
Granted 40,000 $6.00
Exercised -
Forfeited -
---------------- -------------
Outstanding at December 31, 1995 40,000 6.00
Granted 120,250 6.00
Exercised -
Forfeited -
---------------- -------------
Outstanding at December 31, 1996 160,250 $6.00
Granted 26,750 9.56
Exercised - -
Forfeited 5,000 6.00
---------------- --------------
Outstanding at December 31, 1997 182,000 $6.52
================ ==============
Options exercisable at December 31, 1997 159,750 $6.38
================ ==============
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:
(000's omitted, except for share data)
1997 1996 1995
---- ---- ----
Net (Loss) Income: as reported $(1,381) $(5,224) $ 718
Net (Loss) Income: pro forma $(1,506) $(5,625) $ 678
Net (Loss) Income
per Share: as reported $ (.57) $(2.09) $ .33
Net (Loss) Income
per Share: pro forma $ (.62) $(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.
10. 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, $325,000 and $350,000 for 1995, 1996 and 1997, respectively, and Mr.
Veru was paid an annual base salary of $275,000, $325,000 and $350,000 for 1995,
1996 and 1997, 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. For 1996 and 1997 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, 1996 and 1997. In addition, the Company
created a deferred compensation plan 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. The original agreement was for a term of three years
and, pursuant to provisions allowing the Company to renew the agreement for
three year periods, has been extended to December 31, 2000. This agreement
provides for an annual base salary of $150,000 per year
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 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.
Concurrent with the purchase of all the outstanding shares of Fogarty & Klein,
Inc. on December 31, 1997, the Company entered into employment agreements with
three of F&K's senior executives. These agreements provide for base compensation
of $450,000 per year for each of William H. Fogarty, Richard E. Klein and Thomas
Monroe. The term of the agreements for each of Messrs. Fogarty and Klein is for
a period of three years, and Mr. Monroe's agreement is for a period of five
years. In addition to the base compensation, each of the officers is eligible to
participate in an annual bonus pool. In connection with recording the
acquisition of F&K, the Company included as a component of the purchase price
and of the deferred purchase price liability, the present value of $1,200,000 of
the compensation due under these agreements (see Note 2).
LEASES
The Company has entered into noncancellable operating leases for office space in
New York, Chicago, Los Angeles, Houston, Austin, San Antonio and Dallas. The
following are the future minimum annual rental payments under those leases
(000's omitted):
Years ending December 31:
1998 $ 4,093
1999 4,270
2000 4,139
2001 2,680
2002 2,059
Thereafter 12,941
-----------
$ 30,182
===========
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 in part the participants' contributions. To
date, no Company contributions have been made under this plan. In connection
with the EJL acquisition, as 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 and $76,502 in 1996 and 1997, respectively.
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.
11. 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, 1996 and 1997 are as follows (000's omitted):
1995 1996 1997
----------------------------------
Current:
Federal $ - $ - $ -
State and local 89 231 (3)
-----------------------------------
Total current 89 231 (3)
-----------------------------------
Deferred:
Federal 256 - -
State and local 45 76 -
Total deferred -----------------------------------
301 76 -
-----------------------------------
Total
$ 390 $ 307 $ (3)
====================================
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.
The net deferred tax asset as of December 31, 1996 and 1997 consists of the
following amounts (000's omitted):
1996 1997
-----------------------------
Net operating loss carryforwards $ 2,853 $ 2,932
Deferred compensation - -
Bad debt reserve 337 360
Lease related reserves 2,528 2,008
Severance accruals 62 41
Valuation allowance (5,780) (5,341)
------ ------
Deferred tax asset $ - $ -
===== =====
The valuation allowance was increased in 1996 and 1997, to fully reserve for the
deferred tax assets, reflecting management's belief that the 1996 and 1997
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 provisions for income taxes are as follows
(000's omitted):
1995 1996 1997
-----------------------------------
Income taxes (benefit) computed at $ 377 $(1,672) $( 471)
federal statutory rate of 34%
State taxes, net of federal benefit 89 231 37
Non-deductible goodwill amortization - 387 392
Non-deductible costs 40 50 51
Adjustments of prior year accruals and
other, including changes in the (116) 1,311 (12)
valuation allowance ---- ----- ---
Provision (benefit) for income taxes $ 390 $ 307 $ (3)
====== ======= ======
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPA NY SINCE THE DATE HEREOF.
_____________________
TABLE OF CONTENTS
PAGE
Available Information.......................2
Forward Looking Statements..................2
Prospectus Summary..........................3
Risk Factors................................5
Use of Proceeds.............................9
Market Information..........................9
Dividend Policy.............................9
Selected Financial Information.............10
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...........................11
Business....................................17
Management..................................26
Executive Compensation......................28
Principal Stockholders......................34
Description of Capital Stock................35
Selling Stockholders........................39
Plan of Distribution........................41
Legal Matters...............................42
Experts.....................................42
Index to Financial Statements...............F-1
LOIS/USA INC.
______
PROSPECTUS
______
_________ __, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporate Law ("DGCL") provides that a
business corporation may indemnify directors and officers against liabilities
they may incur in such capacities provided certain standards are met, including
good faith and the reasonable belief that the particular action was in, or not
opposed to, the best interest of the corporation. Subsection (a) of Section 145
of the DGCL empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted
under standards similar to those set forth above, except that no indemnification
may be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation, unless and only to the
extent that the Delaware Court of Chancery or the court in which such action or
suit was brought shall determine that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.
Section 145 of the DGCL further provides that, among other things, to the
extent that a director or officer of a corporation has been successful in the
defense of any action, suit or proceeding referred to in Subsections (a) and (b)
of Section 145 of the DGCL, or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 145 of the DGCL shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that a corporation is empowered to purchase and maintain insurance on behalf
of a director or officer of the corporation against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to indemnify
against such liability under Section 145 of the DGCL.
The Bylaws of the Company provide for the mandatory indemnification of
directors and officers to the fullest extent permitted by law.
Section 102(b)(7) of the DGCL permits the Certificate of Incorporation of a
corporation to provide that a director shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of his or her
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (dealing with
unlawful stock purchases or redemptions), or (iv) for any transaction from which
the director derived an improper personal benefit.
The Certificate of Incorporation of the Company provides that the liability
of the Company's directors to the Company or to its stockholders shall be
eliminated to the fullest extent permitted by law.
<PAGE>
The Company has a directors' and officers' liability insurance policy which
affords directors and officers insurance coverage for losses arising from claims
based on breaches of duty, negligence, error and other wrongful acts.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC registration fee................................. $ 883.38
Legal fees and expenses.............................. 18,000.00
Accountants' fees and expenses 10,000.00
Miscellaneous........................................ 3,000.00
Total....................................... $31,883.38
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In May 1997, the Company raised additional capital of approximately $2.2
million through the private placement of 2,160 shares of Series A Convertible
Preferred Stock (the "Series A Stock"). The Series A Stock was sold to
"accredited investors" as that term is defined in Rule 501(a) under the
Securities Act of 1933. The Series A Stock was sold pursuant to exemptions
provided by Section 4(2) of the Securities Act Regulation D promulgated
thereunder. 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. 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.
ITEM 27. EXHIBITS
(a) Exhibits:
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.
@2.1 Stock Purchase Agreement dated as of December 17, 1997, by and among
shareholders of Fogarty & Klein, 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.
H3.3 Certificate of Designation of Lois/USA Inc. dated June 23, 1997.
+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 Loan and Security Agreement dated as of October 28, 1997 by and among
Lois/USA West, Inc., Lois/USA Chicago, Inc., Lois/USA New York, Inc.,
the Lenders named therein and Sanwa Business Credit Corporation (the
"Loan and Security Agreement").
++10.24 Pledge Agreement dated as of October 28, 1997 between Lois/USA Inc.,
as pledgor, and Sanwa Business Credit Corporation, as agent for the
lenders under the Loan and Security Agreement.
++10.25 Guaranty dated as of October 28, 1997 by Lois/USA Inc. in favor of
Sanwa Business Credit Corporation, as agent for the lenders under the
Loan and Security Agreement.
++10.26 First Amendment and Consent Agreement dated as of December 31, 1997 by
and among Lois/USA West, Inc., Lois/USA Chicago, Inc., Lois/USA New
York, Inc., the Lenders named therein and Sanwa Business Credit
Corporation, acknowledged and accepted by Fogarty & Klein, Inc. and
acknowledged and accepted by Lois/USA Inc., as guarantor.
H10.27 Form of Registration Rights Agreement dated as of June 23, 1997.
**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.
@ Incorporated by reference herein from the Company's Current Report on
Form 8-K, dated December 31, 1997.
+ Filed with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995.
++ Filed with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997.
