SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to ____________
Commission file number: 33-83894-NY
LOIS/USA INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3441962
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
40 WEST 57TH STREET, NEW YORK, NEW YORK 10019
(Address of Principal Executive Offices)(Zip Code)
Registrant's telephone number, including area code: (212) 373-4700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes __ No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The registrant had revenues of $39,405,000, in its most recent fiscal
year.
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 17, 1999, was $4,615,216 (based on the last trade on
February 25, 1999 at $7.375 per share). As of March 17, 1999, there were
2,481,474 shares of common stock, $.01 par value per share ("Common Stock"),
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
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 operates as an independent agency within the
Company's network.
The Company incurred a net loss in 1998 of $5,427,000 due principally
to a continuation of the decline in revenues in the Los Angeles office that
began in fiscal 1997, and due to revenue declines in Chicago and New York. In
the third quarter of 1998 the Company decided to close the Los Angeles office,
and in the fourth quarter of 1998 adopted plans to reduce the size of the
creative workforces in the Chicago and New York offices. The 1998 net loss
includes net charges of $747,000, consisting of gross charges of $5,180,000
offset by the reversal of purchase accounting accruals of $4,433,000, for the
Los Angeles office closure and the Chicago and New York restructuring.
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 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 January 15, 1999, the sellers received 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
$1.125 million 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 Item
11-Executive Compensation-Employment Contracts. Of that amount $1.2 million was
treated as a component of the purchase price.
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.
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 to develop new clients in the
western United States and to assist its existing clients in the area. This unit
held the assets of the Los Angeles office acquired from EJL until the office was
closed during the third quarter of 1998. 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.
In 1998 the Company reduced the pace of its acquisitions as it
integrated the F&K operations acquired in 1997. However, the Company did
complete one small acquisition, acquiring Scaros and Casselman ("Scaros"), a
Stamford, Connecticut advertising agency, in May 1998. The operations of Scaros
were merged into the Company's New York office, and Dean Scaros became the
president of Lois/EJL New York.
Management believes that the Company's expansion strategy can enable
the Company to realize greater creative and management depth, economies of
scale, and increased revenues and profitability. In addition, it believes that
the widely known "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 1998 increased by 7.1%
over the 1997 level. The 1998 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
1998 increase came after increases of 6.7% in 1997 and 7.6% in 1996.
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 Builders Square, Alberto-Culver Corporation, American Drug
Stores, BASF, Garden Ridge Centers, Price Pfister, 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. No client represented
more than 10% of the consolidated commissions and fees during 1998. In 1997 and
1996, Alberto-Culver Corporation represented 16% and 11%, 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, Valvoline, the Disney Company and the Academy of Motion
Picture Arts & Sciences. In August 1998, the Year 2K office relocated to 5757
Wilshire Blvd., Los Angeles, California.
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.
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 the 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 from Mediacom Corp. and Proscape
Technologies, Inc. for $93,000 and $25,000,respectively. The Company did not
accept any new Venture clients in 1998.
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 PLC, The Interpublic Group of Companies, Inc.,
Omnicom Group Inc., True North Communications and Saatchi & Saatchi Co. PLC.
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 12, 1999, the Company had 320 employees, including 315
full-time and 5 part-time employees. In addition, the Company hires consultants
or independent contractors on an as-needed basis. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
its relations with its employees are good.
ITEM 2. DESCRIPTION OF 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
BASE APPROX. EXPIRATION
OFFICE LOCATION RENT SQ. FT. 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 5757 Wilshire Blvd. $49,000 2,478 July 31,1999
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.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved from time to time in routine legal matters
incidental to its business. Management believes that the resolution of such
matters will not have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no current public trading market for the Company's Common
Stock. The Company's Common Stock has, from time to time, been traded in the
over-the-counter market, under the symbol "LSUS," and, according to the OTC
Bulletin Board, the total volume of such trades for the year ended was 318,000
shares. The last reported trade, to the Company's knowledge, was on February 25,
1999 at a price of $7.375 per share.
The Company believes that there are approximately 50 holders of record
of its Common Stock as of March 17, 1999.
The Company has never paid a dividend on its Common Stock and does not
expect to pay dividends in the near future. In addition, the terms of the
Company's bank credit facility with Sanwa prohibit the Company from paying
dividends on its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical financial data presented below has been
derived from the Company's consolidated financial statements and should be read
in conjunction with the Consolidated Financial Statements and related notes
thereto and other financial information included elsewhere in this document.
<TABLE>
<CAPTION>
Income Statement Data: Year ended December 31,
(000's omitted except for per share amounts)
- --------------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data: 1994 1995 1996(1) 1997(2) 1998(3)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commissions and Fees $ 15,048 $ 16,035 $ 23,067 $ 28,284 $ 39,405
- --------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (550) 1,302 (4,598)(4) (816) (3,383)(5)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (1,464) 718 (5,224) (1,381) (5,427)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share
- - basic and diluted (.82) .33 (2.09) (.57) (2.24)
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding
- - basic and diluted 1,775 2,175 2,497 2,439 2,456
- --------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
- --------------------------------------------------------------------------------------------------------------------------------
Total assets 18,158 24,190 43,996 70,262 72,431
- --------------------------------------------------------------------------------------------------------------------------------
Long-term debt - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stock - - - $ 2,160 $ 2,060
- --------------------------------------------------------------------------------------------------------------------------------
Redeemable warrants 1,358 - - - -
- --------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (6,125) (2,686) (5,895) (7,555) (12,984)
- --------------------------------------------------------------------------------------------------------------------------------
(1) Includes the effects of the acquisition of EJL, which was acquired February 12, 1996. See Note 3 of Notes to
Consolidated Financial Statements.