H Filed concurrently with this Registration Statement.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from
the law or high end of the estimate maximum offering range may
be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) Include any additional or changed material information on the
plan of distribution;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(II)
do not apply if the registration statement is on Form S-3 or
S-8, and the information required to be included in a
post-effective amendment by those paragraphs is incorporated
by reference from period reports filed by the registrant
under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") that are incorporated by reference in the
registration statement.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that (1) for the purpose of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed pursuant to Rules
424(b)(1), and 42(b)(4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement at the time it was declared effective, and
(2) for the purpose of determining any liability under the Securities Act, each
post-effective amendment, if any, that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York, on the 17th day of April, 1998.
LOIS/USA INC.
By: /S/ THEODORE D. VERU
Theodore D. Veru
Co-Chairman of the Board,
Co-Chief Executive
Officer and President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Theodore
D. Veru and Robert K. Stewart his true and lawful attorney-in-fact and agent,
each acting alone, with full power of substitution and resubstitution for him
and in his name, place and stead, in any and all capacities to sign any and all
amendments including post-effective amendments to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully and to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
/S/ GEORGE LOIS Co-Chairman of the Board April 17, 1998
George Lois Co-ChiefExecutive Officer
and Director
/S/ THEODORE D. VERU Co-Chairman of the Board, April 17, 1998
Theodore D. Veru Co-Chief Executive Officer,
President and Director
/S/ ROBERT K. STEWART Executive Vice President, April 17, 1998
Robert K. Stewart Chief Financial Officer
and Secretary (Principal
Financial Officer and
Principal Accounting Officer
/S/ JOHN N. HATSOPOULOS Director April 17, 1998
John N. Hatsopoulos
/S/ DAVID DEBUSSHERE Director April 17, 1998
David DeBusschere
/S/DENNISON T. VERU Director April 17, 1998
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.
@2.1 Stock Purchase Agreement dated as of December 17, 1997, by and among
shareholders of Fogarty & Klein, 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.
H3.3 Certificate of Designation of Lois/USA Inc. dated June 23, 1997.
+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 Loan and Security Agreement dated as of October 28, 1997 by and among
Lois/USA West, Inc., Lois/USA Chicago, Inc., Lois/USA New York, Inc.,
the Lenders named therein and Sanwa Business Credit Corporation (the
"Loan and Security Agreement").
++10.24 Pledge Agreement dated as of October 28, 1997 between Lois/USA Inc.,
as pledgor, and Sanwa Business Credit Corporation, as agent for the
lenders under the Loan and Security Agreement.
++10.25 Guaranty dated as of October 28, 1997 by Lois/USA Inc. in favor of
Sanwa Business Credit Corporation, as agent for the lenders under the
Loan and Security Agreement.
++10.26 First Amendment and Consent Agreement dated as of December 31, 1997 by
and among Lois/USA West, Inc., Lois/USA Chicago, Inc., Lois/USA New
York, Inc., the Lenders named therein and Sanwa Business Credit
Corporation, acknowledged and accepted by Fogarty & Klein, Inc. and
acknowledged and accepted by Lois/USA Inc., as guarantor.
H10.27 Form of Registration Rights Agreement dated as of June 23, 1997.
**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.
@ Incorporated by reference herein from the Company's Current Report on
Form 8-K, dated December 31, 1997.
+ Filed with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995.
++ Filed with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997.
H Filed concurrently with this Registration Statement.
EXHIBIT 3.3
CERTIFICATE OF DESIGNATIONS, VOTING POWERS,
PREFERENCES AND RIGHTS
OF
THE SERIES OF PREFERRED STOCK
OF
LOIS/USA INC.
TO BE DESIGNATED
SERIES A CONVERTIBLE PREFERRED STOCK
Pursuant to Section 151(g) of the Delaware General Corporation Law, I,
Theodore Veru, Co-Chief Executive Officer and President of Lois/USA Inc., a
Delaware corporation (the "Corporation"), hereby certify that the following is a
true and correct copy of a resolution duly adopted by the Corporation's Board of
Directors, and that said resolution has not been amended or rescinded and is in
full force and effect at the date hereof:
RESOLVED, that pursuant to the authority expressly granted and vested in
the Board of Directors of the Corporation by the Corporation's Amended and
Restated Certificate of Incorporation, as amended to date, the Board of
Directors hereby creates a series of Preferred Stock of the Corporation, par
value $.01 per share, to be designated "Series A Convertible Preferred Stock"
and to consist of two thousand one hundred and sixty (2,160) shares, and hereby
fixes the voting powers, designations, preferences and relative, participating,
optional or other rights and the qualifications, limitations or restrictions
thereon, of the Series A Preferred Stock, as follows:
1. VOTING RIGHTS. The holders of Series A Convertible Preferred Stock shall
have the right to vote, together with the holders of all the outstanding
shares of Common Stock and not by classes, except as otherwise required by
Delaware law, on all matters on which holders of Common Stock are entitled
to vote. Each holder of shares of Series A Convertible Preferred Stock
shall have the right to cast one vote for each whole share of Common Stock
which would be issued to such holder upon conversion of such holder's
shares of Series A Convertible Preferred Stock (including shares of Common
Stock issuable as dividends thereon pursuant to Section 4 hereof) assuming
that such conversion were to occur on the date immediately prior to the
record date for the determination of stockholders entitled to vote.
2. LIQUIDATION OR DISSOLUTION. Subject to the prior rights of the
Corporation's creditors and holders of securities senior to the Series A
Convertible Preferred Stock in respect of distributions upon liquidation,
dissolution or winding-up of the Corporation, in the event of the voluntary
or involuntary liquidation, dissolution or winding-up of the Corporation,
the holders of Series A Convertible Preferred Stock shall be entitled to
receive $1,000 per share (the "Liquidation Preference"), together with
accrued and unpaid dividends payable thereon to the date fixed for payment
of such distribution, if any, all of which shall be paid in cash, before
any distribution is made to holders of any common stock of the Corporation.
If, upon any such liquidation, dissolution or winding-up of the
Corporation, the assets distributable among the holders of Series A
Convertible Preferred Stock shall be insufficient to permit the payment in
full to such holders of the preferential amount payable to such holders
determined as aforesaid, then the holders of Series A Convertible Preferred
Stock will share ratably in any distribution of the Corporation's assets in
proportion to the respective preferential amounts that would have been
payable if such assets were sufficient to permit payment in full of all
such amounts. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of Series A
Convertible Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Corporation. Under this
Section 2, a distribution of assets in any dissolution, winding-up,
liquidation or reorganization shall include (a) any consolidation or merger
of the Corporation with or into any other corporation in which the
Corporation is not the surviving corporation, (b) a sale or other
disposition of all or substantially all of the Corporation's assets in
consideration for cash and/or the issuance of equity securities of another
corporation, or (c) a Change of Control of the Company. Under this Section
2, a distribution of assets in any dissolution, winding-up, liquidation or
reorganization shall not include any dissolution, liquidation, winding-up
or reorganization of the Corporation immediately followed by
reincorporation of a successor corporation, provided that the dissolution,
liquidation, winding-up or reorganization does not amend, alter, or change
the preferences or rights of the Series A Convertible Preferred Stock or
the qualifications, limitations or restrictions thereof in a manner that
adversely affects the Series A Preferred Stock.
3. CONVERSION RIGHTS.
(a) CONVERSION OF SERIES A PREFERRED STOCK. The Series A Convertible
Preferred Stock shall be convertible at the option of the holder
thereof into fully paid and non-assessable shares of Common Stock
from and after the 120th calendar day after the date of first issuance
of the Series A Convertible Preferred Stock (the "Issue Date") and
through the fifth anniversary after the Issue Date, each holder of
shares of Series A Convertible Preferred Stock shall be permitted to
convert the shares of Series A Convertible Preferred Stock held by
such holder. Each share of Series A Convertible Preferred Stock
eligible for conversion pursuant to the preceding sentence shall be
converted at a conversion price of $6.50 per share (the "Conversion
Price") except as adjusted pursuant to Section 3(d) hereof. The number
of shares of Common Stock (hereinafter "Conversion Shares") issuable
upon conversion of each share of Series A Convertible Preferred Stock
shall be determined by dividing $1,000.00 by the Conversion Price in
effect on the Conversion Date. An individual share of Series A
Convertible Preferred Stock may only be permitted to convert in its
entirety. Partial conversion of an individual share of Series A
Convertible Preferred Stock is not permitted.
(b) MECHANICS OF CONVERSION. The holder of any shares of Series A
Convertible Preferred Stock may exercise the conversion right as to
any part thereof by delivering to the Corporation during regular
business hours, at the office of the Corporation at 40 West 57th
Street, New York, New York 10019 a conversion notice in the form
attached to the purchase agreements pursuant to which the Series A
Convertible Preferred Stock is issued (the "Conversion Notice"). The
Conversion Notice shall state (i) that the holder elects to convert
its shares, (ii) subject to applicable securities laws, the name(s) in
which the certificate(s) representing the Conversion Shares and
Dividend Shares to which such holder is entitled are to be issued, and
(iii) the telecopier number to which the Corporation shall telecopy
its confirmation described below. Notice given by telecopier to
telecopier number 212-586-9472 shall be deemed notice for purposes of
this paragraph and shall be deemed given when receipt is acknowledged
by transmit confirmation report. Immediately upon receipt of any
Conversion Notice, the Corporation shall, by telecopier, confirm
receipt thereof at the telecopier number included thereon, which
confirmation shall set forth the number of Conversion Shares and
Dividend Shares to be issued by the Corporation as a result of such
conversion. The Conversion Notice shall be deemed accepted by the
Corporation provided the holder surrenders, or causes any agent for
the holder to surrender, the certificate(s) for the Series A
Convertible Preferred Stock to be converted, duly endorsed or assigned
in blank or to the Corporation, at any location set forth above,
within seven (7) business days after delivery of the Conversion
Notice. Provided that the certificate(s) are delivered in accordance
with the preceding sentence, the conversion shall be deemed to have
been effected on the date of delivery of the Conversion Notice by
telecopier, and such date is referred to herein as the "Conversion
Date." Within three (3) business days of receipt by the Corporation of
the certificate(s) representing the Series A Preferred Stock, the
Corporation shall issue to such holder a certificate or certificates
representing the number of full Conversion Shares and Dividend Shares
which such holder is entitled to receive together with a check or cash
in respect of any fractional interest in a share of Common Stock as
provided in Section 3(c) hereof. Unless (i) such Conversion Shares
and/or Dividend Shares have been held long enough to satisfy the
holding period set forth in Rule 144(k) (or any successor provision)
promulgated under the Securities Act, (ii) such shares become freely
tradeable pursuant to another exemption under the Securities Act, or
(iii) the converting holder purchased such shares pursuant to a
current prospectus under an effective registration statement covering
the purchase and sale of such shares, the certificate(s) representing
the Conversion Shares and the Dividend Shares will bear the following
legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED
IN THE ABSENCE OF EITHER AN EFFECTIVE REGISTRATION STATEMENT FOR THESE
SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF
COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. THESE SHARES
ARE SUBJECT TO CERTAIN REGISTRATION RIGHTS AS SET FORTH IN A
REGISTRATION RIGHTS AGREEMENT, A COPY OF WHICH MAY BE OBTAINED FROM
THE CORPORATION.
If the Registration Statement as hereinafter defined shall have been
declared effective by the Securities and Exchange Commission, the
certificate(s) evidencing the Conversion Shares and the Dividend Shares
will bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES MAY BE SOLD
PURSUANT TO THE REGISTRATION STATEMENT PROVIDED THAT THE HOLDER
COMPLIES WITH THE PROSPECTUS DELIVERY REQUIREMENTS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE SALE IS IN COMPLIANCE WITH
THE PLAN OF DISTRIBUTION AS SET FORTH IN THE PROSPECTUS. THESE SHARES
ARE SUBJECT TO CERTAIN REGISTRATION RIGHTS AS SET FORTH IN A
REGISTRATION RIGHTS AGREEMENT, A COPY OF WHICH MAY BE OBTAINED FROM
THE CORPORATION.
The person in whose name the certificate(s) for the Conversion Shares and
Dividend Shares are to be issued shall be deemed to have become a
stockholder of record on the applicable Conversion Date unless the transfer
books of the Corporation are closed on that date, in which event he or she
shall be deemed to have become a stockholder of record on the next
succeeding date on which the transfer books are open, but the Conversion
Price shall be that in effect on the Conversion Date. Upon conversion of
only a portion of the number of whole shares covered by a certificate
representing shares of Series A Convertible Preferred Stock surrendered for
conversion, the Corporation shall issue and deliver to or upon the written
order of the holder of the certificate so surrendered for conversion, at
the expense of the Corporation, a new certificate covering the number of
shares of Series A Convertible Preferred Stock representing the unconverted
portion of the certificate so surrendered, which new certificate shall
entitle in all respects the holder thereof to the rights of Series A
Convertible Preferred Stock represented thereby to the same extent as if
the certificate theretofore covering such unconverted shares had not been
surrendered for conversion.
(c) FRACTIONAL SHARES. No fractional shares of Common Stock or scrip shall
be issued upon conversion of shares of Series A Preferred Stock. If
more than one share of Series A Convertible Preferred Stock shall be
surrendered for conversion at any one time by the same holder, the
number of full shares of Common Stock issuable upon conversion thereof
shall be computed on the basis of the aggregate number of shares of
Series A Convertible Preferred Stock so surrendered. Instead of any
fractional shares of Common Stock which would otherwise be issuable
upon conversion of any shares of Series A Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fractional
interest in an amount determined on the basis of the then Current
Market Price per share of Common Stock. Fractional interests shall not
be entitled to dividends, and the holders thereof shall not be
entitled to any rights as stockholders of the Corporation in respect
of such fractional interests.
(d) ADJUSTMENTS TO CONVERSION PRICE FOR CERTAIN EVENTS. The Conversion
Price shall be subject to adjustment from time to time as set forth in
this subsection (d).
(i) In case at any time, or from time to time, the Corporation shall:
(A) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend or other
distribution payable in shares of capital stock; (B) subdivide
its outstanding shares of Common Stock into a larger number of
shares; (C) combine its outstanding shares of Common Stock into a
smaller number of shares; or (D) issue by reclassification or
recapitalization of its Common Stock any other class or series of
shares of the Corporation (including any such reclassification or
recapitalization in connection with a consolidation or merger in
which the Corporation is the continuing corporation), the
Conversion Price in effect at the time of the record date for
such dividend or of the effective date of such subdivision,
combination, reclassification or recapitalization shall be
proportionately adjusted so that the holder of any Series A
Convertible Preferred Stock surrendered for conversion after such
time shall be entitled to receive the aggregate number and kind
of shares which, if such Series A Convertible Preferred Stock had
been converted immediately prior to such time, such holder would
have owned or have been entitled to receive. Such adjustment
shall be made successively whenever any event listed above shall
occur. In the event that such dividend or distribution is not so
made, the Conversion Price shall again be adjusted to be the
Conversion Price, respectively, which would then be in effect if
such record date has not been fixed.
(ii) In case at any time, or from time to time, the Corporation shall
(except as hereinafter provided) issue or sell any Additional
Shares of Common Stock for a consideration per share of Common
Stock less than the Current Market Price, then the Conversion
Price shall, on the date specified below for determining the
Current Market Price, be adjusted to that number determined by
multiplying the Conversion Price in effect immediately prior to
such adjustment by a fraction the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to
the issuance of the Additional Shares of Common Stock (including
shares deemed to have been issued pursuant to subsection (d)(iii)
below) plus the number of shares of Common Stock which the
aggregate consideration for the total number of such Additional
Shares of Common Stock so issued would purchase at the Current
Market Price, and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus the
number of such Additional Shares of Common Stock so issued
(including shares deemed to have been issued pursuant to
subsection (d)(iii) below). For the purposes of this subsection
(d)(ii), the date as of which the Current Market Price per share
of Common Stock shall be computed shall be the earlier of (x) the
date on which the Corporation shall enter into a legally binding
contract for the issuance or sale of such Additional Shares of
Common Stock or (y) the date of the actual issuance of such
Additional Shares of Common Stock. The provisions of this
subsection (d)(ii) shall not apply to any issuance of Additional
Shares of Common Stock for which an adjustment is provided under
subsection (i) hereof. No adjustment shall be made under this
subsection (d)(ii) upon the issuance of any Additional Shares of
Common Stock which are issued pursuant to the exercise of any
warrants or other subscription or purchase rights or pursuant to
the exercise of any conversion or exchange rights in any
Convertible Securities, if any such adjustment shall previously
have been made upon the issuance of such warrants or other rights
or upon the issuance of such Convertible Securities (or upon the
issuance of any warrant or other rights therefor) pursuant to
subsection (d)(iii) hereof. Adjustments shall be made
successively whenever such an issuance of Additional Shares of
Common Stock shall occur. In the event that such Additional
Shares of Common Stock are not so issued or sold, the Conversion
Price shall again be adjusted to be the Conversion, as the case
may be, which would then be in effect if such issuance had not
occurred.