(2) Balance sheet information includes the effects of the acquisition of Fogarty & Klein, which was acquired
December 31, 1997. See Note 2 of Notes to Consolidated Financial Statements.
(3) Includes the effects of the acquisition of Fogarty & Klein, which was acquired December 31, 1997.
See Note 2 of Notes to Consolidated Financial Statements.
(4) Operating loss for 1996 includes Unusual Costs of $3,583,000 relating to office closures.
See Note 9 of Notes to Consolidated Financial Statements.
(5) Operating loss for 1998 includes Unusual Costs of $747,000 relating to office closures and reductions.
See Note 9 of Notes to Consolidated Financial Statements.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION OF THE COMPANY'S HISTORICAL FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO AND THE OTHER
FINANCIAL INFORMATION APPEARING ELSEWHERE HEREIN.
GENERAL
The level of an advertising agency's business depends not only on the
number of its client accounts but also on the volume of spending by each client.
During periods of economic difficulty, advertisers will tend to reduce their
advertising and marketing budgets, creating fewer revenue opportunities for
advertising agencies such as the Company.
Total United States advertising spending in 1998 increased by 7.1%
over the 1997 level. The 1998 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
1998 increase came after increases of 6.7% in 1997 and 7.6% in 1996.
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. No client
represented more than 10% of the consolidated commissions and fees during 1998.
In 1997 and 1996, the Company's largest client represented 16% and 11% of the
Company's consolidated commissions and fees, respectively. See Item 1 -
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 Item 1-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 1996, 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 Bank borrowings with a new revolving credit facility from Sanwa
Business Credit Corporation 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 are being implemented, particularly in the areas
of real estate leasing and agency administration costs. However, the Company
incurred non-recurring charges of $3,583,000 in 1996, including costs resulting
from closing of EJL's Houston office due to the loss of a significant client,
and salary expenses related to excess staffing.
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
Item 1-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, with the portions of the purchase price to be paid at December 31,
1998, 1999 and 2000 to be made by cash payments, delivery of additional shares
of Common Stock and warrants to purchase additional shares of Common Stock, or
through employment agreements recorded at their present value (the "Deferred
Purchase Price"). 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. Additionally, as a result of the inclusion of the operations of
F&K in 1998, the results of operations for 1998 lack comparability to the
results of operations for 1996 and 1997.
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 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 resulted 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 planned further initiatives in
1998.
The Company incurred a net loss in 1998 of $5,427,000 due principally
to a continuation of the decline in revenues in the Los Angeles office that
began in fiscal 1997, and due to revenue declines in Chicago and New York. In
the third quarter of 1998 the Company decided to close the Los Angeles office,
and in the fourth quarter of 1998 adopted plans to reduce the size of the
creative workforces in the Chicago and New York offices. The 1998 net loss
includes charges of $747,000 for the Los Angeles closure and the Chicago and New
York reductions (see Note 9 of Notes to Consolidated Financial Statements).
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues from commissions and fees for the year ended December 31,
1998 were $39,405,000, representing an increase of $11,121,000 or 39.3%,
compared to revenues from commissions and fees of $28,284,000 for the year ended
December 31, 1997. The results of operations for 1998 include the operating
results of F&K, acquired December 31, 1997. The inclusion of F&K's operations
increased revenues by $14,277,000. Without the effect of the acquisition of F&K,
revenues for the year ended December 31, 1998 declined by $3,156,000,
principally as the result of the decline in the revenues from the Los Angeles
office which began with client losses in the second half of fiscal 1997, as well
as reduced client revenues in New York and Chicago. As discussed below, as a
result of these developments the Company decided in the third quarter of 1998 to
close the Los Angeles office, and in the fourth quarter of 1998 adopted plans to
reduce the size of the creative workforces in the Chicago and New York offices.
Operating expenses, including the effects of the items recorded as the
result of the office restructurings, increased to $42,788,000 in 1998 from
$29,100,000 in 1997. Excluding the effects of the restructurings, operating
expenses increased in 1998 by $12,941,000 or 44% to $42,041,000, or 107% of
revenue, from $29,100,000 or 103% of revenue for 1997. Substantially all of this
$12,941,000 increase results from the inclusion of the operations of F&K.
As a percentage of revenues, salaries and related costs decreased from
67.7% in 1997 to 67.3% in 1998, due to the decreased staffing which occurred
late in 1998, offset by the decline in revenues in the Company's Los Angeles and
New York offices. These declines in revenues also contributed to the increase in
client services, rent and related charges and other operating expenses, as a
percentage of revenues, from 30.2% in 1997 to 33.8% in 1998. Those expenses
increased by $4,752,000, principally due to the inclusion of the operations of
F&K.
Depreciation and amortization increased from $350,000 in 1997 to
$833,000 due to capital expenditures made in the first six months of 1998 to
upgrade workplace technology and consolidate the Company's Chicago operations.
Amortization of goodwill increased by $342,000 to $1,386,000 in 1998 due to the
goodwill recorded in the F&K acquisition.