(iii) In case at any time, or from time to time, the Corporation shall
take a record of the holders of the Common Stock for the purpose
of entitling them to receive a distribution of, or shall
otherwise issue, any warrants or other rights to subscribe for or
purchase any Additional Shares of Common Stock or any Convertible
Securities and the consideration per share for which Additional
Shares of Common Stock may at any time thereafter be issuable
pursuant to such warrants or other rights or pursuant to the
terms of such Convertible Securities shall be less than the
Current Market Price, then the Conversion Price immediately
thereafter shall be adjusted as provided in subsection (d)(ii)
hereof on the basis that (a) the maximum number of Additional
Shares of Common Stock issuable pursuant to all such warrants or
other rights or necessary to effect the conversion or exchange of
all such Convertible Securities shall be deemed to have been
issued as of the date for the determination of the Current Market
Price per share of Common Stock as hereinafter provided, and (b)
the aggregate consideration for such maximum number of Additional
Shares of Common Stock shall be deemed to be the minimum
consideration received and receivable by the Corporation for the
issuance of such Additional Shares of Common Stock pursuant to
such warrants or other rights or pursuant to the terms of such
Convertible Securities. For the purposes of this subsection
(d)(iii), the date as of which the Current Market Price per share
of Common Stock shall be computed shall be the earliest of (i)
the date on which the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them to
receive any such warrants or other rights, (ii) the date on which
the Corporation shall enter into a legally binding contract for
the issuance of such warrants or other rights or (iii) the date
of actual issuance of such warrants or other rights. Such
reduction shall be made successively whenever such a record date
is fixed. In the event that such rights or warrants are not so
issued or (if issued) to the extent not exercised, the Conversion
Price shall again be adjusted to be the Conversion Price which
would then be in effect if such record date had not been fixed or
such unexercised rights or warrants had not been issued.
(iv) In case at any time, or from time to time, the Corporation shall
take a record of the holders of its Common Stock for the purpose
of entitling them to receive a distribution, by dividend or
otherwise, of evidences of its indebtedness or assets (including
securities, but excluding (x) any dividend or distribution
referred to in subsection (d)(i) hereof and (y) any dividend or
distribution paid in cash out of funds legally available therefor
of the Corporation), then the Conversion Price in effect after
such record date shall be determined by multiplying the
Conversion Price in effect immediately prior to such record date
by a fraction, of which the numerator shall be the total number
of outstanding shares of Common Stock multiplied by the Current
Market Price on such record date, less the fair market value (as
determined by the Board of Directors of the Corporation, whose
determination shall be conclusive) of the portion of the assets
or evidences of indebtedness so to be distributed, and of which
the denominator shall be the total number of outstanding shares
of Common Stock multiplied by such Current Market Price. Such
adjustment shall be made successively whenever such a record date
is fixed. In the event that such distribution is not so made, the
Conversion Price shall again be adjusted to be the Conversion
Price which would then be in effect if such record date had not
been fixed.
(v) No adjustment in either the Conversion Price shall be required
unless such adjustment would require an increase or decrease of
at least five percent (5%) in such conversion price; PROVIDED,
HOWEVER, that any adjustment which by reason of this paragraph
(vi) is not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations
under this subsection (d) shall be made to the nearest cent or to
the nearest 1/100 of a share, as the case may be.
(e) AUTOMATIC REDEMPTION. The Series A Convertible Preferred Stock shall
mature five years after the Issue Date (the "Maturity Date") and shall
automatically be redeemed by the Company at a redemption price of
$1,000 per share, plus any accrued and unpaid dividends thereon.
(f) NO IMPAIRMENT. The Corporation will not, by amendment of its Restated
Certificate of Incorporation or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good
faith assist in the carrying out of all the provisions of this Section
3 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders
of the Series A Convertible Preferred Stock against impairment.
(g) NOTICE PROVISIONS.
(i) Whenever any conversion price shall be adjusted pursuant to
subsection (d) hereof, the Corporation shall forthwith obtain a
certificate signed by the Corporation's chief financial officer,
setting forth, in reasonable detail, the event requiring the
adjustment and the method by which such adjustment was calculated
(including a description of the basis on which the Corporation's
independent public accountants determined the fair value of any
evidences of indebtedness, shares of stock, other securities or
property or assets or warrants or other subscription or purchase
rights referred to in subsections (d)(ii) through (d)(v) hereof)
and specifying the new conversion prices and (if applicable)
describing the amount and kind of common stock, securities,
property or assets or cash which may be received upon conversion
of the Series A Preferred Stock, after giving effect to such
adjustment. The Corporation shall promptly cause a signed copy of
such certificate to be delivered to each holder of Series A
Preferred Stock.
(ii) In case the Corporation shall propose (a) to pay any dividend
payable in stock of any class to the holders of its Common Stock
or to make any other distribution to the holders of its Common
Stock, (b) to offer to the holders of its Common Stock rights to
subscribe for or to purchase any Convertible Securities or
Additional Shares of Common Stock or shares of stock of any class
or any other securities, rights or options, (c) to effect any
reclassification of its Common Stock (other than a
reclassification involving only the subdivision or combination of
outstanding shares of Common Stock), (d) to effect any capital
reorganization, (e) to effect any consolidation, merger or sale,
transfer or other distribution of all or substantially all its
property, assets or business, or (f) to effect the liquidation,
dissolution or winding-up of the Corporation, then in each such
case, the Corporation shall give to each holder of Series A
Convertible Preferred Stock a notice of such proposed action,
which shall specify the date on which a record is to be taken for
the purposes of such stock dividend, distribution or rights, or
the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, disposition, liquidation,
dissolution or winding-up is to take place and the date of
participation therein by the holders of Common Stock, if any such
date is to be fixed, and shall also set forth such facts with
respect thereto as shall be reasonably necessary to indicate the
effect of such action on the Common Stock and the conversion
prices after giving effect to any adjustment which will be
required as a result of such action. Such notice shall be so
given in the case of any action covered by (a) or (b) above at
least 20 days prior to the record date for determining holders of
the Common Stock for purposes of such action and, in the case of
any other such action, at least 20 days prior to the date of the
taking of such proposed action or the date of participation
therein by the holders of Common Stock, whichever shall be the
earlier.
(h) TREASURY STOCK. The sale or other disposition of any issued shares of
Common Stock owned or held by or for the account of the Corporation
shall be deemed an issuance thereof for purposes of subsection (d)
hereof, but until so issued such shares shall not be deemed to be
outstanding.
(i) COMPUTATION OF CONSIDERATION. To the extent that any Additional Shares
of Common Stock or any Convertible Securities or any warrants or other
rights to subscribe for or purchase any Additional Shares of Common
Stock or any Convertible Securities shall be issued for a cash
consideration, the consideration received by the Corporation therefor
shall be deemed to be the amount of the cash received by the
Corporation therefor, or, if such Additional Shares of Common Stock or
Convertible Securities are offered by the Corporation for
subscription, the subscription price, or, if such Additional Shares of
Common Stock or Convertible Securities are sold to underwriters or
dealers for public offering without a subscription offering, the
initial public offering price, in any such case excluding any amounts
paid or receivable for accrued interest or accrued dividends and
without deduction of any compensation, discounts or expenses paid or
incurred by the Corporation for and in the underwriting of, or
otherwise in connection with, the issue thereof. To the extent that
such issuance shall be for a consideration other than cash, then,
except as herein otherwise expressly provided, the amount of such
consideration shall be deemed to be the fair value of such
consideration at the time of such issuance as determined by the Board
of Directors of the Corporation. The consideration for any Additional
Shares of Common Stock issuable pursuant to any warrants or other
rights to subscribe for or purchase the same shall be the
consideration received by the Corporation for issuing such warrants or
other rights, plus the additional consideration payable to the
Corporation upon the exercise of such warrants or other rights. The
consideration for any Additional Shares of Common Stock issuable
pursuant to the terms of any Convertible Securities shall be the
consideration received by the Corporation for issuing any warrants or
other rights to subscribe for or purchase such Convertible Securities,
plus the consideration paid or payable to the Corporation in respect
of the subscription for or purchase of such Convertible Securities,
plus the additional consideration, if any, payable to the Corporation
upon the exercise of the right of conversion or exchange in such
Convertible Securities. In case of the issuance at any time of any
Additional Shares of Common Stock or Convertible Securities in payment
or satisfaction of any dividend upon any class of stock other than
Common Stock or in payment of any debt, the Corporation shall be
deemed to have received for such Additional Shares of Common Stock or
Convertible Securities a consideration equal to the amount of such
dividend or debt so paid or satisfied.
(j) FRACTIONAL INTERESTS. In computing adjustments under this Section 3,
fractional interests in Common Stock shall be taken into account to
the nearest one-hundredth of a share.
(k) ANTIDILUTION PROVISIONS. No adjustment shall be made as a result of
any increase in the number of Additional Shares of Common Stock
issuable or any decrease in the consideration payable upon any
issuance of Additional Shares of Common Stock, pursuant to any
provisions intended solely to avoid dilution contained in any
warrants, rights or Convertible Securities.