The Company recorded aggregate office closure and reduction costs,
classified as Unusual Costs, of $747,000 in 1998. A portion of those charges
resulted from the Company's decision to close the Los Angeles office that had
been acquired as a part of the EJL acquisition in February 1996. The decision
was made after the Company concluded that client losses that began in the second
half of 1997 were not being replaced at a rate necessary to support the expenses
of that office. The expenses included significant lease obligations, which,
before making the decision to close the office, the Company determined through
negotiations with the lessor could be reduced if the space was abandoned. The
office was closed in September 1998. In connection with the closing of its Los
Angeles office, the Company recorded charges of $3,292,000, which was comprised
of $370,000 for the cost of termination of the lease, $118,000 for the cost of
furniture and fixtures surrendered to the lessor as part of the lease
termination, $1,677,000 for severance costs for the employees of the office and
$1,127,000 for other office closure costs. Those charges were offset by the
reversal of the $3,870,000 remaining of the liability for EJL's unfavorable Los
Angeles lease the Company recorded at the time EJL was acquired and the reversal
of the $563,000 remaining liability recorded for certain salary arrangements
entered into in connection with the acquisition (see Note 3 of Notes to
Consolidated Financial Statements). Unusual Costs also includes $913,000 for the
future lease costs related to the space in the Company's New York office that
will become unused as the result of the reduction of employees in that office,
$523,000 of other New York restructuring costs, $384,000 for the severance costs
for reductions in the workforce in New York, which were completed in the first
quarter of 1999 and $68,000 recorded in the fourth quarter of 1998 for the
severance costs of reductions in the workforce in Chicago.
Amortization of finance costs declined to $281,000 in 1998 compared to
$398,000 for the December 31, 1997 period. During 1997, the Company wrote off
the balance of unamortized fees related to its Chase Bank facilities when those
facilities were replaced by Sanwa Bank facilities. Net interest expense
increased from $170,000 in 1997 to $1,761,000 in 1998 as a result of higher
borrowings under the Sanwa facility. These funds were used in the refinancing of
the Chase Bank facilities, to finance the F&K acquisition and to provide general
working capital to fund the Company's operating losses.
The provision for taxes increased from a benefit of $3,000 in 1997 to
a $2,000 expense in 1998. No benefit was recorded for the Company's loss in
1998. Approximately $12,000,000 of net operating loss carry forwards are
available to offset future taxable income.
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 implemented by
the Company following its 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 operated at a significant loss due to
continuing declines in revenues. The Company closed its Los Angeles office in
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 1997 level of revenue.
Amortization of financing costs increased to $398,000 as a result of
the write-off of the unamortized costs related to the Chase Bank 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 were
available to offset future taxable income at December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had a working capital deficit of
$27,984,000, reflecting an increase of $9,646,000 from the December 31, 1997
working capital deficit caused principally by negative operating cash flows of
$6,979,000 and capital and acquisition expenditures of $2,005,000. The negative
operating cash flows of $6,979,000 reflected the net loss of $5,427,000 adjusted
for non-cash charges including $603,000 for the accretion of interest on
deferred purchase price payments, $859,000 for depreciation and amortization and
$1,386,000 for the amortization of goodwill, the non-cash reductions of the
office closure and reduction expenses (Unusual Costs) from the elimination of
previously established lease and salary liabilities, and certain significant
changes in working capital accounts. Those working capital changes included
negative cash flows for a $3,056,000 increase in accounts receivable and
$1,705,000 for a decrease in advanced billings and cash inflows from a
$5,927,000 increase in accounts payable. The increase in accounts receivable
reflects the increase in the Company's overall revenues, while the decrease in
advanced billings reflects a decrease in assignments for which the Company has
billed in advance. The increase in accounts payable reflects both increased
media placements for clients and general extension of payments to finance
operations. The Company financed the negative operating cash flow and capital
and acquisition expenditures with $8,042,000 borrowed under its bank credit
facility and the use of $1,021,000 of the cash on hand at the beginning of the
year.
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 are 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.
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.
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, beginning in the second quarter of 1997. However, the holders of
1,375 shares of the Series A Convertible Preferred Stock 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 require cash dividends of $73,500 in 1999.
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 June 17, 1999, the Company entered into a syndicated credit
facility with Greentree Financial Servicing Corporation ("Green Tree") for a $30
million syndicated facility, which replaced its credit facility with Sanwa. The
credit facility has a term of three years and bears interest up to 4.0% above
the London Interbank Offered Rate ("LIBOR"). As in the facility it replaced,
borrowings are secured by essentially all of the assets of the Company,
including the stock and assets of the Company's subsidiaries. The amount
available under the facility is based upon a specified percentage of eligible
accounts receivable. The agreement contains various financial covenants, the
most significant of which are based upon EBITDA, Interest Coverage Ratios, and
Fixed Charge Coverage Ratios
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.
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 January 15, 1999 the sellers received 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 will 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 Item
11-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, 1999 and 2000 will
be funded from the Sanwa credit facility.
In May 1998, the Company acquired certain assets of Scaros and
Casselman, Inc. ("S&C"), a Connecticut based advertising agency. Total
consideration to be paid for this purchase is approximately $800,000. The
operations of S&C have been merged into the New York office. The operations of
S&C are not material to the consolidated results of operations.
The Company believes that cash flows from operations, together with
funds expected to be available under the Company's new credit facility with
Green Tree, 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 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 must first be
applied in the first quarter of fiscal years that begin after June 15, 1999, and
in general requires that entities recognize all derivative financial instruments
as assets or liabilities, measured at fair value, and include in earnings the
changes in the fair value of such assets and liabilities. SFAS No. 133 also
provides that changes in the fair value of assets or liabilities being hedged
with recognized derivative instruments be recognized and included in earnings.
The Company does not utilize derivative instruments, either for hedging or other
purposes, and therefore anticipates that the adoption of the requirements of
SFAS No. 133 will not have a material affect on its 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 also Year 2000
compliant. In addition, a committee has been formed by the Company to monitor
these systems as well as those of its suppliers. This committee, consisting of
financial and data processing personnel of each of the Company's entities, meets
weekly to assess the potential effect of the Year 2000 issue on its ability to
perform data processing functions, as well as, obtain goods and services from
its suppliers. The Committee has communicated with those third-party vendors it
believes are critical to its operations, and has been informed that such vendors
are either already Year 2000 compliant or that such vendors expect to be Year
2000 compliant by the end of the year. The Committee has also assessed the need
for independent testing of its systems and those of its vendors and is in the
process of developing a testing strategy and timeline. It is possible that the
failure of one or more critical third-party vendors to complete any system
upgrades, enhancements or modifications necessary to achieve Year 2000 readiness
could have a material impact on the Company's operations. The committee is also
in the process of developing, in the near future, a comprehensive contingency
plan, which identifies the key systems and third parties and outlines a recovery
program.
The Company believes that it is difficult to specifically identify the
cause of the most reasonable worst case Year 2000 scenario. The Company believes
that a reasonable worst case scenario would involve the failures of significant
third-party vendors, with which the Company has no direct data processing
involvement, that could continue for more than several days and affect the
Company's ability to provide services and media placements to its clients. The
development of a contingency plan will be assessed on an ongoing basis based
upon additional information received with regard to third parties' Year 2000
readiness. The Company relies upon the assurance of all third party vendors as
to Year 2000 compliance.
OTHER
Inflation has not had any material impact on the commissions and fees
of the Company for the years ended December 31, 1996, 1997, or 1998.
The Company does not utilize futures, options or other derivative
financial instruments.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained under "Item 1. Description of Business"
and "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations," and other statements contained herein regarding matters
that are not historical facts, are forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995). Because such
forward-looking statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like virtually all commercial enterprises, the Company is exposed to
the risk ("market risk") that the cash flows to be received or paid relating to
certain financial instruments could change as the result of changes in interest
rates, exchange rates, commodity prices, equity prices and other market changes.
Market risk is attributable to all market risk sensitive financial instruments,
including long term debt.
The Company does not engage in trading activities and does not utilize
interest rates swaps or other derivative financial instruments or buy and sell
foreign currency, commodity or stock indexed futures or options. Additionally,
with the exception of the Green Tree credit facility which was entered into on
June 17, 1999, the interest on all of the Company's debt is payable at fixed
interest rates. Accordingly, the Company's exposure to market risk is limited to
the potential effect of changes in interest rates on the cash flows (payments)
relating to its variable rate debt with Green Tree. This credit facility bears
interest at specified spreads above the London Interbank Offered Rate ("LIBOR").
Based on the balance outstanding under the Sanwa credit facility at December 31,
1998, a hypothetical immediate and sustained increase of 1% in the LIBOR would
have the affect of increasing the Company's interest payments by approximately
$127,000 per year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are submitted in Item 14 of this Form 10-K
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following set forth the executive officers and directors of the
company:
NAME Age Title
George Lois 67 Co-Chairman of the Board, Co-Chief Executive
Officer and Director
Theodore Veru 71 Co-Chairman of the Board, Co-Chief Executive
Officer, President and Director
William Fogarty 66 Co-Chairman and Co-Chief Executive Officer of F&K
Edwin Holzer 65 Chairman and Chief Executive Officer of
Lois/EJL Chicago
Richard Klein 64 Co-Chairman and Co-Chief Executive Officer of F&K
Mike de Maio 45 Executive Vice President
Robert Stewart 43 Chief Financial Officer, Treasurer and Secretary
of the Company; Secretary and Executive Vice
President of F&K
John Hatsopoulos (1)(2) 64 Director
David DeBusschere(1)(2) 58 Director
Dennison Veru 38 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 appointed President of Awad & Associates in
1996. 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.
WIILIAM FOGARTY is Co-Chief Executive Officer of F&K. Mr. Fogarty has
been an officer of F&K since its formation in 1980. Mr. Fogarty was appointed
Co-Chief Executive Officer in 1997 when the Company acquired F&K.
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.
RICHARD KLEIN is Co-Chief Executive Officer of F&K. Mr. Klein has been
an officer of F&K since its formation in 1980. Mr. Klein was appointed Co-Chief
Executive Officer in 1997 when the Company acquired F&K.
MIKE DE MAIO is an Executive Vice President 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.
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. Mr. Stewart became Secretary and Executive
Vice President of F&K when the Company acquired F&K in 1997. He is a Certified
Public Accountant and received his Masters of Business Administration degree
from New York University.
<PAGE>
PART III
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information for the years ended
December 31 in each of 1996, 1997 and 1998 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,
1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------------------------------------------------
All Other
Name and Principal Position Year Salary Bonus Compensation (3)
<S> <C> <C> <C>
George Lois 1998 $450,000 - $30,580(1)
Co-Chief Executive Officer 1997 347,917 - 30,580(1)
1996 325,000 - 26,233(1)
Theodore Veru 1998 $450,000 - $71,600(1)
Co-Chief Executive 1997 347,917 - 71,600(1)
Officer and President 1996 325,000 - 45,005(1)
Edwin Holzer 1998 $300,000 - $ 5,000(1)
Chief Executive Officer 1997 300,000 $75,000 8,501(1)
Lois/EJL Chicago, Inc. 1996 300,000 50,000 54,923(1)(2)
William Fogarty 1998 450,000 25,237(4)
Co-Chief Executive Officer
Fogarty & Klein, Inc.
Richard Klein 1998 450,000 24,657(4)
Co-Chief Executive Officer
Fogarty & Klein, Inc.
- ----------------------
(1) In 1998 and 1997, insurance premiums paid on behalf of Messrs. Lois and
Veru were $20,580 and $61,600, respectively, and in 1997 $3,501 on behalf
of Mr. Holzer. In 1996, $21,233, $40,005, and $3,501, 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 1998, medical expenses on
behalf of each of Messrs. Lois and Veru were $10,000 and $5,000 for Mr.
Holzer.
(2) Includes payments of $46,422 in 1996 pursuant to a plan created for Mr.
Holzer.
(3) Other compensation consists of medical expenses, life insurance, matching
contributions to 401(k) plans and car allowances paid on behalf of each
individual.