(l) WHEN ADJUSTMENT NOT REQUIRED.
(i) If the Corporation shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a
dividend or distribution or subscription or purchase rights and
shall, thereafter and before the distribution to stockholders
thereof, legally abandon its plan to pay or deliver such
dividend, distribution, subscription or purchase rights, then
thereafter no adjustment shall be required by reason of the
taking of such record and any such adjustment previously made in
respect thereof shall be rescinded and annulled.
(ii) If the Corporation declares or makes any dividend or distribution
with respect to Common Stock, other than regular cash dividends
or dividends payable solely in shares of Common Stock, and each
holder of Series A Convertible Preferred Stock concurrently
receives dividends or distributions equal in amount and in the
same kind of property (whether cash, securities or other
property) as such holder would be entitled to receive if all of
the outstanding Series A Convertible Preferred Stock were
converted into Common Stock as of the record date of such
dividend or distribution with respect to Common Stock, then
thereafter no adjustment shall be required with respect to such
dividend or distribution.
(m) OTHER ACTION AFFECTING COMMON STOCK. If a state of facts shall occur
which, without being specifically controlled by the other provisions
of this Section 3, would not fairly protect the conversion rights of
the Series A Convertible Preferred Stock in accordance with the
essential intent and principles of such provisions, then the Board of
Directors of the Corporation shall in good faith make an adjustment in
the application of such provisions, in accordance with such essential
intent and principles, so as to protect such conversion rights.
(n) NECESSARY CORPORATE ACTION. Before taking any action which would
result in an adjustment in the Conversion Price, the Corporation shall
obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies
having jurisdiction thereof.
(o) TAXES UPON CONVERSION. The Corporation shall pay all documentary,
stamp or other transaction taxes attributable to the issuance or
delivery of shares of Common Stock upon conversion of any shares of
Series A Preferred Stock.
(p) RESERVATION OF COMMON STOCK. The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares
of Common Stock solely for the purpose of effecting the conversion of
shares of Series A Preferred Stock, the full number of whole shares of
Common Stock then deliverable upon the conversion of all shares of
Series A Convertible Preferred Stock at the time outstanding
(including Dividend Shares). All shares of Common Stock which shall be
so issuable shall, when issued upon conversion of all or any portion
of the Series A Preferred Stock, be duly and validly issued and fully
paid and non-assessable and free from all taxes, liens and charges
with respect to the issuance thereof. Upon conversion of Series A
Preferred Stock, the shares of Series A Convertible Preferred Stock so
converted shall have the status of authorized and unissued Preferred
Stock, and the number of shares of Series A Convertible Preferred
Stock which the Corporation shall have authority to issue shall be
decreased by any such conversion.
(q) DIVIDENDS CONSTITUTE CORPORATE DEBT. All dividends accrued and unpaid
on Series A Convertible Preferred Stock to and including the date of
conversion, whether or not declared by the Board of Directors, shall
constitute a debt of the Corporation payable without interest to the
converting holders and shall be paid by the Corporation on the
Conversion Date, in its option, either in cash or by the issuance of
Dividend Shares as provided in Section 4 hereof.
4. DIVIDENDS.
(a) DIVIDENDS. Each holder of shares of Series A Convertible Preferred
Stock shall be entitled to receive, in preference to the holders of
Common Stock, a cumulative quarterly dividend payment of $25.00 for
each share of Series A Convertible Preferred Stock held, beginning
July 15, 1997, and payable quarterly on each January 15, April 15,
July 15 and October 15. With respect to the first four quarterly
dividend payments, dividends are payable (i) in shares of Common Stock
("Dividend Shares"), with the number thereof to be determined by
dividing the accrued dividend payable by the Conversion Price in
effect on the Conversion Date, or (ii) in cash, at the option of the
holder of the related Share of Sereis A Preferred Stock, as determined
on the Issue Date. Dividends to be paid subsequent to the fourth
quartlerly dividend payment shall be paid in cash. Dividends on the
shares of Series A Convertible Preferred Stock shall accumulate from
the date of issuance through the date of conversion or redemption, as
the case may be, on the basis of a calendar year consisting of twelve
(12) months each consisting of thirty (30) days. Dividends shall be
payable in cash only out of the assets of the Corporation legally
available for the payment thereof.
(b) RESTRICTIONS ON DIVIDENDS, ETC. As long as any shares of Series A
Convertible Preferred Stock shall be outstanding, the Corporation
shall not declare, pay or set aside for payment any dividend or
declare or make any distributions upon or purchase, redeem or
otherwise acquire Common Stock or any other series or class of capital
stock.
5. OPTIONAL REDEMPTION.
(a) REDEMPTION RIGHT. The Corporation shall have the right to redeem the
outstanding Series A Preferred Stock, in whole or in part, at any time
and from time to time, prior to the second anniversary of the Issue
Date, by paying to the holders thereof in cash the redemption price
per share of $1,200.00, together with cash in the amount of all
accrued and unpaid dividends thereon through the Redemption Date (as
defined in subsection (b) herein); PROVIDED, HOWEVER, that the
Corporation may not redeem any shares of Series A Convertible
Preferred Stock for which it has received on or prior to the
Redemption Date, a Conversion Notice. After the second anniversary of
the Closing Date, the Corporation shall have the right to redeem the
outstanding Series A Preferred Stock, in whole or in part, at any time
and from time to time, by paying to the holders thereof in cash the
redemption price per share of $1,000.00, together with cash in the
amount of all accrued and unpaid dividends thereon through the
Redemption Date.
(b) NOTICE OF REDEMPTION. If any shares of Series A Convertible Preferred
Stock are to be redeemed pursuant to subsection (a) hereof, notice
thereof (the "Redemption Notice") shall be sent not later than thirty
calendar days prior to the date fixed for redemption to each holder of
record whose Series A Convertible Preferred Stock is to be redeemed,
for overnight delivery by nationally recognized overnight express
courier service, to such holder at such holder's address as the same
shall appear on the books of the Corporation. The Redemption Notice
shall state (a) the shares of Preferred Stock will be redeemed at the
close of business on the date each holder receives the Conversion
Notice (the "Redemption Date"), (b) the redemption price, (c) the
place at which certificates for shares of Series A Convertible
Preferred Stock called for redemption must be surrendered to collect
the redemption price, (d) that dividends on shares of Series A
Convertible Preferred Stock called for redemption cease to accrue at
the close of the last day of business prior to the Redemption Date and
(e) the Section of this Certificate of Designation, Voting Powers,
Preferences and Rights pursuant to which they are to be redeemed.
(c) PARTIAL REDEMPTION. If less than all of the outstanding shares of
Series A Convertible Preferred Stock are to be redeemed, the shares to
be redeemed shall be determined PRO RATA or by lot in a manner fixed
by the Board of Directors. On or after the Redemption Date, each
holder of shares of Series A Convertible Preferred Stock that were
called for redemption shall present and surrender the certificate or
certificates for such shares to the Corporation at the place
designated in the Redemption Notice and thereupon the redemption price
of such shares shall be paid to, or to the order of, the person whose
name appears on such certificate or certificates as the owner thereof.
From and after the Redemption Date, unless the Corporation shall
default in the payment of redemption price pursuant to the Redemption
Notice, all dividends on the Series A Convertible Preferred Stock
shall cease to accrue and all rights of the holders thereof as
stockholders of the Corporation, except the right to receive the
redemption price (but without interest thereon), shall cease and
terminate. Any and all shares of Series A Convertible Preferred Stock
redeemed, purchased or otherwise acquired by the Corporation
thereafter shall be canceled and returned to the status of authorized
and unissued Preferred Stock.
(d) TRANSFER BOOKS. To facilitate the redemption of any shares of Series A
Preferred Stock, the Board of Directors is authorized to cause the
transfer books for such Series A Convertible Preferred Stock to be
closed as to the shares to be redeemed, unless the rules of any
national securities exchange or automated quotation system on which
the Series A Convertible Preferred Stock may be listed or quoted
prohibit the closing of such transfer books.
6. NO PREEMPTIVE RIGHTS. No holder of Series A Convertible Preferred Stock
shall have any preemptive or preferential right of subscription to any
shares of stock of the Corporation, or to options, warrants or other
interests therein or therefor, or to any obligations convertible into stock
of the Corporation, issued or sold, or any right of subscription to any
thereof other than such, if any, as the Board of Directors, in its
discretion, from time to time may determine and at such price or prices as
the Board of Directors from time to time may fix pursuant to the authority
conferred by the Corporation's Certificate of Incorporation.