(4) Mr. Fogarty and Mr. Klein became Co-Chief Executive Officers of F&K on
December 31, 1997 in connection with the Company's acquisition of F&K.
</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 $450,000, effective January 1, 1998. 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.
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 $5,000 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. Effective July 30,
1998 the employment agreement of Mr. Laws was terminated and he received a
series of payments totaling $762,000 in settlement of such agreement. The
employment agreement with Mr. Coe was terminated on January 31, 1999. Mr. Coe
will receive a lump sum payment of $600,000 on or after March 31, 1999. This
amount accrues interest at 10% from April 1, 1999 until the payment is made.
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 is also eligible to participate in an annual bonus pool.
Concurrent with the acquisition of Scaros & Casselman, Dean Scaros
entered into a three year employment agreement terminating on May 14, 2001.
Under such agreement, Mr. Scaros will receive a base salary of $300,000 and is
eligible to receive an annual bonus based upon meeting certain profit goals.
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, 1997 and
1998, the amount of Company contributions were $98,737, $76,502 and $333,835,
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 had been reserved for issuance under the Stock Option
Plan. The amount was 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 12, 1999, 398,000
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 have been reserved for issuance under the
Directors' Plan. The Directors' Plan provides for the automatic one-time grant
of non-qualified options to non-employee directors. Under the Directors' Plan, a
non-qualified stock option to purchase 10,000 shares of Common Stock is
automatically granted to each non-employee director of the Company, in a single
grant effective as of January 3, 1995 (the date of consummation of the Company's
Offering) or, if later, the time the director first joins the Board of
Directors. The Directors' Plan authorizes grants of options up to an aggregate
of 100,000 shares of Common Stock. The exercise price per share is the fair
market value of the Company's Common Stock on the date on which the option is
granted (the "Grant Date"), which equals $6.00 per share in the case of the
initial grants to Mr. Hatsopoulos, Mr. DeBusschere and Mr. Dennison Veru. The
options granted pursuant to the Directors' Plan vest at the rate of one-third
each year from the date elected to the Board. Options granted pursuant to the
Directors' Plan expire ten years from their Grant Date. The Directors' Plan is
administered by the Compensation Committee. The Compensation Committee has the
authority, subject to the terms of the Directors' Plan, to determine the
appropriate adjustments in the event of a change in the Common Stock or the
Company's capital structure, and to perform other administrative functions. The
Director's Plan permits the exercise of options upon the occurrence of certain
events and upon termination of a director's service as a director (other than
for cause), without regard to the three year schedule described above, under
circumstances similar to those provided in the Stock Option Plan. The Directors'
Plan may be terminated, under circumstances similar to those provided in the
Stock Option Plan.
The following table shows the number of shares as to which options
were granted in 1998 to each director or executive officer under the Stock
Option Plan and the Directors' Plan:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR FROM 1994 STOCK OPTION PLAN
Potential Realizable Value
Individual Grants at Assumed Appreciation for
--------------------------------------------------------------------- Option Term
--------------------------------
Number of Percent of Total
Securities Options/SARs Exercise or
Underlying Granted to Base
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/SH) Date 5% ($) 10%($)
- ------------------- --------------- ------------------ ------------- ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
George Lois 100,000 46.30% $ 10.00 March 20,2008 $ 628,895 $ 1,457,845
Theodore Veru 100,000 46.30% $ 10.00 March 20,2008 $ 628,895 $ 1,457,845
Mike DeMaio 5,000 2.31% $ 8.25 January 16,2008 $ 40,195 $ 82,542
OPTION/SAR GRANTS IN LAST FISCAL YEAR FROM DIRECTORS PLAN
Potential Realizable Value
Individual Grants at Assumed Appreciation for
----------------------------------------------------------- Option Term
-------------------------------
Number of Percent of Total
Securities Options/SARs Exercise or
Underlying Granted to Base
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/SH) Date 5% ($) 10%($)
- ------------------ --------------- ------------------ ------------ ------------ ----------- ----------
None Granted
</TABLE>
The following table illustrates stock option awards exercised or
exercisable by the named executive officers during 1998 and the aggregate
amounts realized by each such officer. The table also shows the aggregate number
of unexercised options that were exercisable and unexercisable at December 31,
1998 which represents the positive difference between the market price of the
Company's Common Stock and the exercise price of such options:
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION FISCAL YEAR /SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Value of
Securities Unexercised
Underlying in-the-
Unexercised Money
Options at Options at
Fiscal Fiscal
Year-End (#) Year-End ($)
Shares Acquired Exercisable/ Exercisable/
Name On Exercise (#) Value Realized ($) Unexercisable Unexercisable (1)
- ----- ---------------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C>
George Lois 0 $ 0 150,000/0 275,000/0
Theodore D. Veru 0 0 150,000/0 275,000/0
Robert Stewart 0 0 8,333/1,667 37,500/7,500
Edwin Holzer 0 0 6,667/3,333 25,000/5,000
Mike DeMaio 0 0 0/5,000 0/11,250
- ----------------------------
(1) Value at December 31, 1998 based upon the last reported trade of $10.50 per
share.
</TABLE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information with respect to
beneficial ownership of the Company's common stock as of March 17, 1999, (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
Name Amount and Nature Percent Of Class
of Beneficial
Ownership
George Lois 1,026,951(1)(2) 35.19%
Theodore Veru 1,037,926(1)(2) 35.56%
William Fogarty 38,816(6) 1.33%
Edwin Holzer 10,000(4) *
Richard Klein 38,816(6) 1.33%
Mike de Maio 37,588(2)(5) 1.29%
Robert Stewart 11,463(2)(4) *
David DeBusschere 15,487(2)(3) *
John Hatsopoulos 15,000(3) *
Dennison Veru 26,951(2)(3) *
All directors and executive 2,258,998 77.40%
officers as group (10 persons)
- ------------------------------
*Less than 1%
(1) Includes 150,000 shares issuable upon exercise of options to purchase
shares of Common Stock granted under the Stock Option Plan.
(2) In addition, Messrs. Lois, Veru, de Maio, Stewart, DeBusschere and Dennison
Veru own (directly or beneficially) Series A Convertible Preferred Stock in
the amount of 100, 150, 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.
(5) Includes shares issuable upon exercise of option to purchase 5,000 shares
of common stock granted under the Stock Option Plan.
(6) Includes shares issuable upon exercise of options to purchase 16,658 shares
of common stock granted under the stock purchase agreement dated December
31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements. The financial statements required to be
filed by Item 8 herewith are as follows:
INDEX
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
CONSOLIDATED BALANCE SHEETS F-2 - F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT) F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-22
(a)(2) Exhibits. Reference is made to the Exhibit Index, which is
found on pages of this form 10K.
(b) Reports on Form 8-K.
1. Current Report on Form 8-K dated December 31, 1997, filed January 15, 1998,
reporting that the Company had acquired all of the outstanding shares of F&K.
2. Current Report on Form 8-K dated December 31, 1997, filed March 16, 1998,
reporting that the Company had acquired all outstanding shares of F&K, including
pro forma consolidated financial statements as of December 31, 1997 and for the
year ended December 31, 1997 giving effect to the acquisition by the Company of
all outstanding shares of F&K and Audited combined and consolidated financial
statements of F&K for the years ended December 31, 1995, 1996 and 1997.
<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, 1998 and 1997, 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,
1998. These consolidated financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lois/USA Inc. and subsidiaries
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule on page S-1 is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
New York, New York
March 31, 1999
(Except with respect to certain
matters discussed in Note 11,
as to which the
date is June 17, 1999)
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(000'S OMITTED)
ASSETS December 31, December 31,
1997 1998
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,218 $ 2,197
Accounts receivable, net 38,475 40,839
Expenditures billable to clients 764 1,987
Other current assets 758 592
------------ ------------
TOTAL CURRENT ASSETS 43,215 45,615
------------ ------------
PROPERTY AND EQUIPMENT, AT COST: 4,503 5,529
Less-accumulated depreciation and amortization (2,470) (2,768)
------------ ------------
NET PROPERTY AND EQUIPMENT 2,033 2,761
----------- -----------
OTHER ASSETS:
Deferred financing costs, net 747 466
Goodwill, net 23,816 23,182
Other assets 451 407
------------ ------------
TOTAL OTHER ASSETS 25,014 24,055
------------ ------------
Total assets $ 70,262 $ 72,431
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 48,789 $ 54,716
Accrued expenses 4,713 5,427
Bank loan 4,642 12,684
Advance billings 1,787 82
Lease related reserves - current 1,622 690
------------- -------------
TOTAL CURRENT LIABILITIES 61,553 73,599
------------- -------------
OTHER LIABILITIES:
Lease related reserves 4,854 633
Deferred purchase price 9,250 9,123
------------- -------------
TOTAL LIABILITIES 75,657 83,355
------------- -------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK 2,160 2,060
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: 24 24
20,000,000 shares authorized; 2,439,861 and 2,476,251 issued
and outstanding, respectively.
Additional paid-in capital 5,537 5,773
Accumulated deficit (13,116) (18,781)
---------- ----------
TOTAL STOCKHOLDERS' DEFICIT (7,555) (12,984)
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 70,262 $ 72,431
=========== ==========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(000'S OMITTED, EXCEPT FOR SHARE DATA)
1996 1997 1998
------ ---- ----
REVENUE:
<S> <C> <C> <C>
Commissions and fees $ 23,067 $ 28,284 $ 39,405
---------- ---------- ----------
OPERATING EXPENSES:
------------------
Salaries and related costs 16,218 19,143 26,507
Unusual costs 3,583 - 747
Client services 1,934 2,578 3,464
Rent and related charges 1,702 1,686 2,114
Amortization of goodwill 1,032 1,044 1,386
Depreciation and amortization 441 350 833
Other operating expenses 2,755 4,299 7,737
----------- --------- ---------
TOTAL OPERATING EXPENSES 27,665 29,100 42,788
----------- --------- ---------
OPERATING LOSS (4,598) (816) (3,383)
NONOPERATING EXPENSES:
---------------------
Interest, net 232 170 1,761
Amortization of deferred financing costs 87 398 281
------------ ----------- -----------
TOTAL NONOPERATING EXPENSES 319 568 2,042
------------ ----------- -----------
LOSS BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES (4,917) (1,384) (5,425)
PROVISION (BENEFIT) FOR INCOME TAXES 307 (3) 2
------------ ----------- -----------
NET LOSS (5,224) (1,381) (5,427)
------------ ----------- -----------
PREFERRED STOCK DIVIDEND - (21) (79)
------------ ----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK $ (5,224) $ (1,402) $ (5,506)
============ =========== ===========
LOSS PER SHARE - BASIC AND DILUTED $ (2.09) $ (.57) $ (2.24)
============ =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON 2,496,928 2,439,259 2,455,550
SHARES 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, 1996, 1997 AND 1998
(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, 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
Net issuance costs - - (161) - (161)
Dividends on redeemable preferred stock - - 37 (57) (20)
Net loss - - - (1,381) (1,381)
--------- ----------- --------- ---------- ----------
BALANCE, DECEMBER 31, 1997 2,440 24 5,537 (13,116) (7,555)
Preferred stock converted to common stock 15 - 100 (216) (116)
Stock dividends on redeemable preferred stock 21 - 136 - 136
Other - - - (22) (22)
Net loss - - - (5,427) (5,427)
BALANCE, DECEMBER 31, 1998 2,476 $ 24 $5,773 $(18,781) $(12,984)
=========== ======== ========= ========== ============
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(000'S OMITTED)
1996 1997 1998
----- ----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (5,224) $(1,381) $ (5,427)
Adjustments to reconcile net loss
to net cash used in operating activities:
Present value interest on Deferred Purchase Price - 140 603