7. CERTAIN RESTRICTIONS. So long as any Series A Convertible Preferred Stock
is outstanding, the Corporation shall not, without the consent of holders
of a majority of the outstanding shares of Series A Preferred Stock, (i)
purchase, redeem or otherwise acquire any shares of any class of the
Corporation's outstanding capital stock (except as otherwise provided in
Section 4(b) hereof), (ii) issue any class or series of any class of
capital stock which ranks prior to or PARI PASSU with the Series A
Convertible Preferred Stock with respect to dividend rights or rights on
liquidation, winding-up or dissolution of the Corporation or (iii) amend,
alter or change the preferences or rights of any series or class of capital
stock of the Corporation (including the Series A Preferred Stock) or the
qualifications, limitations or restrictions thereof if such amendment,
alteration or change adversely affects the Series A Preferred Stock.
8. DEFINITIONS.
(a) "Additional Shares of Common Stock" shall mean all shares of Common
Stock issued by the Corporation after May 19, 1997, except Common
Stock which may be issued pursuant to: (i) the conversion of the
Series A Preferred Stock; (ii) the exercise by the holders thereof of
any options which may be granted pursuant to the Corporation's 1994
Stock Option Plan; (iii) the exercise by employees of the Corporation
or any of its subsidiaries of options granted pursuant to any stock
option plan which may hereafter be adopted by the Corporation where
the exercise price of such options is not less than the fair market
value of a share of Common Stock on the date of grant thereof; and
(iv) the issuance of any Common Stock pursuant to that certain Stock
Purchase Agreement dated as of February 12, 1996 by and among Lois/USA
Inc. and the shareholders of Eisaman, Johns & Laws Advertising, Inc.
(b) "Change in Control" shall mean a merger or consolidation of the
Corporation with any other corporation, other than a merger or
consolidation which would result in the voting securities of the
Corporation outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) at least fifty percent
(50%) of the total of the voting power represented by the voting
securities of the Corporation or such surviving entity outstanding
immediately after such merger or consolidation or, except as provided
under Section 2 hereof, the closing of a sale or disposition by the
Corporation of all or substantially all of the Corporation's assets
(other than to a subsidiary or subsidiaries of the Corporation).
(c) "Common Stock" shall mean the shares of common stock of the
Corporation, par value $.01 per share, and any stock into which such
Common Stock may hereinafter be changed.
(d) "Conversion Date" shall have the meaning such term is given in Section
3(b) hereof.
(e) "Conversion Notice" shall have the meaning such term is given in
Section 3(b) hereof.
(f) [Reserved.]
(g) "Conversion Price" shall mean the average closing bid price of the
Common Stock as calculated over the five trading-day period ending on
the last trading day prior to the Issue Date, except as adjusted
pursuant to Section 3(d) hereof
(h) "Conversion Shares" shall have the meaning such term is given in
Section 3(a) hereof.
(i) "Convertible Securities" shall mean evidences of indebtedness, shares
of stock or other securities which are convertible into or exercisable
or exchangeable for, with or without payment of additional
consideration in cash or property, for Additional Shares of Common
Stock, either immediately or upon the arrival of a specified date or
the happening of a specified event.
(j) "Current Market Price" per share of Common Stock at any date herein
specified shall mean the average of the daily market prices for 5
consecutive Trading Days ending on the last trading day prior to such
date, except that for purposes of Section 3(c) hereof, the "Current
Market Price" per share of Common Stock shall mean the market prices
on the Trading Day therein specified. The market price for each such
Trading Day shall be the average of the closing bid and asked prices
regular way or, if the Common Stock is not so quoted, as reasonably
determined by the Board of Directors of the Corporation.
(k) "Dividend Shares" shall have the meaning such term is given in Section
4 hereof.
(l) "Issue Date" shall have the meaning such term is given in Section 3(a)
hereof.
(m) "Liquidation Preference" shall have the meaning such term is given in
Section 2 hereof.
(n) "Maturity Date" shall have the meaning such term is given in Section
3(e) hereof.
(o) "Person" shall mean any individual, corporation, association, company,
business trust, partnership, joint venture, joint-stock company,
trust, unincorporated organization or association or government or any
agency or political subdivision thereof.
(p) "Redemption Date" shall have the meaning such term is given in Section
5(b) hereof.
(q) "Redemption Notice" shall have the meaning such term is given in
Section 5(b) hereof.
(r) "Securities Act" shall mean the Securities Act of 1933, as amended.
(s) "Trading Day" shall mean any day on which trading takes place (a) in
the over-the-counter-market and prices reflecting such trading are
published by the National Association of Securities Dealers Automated
Quotation System or (b) if the Common Stock is then listed or admitted
to trading on a national securities exchange, on the principal
national securities exchange on which the Common Stock is then listed
or admitted to trading.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this 23rd
day of June, 1997.
By: /S/ THEODORE VERU
Name: Theodore Veru
Title: Co-Chief Executive Officer and
President
ATTEST:
By: /S/ ROBERT K. STEWART
Robert K. Stewart, Secretary
EXHIBIT 10.27
FORM OF REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and entered
into as of June 23, 1997, by and between Lois/USA Inc., a Delaware corporation
(the "Company"), and the purchaser whose name and address is set forth on the
signature page hereof (the "Purchaser").
This Agreement is made pursuant to the Purchase Agreement, dated as of June
23, 1997, between the Company and the Purchaser (the "Purchase Agreement"). In
order to induce the Purchaser to enter into the Purchase Agreement, the Company
has agreed to provide for the benefit of the Purchaser and the Other Purchasers
(as defined below) of the Preferred Shares (as defined below) and any subsequent
holders of Registrable Securities (as defined below), the registration rights
set forth in this Agreement. The execution of this Agreement is a condition to
the closing under the Purchase Agreement.
The Company proposes to enter into substantially this same form of
registration rights agreement with certain other investors (the "Other
Purchasers") and expects to complete sales of Preferred Shares to them. The
Purchaser and the Other Purchasers are hereinafter sometimes collectively
referred to as the "Purchasers," and this Agreement and the registration rights
agreements executed by the Company and the Other Purchasers are hereinafter
sometimes collectively referred to as the "Agreements." The term "Placement
Agent" shall mean KSH Investment Group, Inc.
The parties hereby agree as follows:
9. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have the
following meanings:
CERTIFICATE OF DESIGNATIONS: Means the Certificate of Designations,
Voting Powers, Preferences and Rights of the Series A Convertible Stock,
attached as Exhibit C to the Confidential Private Placement Memorandum.
CLOSING DATE: Has the meaning such term is given in the Purchase
Agreement.
COMMON STOCK: The shares of common stock, par value $.01 per share of
the Company.
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM: The Confidential Private
Placement Memorandum dated April 29, 1997 prepared by the Company in connection
with the private placement of the Preferred Shares.
CONVERSION NOTICE: Has the meaning such term is given in the
Certificate of Designations.
CONVERSION PRICE: The Conversion Price has the meaning such term is
given in the Certificate of Designations.
CONVERSION SHARES: Shares of Common Stock issuable upon the conversion
of the Preferred Shares. Each Preferred Share will be convertible into the
number of Conversion Shares determined by dividing the subscription price of
$1,000 per Preferred Share by the Conversion Price.
DIVIDEND SHARES: Shares of Common Stock issuable to holders of
Preferred Shares as a dividend payment equal to $25.00 per quarter per Preferred
Share, as provided in the Certificate of Designations.
EFFECTIVE DATE: The date that the Registration Statement is declared
effective by the SEC.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended from
time to time.
HOLDER: Each beneficial holder from time to time of Registrable
Securities.
INDEMNIFIED HOLDER: See Section 6(a).
NASD: National Association of Securities Dealers, Inc.
PERSON: An individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
PREFERRED SHARES: The shares of Series A Convertible Preferred Stock
of the Company, par value $.01 per share, issued pursuant to the Certificate of
Designations and pursuant to the Purchase Agreements with the Purchaser and the
Other Purchasers.
PROSPECTUS: The prospectus included in any Registration Statement, as
supplemented by any prospectus supplement and as amended by all amendments,
including post-effective amendments and all material incorporated by reference
in such prospectus.
REGISTRABLE SECURITIES: The Underlying Common Shares; provided that an
Underlying Common Share ceases to be a Registrable Security when it (i) has been
effectively registered under Section 5 of the Securities Act and disposed of in
accordance with any Registration Statement, (ii) has been distributed to the
public pursuant to Rule 144 under the Securities Act ("Rule 144") (or any
similar provisions then in force) or (iii) is eligible for distribution to the
public by the Holder pursuant to Rule 144(k) (or any similar provisions then in
force).
REGISTRATION EXPENSES: See Section 5.
REGISTRATION STATEMENT: Any registration statement of the Company
which, in accordance with Section 3 hereof, covers any of the Registrable
Securities pursuant to the provisions of this Agreement, including the
Prospectus, amendments and supplements to such Registration Statement, including
post-effective amendments, and all exhibits and all material incorporated by
reference in such Registration Statement.
SECURITIES ACT: The Securities Act of 1933, as amended from time to
time.
SEC: The Securities and Exchange Commission.
SUBSCRIPTION DATE: June 23, 1997 or such other date no later than
seven business days thereafter, as agreed upon by the Company and the Placement
Agent.
UNDERLYING COMMON SHARES: The Conversion Shares and the Dividend
Shares.
10. SECURITIES SUBJECT TO THIS AGREEMENT
Each holder from time to time of Registrable Securities shall be entitled
to the benefits of this Agreement. A Person is deemed to be a Holder of
Registrable Securities whenever such Person is the beneficial owner of
Registrable Securities. The Company is entitled to treat the record holder of
Registrable Securities as beneficial owner of Registrable Securities unless
otherwise notified by such holder.
11. REGISTRATION STATEMENT: TIMING OF FILING, EFFECTIVENESS AND PERIOD OF
USABILITY
Subject to the provisions of Section 4 hereof, the Company shall, as soon
as possible after the Closing Date, prepare and file with the SEC a Registration
Statement on Form SB-2 (or any other form of registration statement on which it
may file for registration under the Securities Act) registering resales of the
Underlying Common Shares by the Holders from time to time through the NASD OTC
Bulletin Board or the facilities of any national securities exchange or the
Nasdaq National Market if the Common Stock is then listed or quoted thereon or
in privately-negotiated transactions. The Registration Statement shall register
all of the Underlying Common Shares. The Company will use its best efforts to
cause the initial Registration Statement to be declared effective by the SEC as
soon as possible within four months after the Closing Date. The Company hereby
agrees that it shall (i) prepare and file such post-effective amendments to the
initial Registration Statement and/or such additional Registration Statements as
may be necessary to ensure that at all times there shall be registered with the
SEC for resale by the Holders from time to time as provided in this Section 3
sufficient shares of Common Stock to account for all Underlying Common Shares
which become issuable from time to time with respect to the Preferred Shares (as
a result of changes in the Conversion Price), and (ii) cause such post-
effective amendments to the initial Registration Statement and/or such
additional Registration Statements to be declared effective by the SEC prior to
the issuance of any shares of Common Stock covered thereby.
The Company agrees to use diligent efforts to keep the Registration
Statement(s) continuously effective and usable for resale of Registrable
Securities until thirty months (the "Effectiveness Period") from the Closing
Date or such shorter period which will terminate when all Underlying Common
Shares have ceased to be Registrable Securities.
12. REGISTRATION PROCEDURES
In connection with the Company's obligation to file Registration Statements
as provided in Section 3 hereof, the Company will as expeditiously as possible:
(a) prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement, and such supplements to the
Prospectus, as may be required by the rules, regulations or instructions
applicable to the registration form utilized by the Company or by the
Securities Act or rules and regulations thereunder for shelf registration
or otherwise necessary to keep the Registration Statement effective for the
applicable period and cause the Prospectus as so supplemented to be filed
pursuant to Rule 424 under the Securities Act; and comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the applicable
period in accordance with the methods of disposition by the sellers thereof
set forth in such Registration Statement or supplement to the Prospectus;
(b) notify Purchaser and the Holders of Registrable Securities
promptly, and confirm such advice in writing,
(1) when the Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the same
has become effective,
(2) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose, and
(3) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable
Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose;
(c) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement at the earliest
possible moment;
(d) furnish, without charge, to Purchaser and, upon request, each
Holder of Registrable Securities, at least one conformed copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(e) deliver to the Purchaser and each Holder of Registrable Securities
without charge, as many copies of the Prospectus (including each
preliminary prospectus) and any amendment or supplement thereto as such
Persons may reasonably request; the Company consents to the use of the
Prospectus or any amendment or supplement thereto by each Purchaser and
each Holder of Registrable Securities in connection with the offering and
sale of the Registrable Securities covered by the Prospectus or any
amendment or supplement thereto;
(f) use its reasonable efforts to cause the Registrable Securities
covered by the Registration Statement to be registered with or approved by
such governmental agencies or authorities as may be necessary to enable the
Holders thereof to consummate the disposition of such Registrable
Securities in such jurisdictions as the Holders may reasonably specify in
response to inquiries to be made by the Company, provided that the Company
will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action which
would subject it to general service of process in any such jurisdiction
where it is not then so subject;
(g) if any event shall occur as a result of which it is necessary, in
the opinion of counsel for the Company, to amend or supplement the
Prospectus in order to make the Prospectus not misleading in the light of
the circumstances existing at the time it is delivered by a Holder, prepare
a supplement or post-effective amendment to the Registration Statement or
the related Prospectus or any document incorporated therein by reference or
file any other required document so that, as thereafter delivered to the
Holders of the Registrable Securities, the Prospectus will not contain an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading;
(h) obtain a CUSIP number for all Registrable Securities (unless
already obtained), not later than the Effective Date;
(i) make available for inspection during normal business hours by a
representative of the Holders of a majority of the Registrable Securities
and any attorney or accountant retained by such representative, all
financial and other records, pertinent corporate documents and properties
of the Company, and cause the Company's officers, directors and employees
to supply all information reasonably requested by such Holders or any such
attorney or accountant in connection with the Registration Statement;
provided that all such records, information or documents shall be kept
confidential by such Persons unless disclosure of such records, information
or documents is required by court or administrative order or is generally
available to the public other than as a result of disclosure in violation
of this paragraph (i);
(j) otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC, and make generally available to its security
holders an earnings statement satisfying the provisions of Section 11(a) of
the Securities Act (in accordance with Rule 158 thereunder or otherwise),
no later than 45 days after the end of the 12-month period (or 90 days, if
such period is a fiscal year) beginning with the first month of the
Company's first fiscal quarter commencing after the Effective Date, which
statements shall cover said 12-month period;
(k) if at any time an event of the kind described in Section 4(g)
shall occur, notify Purchaser and the Holders of Registrable Securities
that the use of the Prospectus must be discontinued (the Company will not
declare any such "black-out" periods in excess of twenty business days
during any twelve month period, unless otherwise required); and
(l) on or prior to the date the Registration Statement is declared
effective by the SEC, all of the Underlying Common Shares to be listed for
trading on the NASD OTC Bulletin Board or any securities exchange on which
the Company's shares of Common Stock are then listed.
Each Holder of Registrable Securities as to which any registration is
being effected agrees, as a condition to the registration obligations with
respect to such Holder provided herein, to furnish to the Company such
information regarding the distribution of such Registrable Securities as
the Company may from time to time reasonably request in writing.
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company
described in this paragraph 4(k), such Holder will forthwith discontinue
disposition of Registrable Securities until such Holder's receipt of the
copies of the supplemented or amended Prospectus contemplated by Section
4(g) hereof, or until it is advised in writing by the Company (which notice
the Company shall give as promptly as possible), that the use of the
Prospectus may be resumed, and has received copies of any additional or
supplemental filings which are incorporated by reference in the Prospectus,
and, if so directed by the Company, such Holder will deliver to the Company
(at the Company's expense) all copies, other than permanent file copies
then in such Holder's possession, of the Prospectus covering such
Registrable Securities current at the time of receipt of such notice.
13. REGISTRATION EXPENSES
(a) All expenses incident to the Company's performance of or compliance
with this Agreement, including without limitation:
(1) all registration, filing and listing fees;
(2) fees and expenses of counsel acceptable to the holders of a
majority in principal amount of the Registrable Securities for compliance
with securities or blue sky laws;
(3) the Company's printing, messenger, telephone and delivery
expenses;
(4) fees and disbursements of counsel for the Company;
(5) fees and disbursements of all independent certified public
accountants of the Company (including the expenses of any special audit
necessary to satisfy the requirements of the Securities Act); and
(6) fees and expenses associated with any NASD filing required to be
made in connection with the Registration Statement.
(all such expenses being herein called "Registration Expenses") will be borne by
the Company, regardless of whether the Registration Statement becomes effective.
The Company will, in any event, pay its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, the
fees and expenses incurred in connection with the listing of the securities to
be registered on the NASD OTC Bulletin Board or any a securities exchange or the
Nasdaq National Market.
14. INDEMNIFICATION AND CONTRIBUTION
(a) INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and
hold harmless each Holder of Registrable Securities, its officers, directors,
employees and agents and each Person who controls such Holder within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act
(each such person being sometimes hereinafter referred to as an "Indemnified
Holder") from and against all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation and legal expenses) arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement or Prospectus or in any amendment
or supplement thereto or in any preliminary prospectus, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; PROVIDED, HOWEVER, that the Company will not be liable in any such
case to the extent that any such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or alleged untrue
statement or omission or alleged omission thereof based upon information
furnished in writing to the Company by such Holder or its agent expressly for
use therein; PROVIDED further, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission in the Prospectus, if such untrue statement or
alleged untrue statement, omission or alleged omission was completely corrected
in an amendment or supplement to the Prospectus and if, having previously been
furnished by or on behalf of the Company with copies of the Prospectus as so
amended or supplemented, such Holder thereafter fails to deliver such Prospectus
as so amended or supplemented, prior to or concurrently with the sale of a
Registrable Security to the person asserting such loss, claim, damage, liability
or expense who purchased such Registrable Security which is the subject thereof
from such Holder. This indemnity will be in addition to any liability which the
Company may otherwise have.