Depreciation and amortization 441 350 859
Loss on disposals of fixed assets 254 41 118
Amortization of deferred financing costs 87 398 281
Bad debt expense 60 127 692
Amortization of goodwill 1,032 1,044 1,386
Deferred taxes 76 - -
Decrease in lease related reserves (1,278) (1,611) (1,282)
Office closure - - (4,433)
Other - 100 -
(Increase) decrease in accounts receivable 7,653 (267) (3,056)
(Increase) decrease in expenditures billable to clients 196 1,372 (1,223)
(Increase) decrease in other current assets 528 (293) 142
(Increase) decrease in other assets (89) - 44
Increase (decrease) in bank overdraft 2,865 (2,865) -
Increase (decrease) in accounts payable (7,362) 3,879 5,927
Increase (decrease) in accrued expenses (1,174) 366 714
Increase (decrease) in advanced billings 1,884 (1,459) (1,705)
Decrease in deferred payouts (46) (250) (619)
---------- ---------- ---------
NET CASH USED IN OPERATING ACTIVITIES (97) (309) (6,979)
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (185) (268) (1,705)
Cash paid for acquisitions, net of cash acquired (1,888) (399) (300)
Acquisition costs (347) (618) -
------------ ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (2,420) (1,285) (2,005)
------------ ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred dividends - (21) (79)
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 8,042
Increase in deferred financing costs (225) (795) -
----------- --------- ------------
Net cash provided by financing activities 1,355 4,245 7,963
----------- ---------- ------------
Net decrease in cash and cash equivalents (1,162) (2,651) (1,021)
----------- ---------- ------------
CASH AND CASH EQUIVALENTS, beginning of year 1,729 567 3,218
---------- ---------- ------------
CASH AND CASH EQUIVALENTS, end of year $ 567 $ 3,218 $2,197
========== ========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 1996 1997 1998
---- ---- ----
CASH PAID DURING THE PERIOD FOR:
Interest $ 297 $ 110 $ 1,170
Income taxes 140 37 2
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.
The Company is a full service advertising and marketing communications company
operating on a national basis through four advertising agencies collectively
having offices 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 considers all of its operations to be one operating segment.
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 5 contains covenants restricting the Company from making
capital expenditures in excess of specified amounts. Furthermore, issuances of
securities, either to finance or consummate acquisitions or to obtain operating
working capital, could dilute existing shareholders.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include all of the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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.
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.
CASH AND CASH EQUIVALENTS
Cash includes cash on hand and in banks. The Company considers all highly liquid
investments with original maturity of three months or less to be cash
equivalents.
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 net accounts receivable at December 31, 1997 and 1998 are allowances
for uncollectible accounts of $1,087,000 and $1,562,000, respectively.
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. Such 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. No such securities were received during 1998. The
investment balances are $252,495 and $190,762 as of December 31, 1997 and 1998,
respectively. There are no material unrealized holding gains or losses as of
December 31, 1998.
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 lesser of their estimated useful lives or the remaining
lease term. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets to be
Disposed of, the Company reviews its recorded property and equipment for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable and provides currently for
any identified impairments. 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 cost 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, 1997 and 1998, accumulated
amortization of goodwill amounted to $2,662,000 and $ 4,048,000, respectively.
Management periodically evaluates goodwill for impairment on the basis of a
comparison of the undiscounted future estimated cash flows arising from the
acquired business to the related unamortized goodwill.
DEFERRED FINANCING COSTS
Deferred financing costs at December 31, 1997 and 1998 represent financing costs
incurred in connection with a credit facility obtained in October 1997, as
discussed in Note 5. 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.
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, by 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 7.
INCOME TAXES
The Company accounts for income taxes under the liability method in accordance
with SFAS No. 109, Accounting for Income Taxes. In accordance with such
standard, the provision for income taxes includes deferred income taxes
resulting from items reported in different periods for income tax and financial
statement purposes. Deferred tax assets and liabilities represent the expected
future tax consequences of the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The effects of changes in tax rates on deferred tax assets and
liabilities are recognized in the period that includes the enactment date.
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
In 1998, the Company had no client from whom revenues exceeded 10% of
consolidated revenues. In the years ending December 31, 1996 and 1997, the
Company had one client from whom revenues were 11.0% and 16.0% of consolidated
revenues, respectively.
As of December 31, 1997 and 1996, the aggregate amounts due from clients which
accounted for 10% or more of revenues in each applicable year and included in
accounts receivable were $1,831,064, or 5% and $6,004,865, or 27%, 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.
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:
1996 1997 1998
---- ---- ----
Fair value of non-cash assets acquired $30,794 $ 18,681 $ 752
Cash paid, net of cash acquired (2,235) (399) (300)
Common shares (2,015) (2,500) -
-------- ---------- -------
Liabilities assumed $26,544 $ 15,782 $ 452
======== ========== =======
OTHER ACQUISITIONS
In May 1998, the Company acquired certain assets of Scaros and Casselman, Inc.