If any action or proceeding (including any governmental investigation or
inquiry) shall be brought or asserted against any Indemnified Holder in respect
of which indemnity may be sought from the Company, such Indemnified Holder shall
promptly notify the Company in writing (but the omission to so notify the
Company shall not relieve it of any liability that it may have against any
Indemnified Holder otherwise than under this subsection), and the Company shall
assume the defense thereof, including the employment of counsel reasonably
satisfactory to such Indemnified Holder and the payment of all expenses.
Indemnified Holders shall have the right, collectively, to employ their own
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall be the expense of the Indemnified
Holders unless (a) the Company has agreed to pay such fees and expenses or (b)
the Company shall have failed to assume the defense of such action or proceeding
and have failed to employ counsel reasonably satisfactory to the Indemnified
Holders in any such action or proceeding or (c) the named parties to any such
action or proceeding (including any impleaded parties) include the Indemnified
Holders and the Company, and the Indemnified Holders shall have been advised by
counsel that there may be one or more legal defenses available to the
Indemnified Holders which are different from or additional to those available to
the Company (in which case, if the Indemnified Holders notify the Company in
writing that they elect to employ their own counsel at the expense of the
Company, the Company shall not have the right to assume the defense of such
action or proceeding on behalf of the Indemnified Holders, it being understood,
however, that the Company shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of more than
one separate firm of attorneys (together with appropriate local counsel) at any
time for the Indemnified Holders which firm shall be designated in writing by
the Indemnified Holders representing at least a majority of the aggregate
principal amount of the outstanding Registrable Securities). Any such fees and
expenses payable by the Company shall be paid to the Indemnified Holders
entitled thereto as incurred by the Indemnified Holders. The Company shall not
be liable for any settlement of any such action or proceeding effected without
its written consent, but if settled with its written consent, or if there be a
final judgment for the plaintiff in any such action or proceeding, the Company
agrees to indemnify and hold harmless the Indemnified Holders from and against
any loss or liability by reason of such settlement or judgment.
(b) INDEMNIFICATION BY HOLDER OF REGISTRABLE SECURITIES. Each Holder of
Registrable Securities agrees to indemnify and hold harmless the Company, its
respective directors and officers and each Person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act to the same extent as the foregoing indemnity from the
Company to such Holder, but only with respect to information relating to such
Holder furnished in writing by such Holder expressly for use in any Registration
Statement or Prospectus, or any amendment or supplement thereto, or any
preliminary prospectus. In case any action or proceeding shall be brought
against the Company or its respective directors or officers or any such
controlling person, in respect of which indemnity may be sought against a Holder
of Registrable Securities, such Holder shall have the rights and duties given
the Company, and the Company or its respective directors or officers or such
controlling person shall have the rights and duties given to each holder by the
preceding paragraph. In no event shall the liability of any Holder of
Registrable Securities hereunder be greater in amount than the dollar amount of
the proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) CONTRIBUTION. If the indemnification provided for in this Section 6 is
unavailable to an indemnified party under Section 6(a) or Section 6(b) hereof
(other than by reason of exceptions provided in those Sections) in respect of
any losses, claims, damages, liabilities or expenses referred to therein, then
each applicable indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses, (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company from the sale of the Preferred Shares to Purchaser pursuant to the
Purchase Agreement on the one hand and each Holder of Registrable Securities
from the offering of the Registrable Securities by such Holder, on the other
hand, or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and each Holder of Registrable Securities on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages, or liabilities, as well as the other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and each Holder of Registrable Securities on the other shall be deemed to be in
the same proportion as the aggregate amount paid by Purchaser to the Company
pursuant to the Purchase Agreement for the Registrable Securities purchased by
such Holder that were sold pursuant to the Registration Statement bears to the
difference (the "Difference") between the amount such Holder paid for the
Registrable Securities that were sold pursuant to the Registration Statement and
the amount received by such Holder from such sale. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the particular
Holder and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The Company
and the Holders of Registrable Securities agree that it would not be just and
equitable if contributions pursuant to this subsection (c) were to be determined
by pro rata allocation or by any other method of allocation that does not take
account of the equitable consideration referred to in the first sentence of this
subsection (c). The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities referred to in the first sentence of this
subsection (c) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigation or defending
against any action or claim that is the subject of this subsection (c).
Notwithstanding the provisions of this subsection (c), each Holder of
Registrable Securities shall not be required to contribute any amount in excess
of the amount by which the Difference exceeds the amount of any damages that
such Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act), shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
15. RULE 144 AND RULE 144A
For so long as the Company is subject to the reporting requirements of
Section 13 or 15 of the Exchange Act, the Company covenants that it will file
the reports required to be filed by it under the Securities Act and Section
13(a) or 15(d) of the Exchange Act and the rules and regulations adopted by the
SEC thereunder. If the Company is not subject to the reporting requirements of
Section 13 or 15 of the Exchange Act, the Company also covenants that it will
provide the information required pursuant to Rule 144A(d)(4) under the
Securities Act upon the request of any Holder of Registrable Securities which
continue to be "restricted securities" within the meaning of Rule 144(a)(3)
under the Securities Act and it will take such further action as any holder of
such Registrable Securities may reasonably request, all to the extent required
from time to time to enable such holder to sell its Registrable Securities
without registration under the Securities Act within the limitation of the
exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may
be amended from time to time, so long as such provision does not require the
public filing of information relating to the Company which the Company is not
otherwise required to file, (b) Rule 144A under the Securities Act, as such Rule
may be amended from time to time, or (c) any similar rule or regulation
hereafter adopted by the SEC that does not require the public filing of
information relating to the Company. Upon the request of any Holder of
Registrable Securities, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
16. MISCELLANEOUS
(a) NO INCONSISTENT AGREEMENTS. The Company will not on or after the dateof
this Agreement enter into any agreement with respect to their securities which
is inconsistent with the rights granted to the Holders of Registrable Securities
in this Agreement or otherwise conflicts with the provisions hereof. The rights
granted to the Holders of Registrable Securities hereunder do not in any way
conflict with and are not inconsistent with the rights granted to the holders of
the Company's securities under any such agreements.
(b) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company will not take
any action, or permit any change to occur, with respect to the Registrable
Securities which would adversely affect the ability of the Holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement.
(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless the Company has obtained the written consent of Holders of a majority of
the Registrable Securities.
(d) NOTICES. All notices, requests, consents and other communications
hereunder shall be by telecopier, with a copy being mailed by a nationally
recognized overnight express courier, and shall be deemed given when receipt is
acknowledged by transmit confirmation report, and shall be delivered as
addressed as follows:
(1) if to the Purchaser, at the most current address given by the
Purchaser to the Company in accordance with the provisions of this Section
8(d), which address initially is as set forth on the signature page hereto;
(2) if to a Holder of Registrable Securities, at its address of record
as indicated on the books of the transfer agent and registrar for the
Registrable Securities; and
(3) if to the Company, initially at its address set forth in Section
10 of the Purchase Agreement and thereafter at such other addresses, notice
of which is given in accordance with the provisions of this Section 8(d).
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
Holders of Registrable Securities.
(f) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO ITS
RULES AS TO CONFLICTS OF LAW) AND THE FEDERAL LAW OF THE UNITED STATES OF
AMERICA.
(i) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(j) ENTIRE AGREEMENT. This Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the securities sold pursuant to the Purchase Agreement. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
(k) CALCULATION OF MAJORITY. For purposes of determining whether the
Holders of a majority of the Registrable Securities have taken action pursuant
thereto, any Preferred Shares then outstanding shall be deemed to have been
converted into Underlying Common Shares, which shares shall be treated as
outstanding for purposes hereof.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
LOIS/USA INC.
By: _______________________________
Name:
Title:
Print or Type:
Name of Purchaser
(Individual or Institution):
-----------------------------------
Name of Individual representing
Purchaser (if an Institution):
-----------------------------------
Title of Individual representing
Purchaser (if an Institution):
-----------------------------------
Signature by:
Individual Purchaser or Individual
representing Purchaser:
-----------------------------------
Address: __________________________
Telephone: ________________________
Telecopier: _______________________
EXHIBIT 23.1
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made part of this
registration statement.
/s/ Arthur Andersen LLP
New York, New York
April 16, 1998