("S&C"), a Connecticut based advertising agency. Total consideration to be paid
for this purchase is approximately $800,000. The operations of S&C, which have
been merged into the New York office, are not material to the consolidated
results of operations.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires the disclosure of a
company's comprehensive income, such as unrealized gains and losses on
investments and foreign currency translation adjustments, as a separate
component of stockholders' equity. The Company recorded no material
comprehensive income during the periods presented.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standard Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 must be applied in the first quarter of fiscal years beginning after June
15, 1999, and in general requires that entities recognize all derivative
financial instruments as assets or liabilities, measured at fair value, and
include in earnings the changes in the fair value of such assets and
liabilities. SFAS No. 133 also provides that changes in the fair value of assets
or liabilities being hedged with recognized derivative instruments be recognized
and included in earnings. The Company does not utilize derivative instruments,
either for hedging or other purposes, and therefore anticipates that the
adoption of the requirements of SFAS No. 133 will not have a material affect on
its financial statements.
FINANCIAL CONDITION
At December 31, 1998, the Company had a working capital deficit of $28,137,000,
reflecting an increase of $9,799,000 from the December 31, 1997 working capital
deficit caused principally by negative operating cash flows of $4,822,000 and
capital and acquisition expenditures of $2,005,000. The Company has recently
revised its credit agreement, as discussed in Note 11, and management believes
it has sufficient working capital to continue to fund its operations. For
additional information on liquidity and capital resources see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the accompanying Form 10(K).
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 issued 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 Stock Purchase Agreement for the F&K acquisition requires the Company to
make additional purchase price payments on the first, second and third
anniversaries of the acquisition. On January 15, 1999, the sellers received 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 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 in the accompanying consolidated statement of operations.
During the third quarter of 1998, the former Los Angeles office of EJL was
closed as a result of diminished client revenues (see Note 9).
The acquisition of EJL as of January 1, 1996 would not have had a material
effect on the results of operations for the year ended December 31, 1996.
4. PROPERTY AND EQUIPMENT
Fixed assets as of December 31, 1997 and 1998 are summarized as follows (000's
omitted):
1997 1998
---- ----
Equipment $2,161 $1,721
Furniture and fixtures 917 592
Leasehold improvements 869 1,098
Autos 47 -
Computers 509 2,118
------- -------
4,503 5,529
Less- Accumulated depreciation
and Amortization 2,470 2,768
----- -----
$2,033 $2,761
====== ======
5. CREDIT FACILITIES
Concurrent with the Company's offering of common stock in January 1995 and the
repayment of the subordinated loan, 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 offering, the
Company borrowed $2 million under the Reducing Revolving Credit Agreement which,
when added to the net proceeds of the offering enabled the Company to repay the
subordinated loan. 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 December 31, 1996, 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, 1998, borrowings of
$12,684,000 were outstanding and additional borrowings of $8,664,000 were
available under the Sanwa facility.
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.
6. 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. During 1998, 100 shares of the Series A
Convertible Preferred Stock were converted into 15,384 shares of common stock.
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. No shares were
converted in 1997.
Dividends on the Series A Preferred Stock are payable quarterly at a rate of $25
per share. Holders of 1,375 shares of the Series A Preferred Stock elected to
receive the first four dividend payments in the form of shares of the Company's
common stock, valued at $6.50 per share.
7. 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 500,000 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. As
of March 12, 1999, 398,000 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, 1996, 1997 and 1998:
Weighted
Number Average
of Exercise
shares Price
--------------- ---------------
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
Granted 216,000 9.91
Exercised - -
Forfeited - -
--------------- ----------------
Outstanding at December 31, 1998 398,000 8.36
================ ================
Options exercisable at December 31, 1998 369,667 $8.36
================ ================
<PAGE>
The Company has adopted the disclosure only provisions of SFAS No. 123 (see Note
1) and is continuing to recognize compensation expense using the intrinsic value
method under APB No. 25. Had compensation expense for the Company's stock
options been recognized based on the fair market value at the grant date for
awards, 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)
1998 1997 1996
---- ---- ----
Net Loss: as reported $(5,506) $(1,381) $ (5,224)
Net Loss: pro forma $(6,547) $(1,506) $ (5,625)
Net Loss
per Share: as reported $ (2.24) $ (.57) $ (2.09)
Net Loss
per Share: pro forma $ (2.67) $ (.62) $ (2.25)
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.
8. 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 $325,000,
$350,000 and $450,000 for 1996, 1997 and 1998, respectively, and Mr. Veru was
paid an annual base salary of $325,000, $350,000 and $450,000 for 1996, 1997 and
1998, 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 1997 and 1998 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 to 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 $200,000 per year.
Concurrent with the acquisition of EJL, the Company entered into five year
employment agreements expiring February 13, 2001 with four executives of EJL.
Pursuant to these agreements, Mr. Laws and Mr. Coe were to serve as Chairman of
Lois/EJL Los Angeles, and President and Chief Executive Officer of Lois/EJL Los
Angeles, respectively, and were to each receive a base salary of $325,000 per
year. Michele de Maio serves as President of Lois/EJL Chicago and receives 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. Effective July 30, 1998,
the employment agreement of Mr. Laws was terminated and he received a series of
payments totaling $762,000 in settlement of such agreement. The employment
agreement with Mr. Coe was terminated on January 31, 1999. Mr. Coe will receive
a lump sum payment of $600,000 on or after March 31, 1999. This amount accrues
interest at 10% from April 1, 1999 until the payment is made. Concurrent with
the acquisition of EJL, the Company also 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).
Concurrent with the acquisition of Scaros & Casselman, Dean Scaros received a
three year employment agreement terminating on May 14, 2001. Under such
agreement, Mr. Scaros will receive a base salary of $300,000 and is eligible to
receive an annual bonus based upon meeting certain profit goals.
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:
1999 $ 2,998
2000 2,817
2001 1,433
2002 812
2003 935
Thereafter 6,187
-----------
$ 15,182
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 the then current fair market value. This liability was
included on the accompanying consolidated balance sheet as of December 31, 1997
as lease related reserves. During 1998, the Company settled the remaining
liability under the Los Angeles lease for total consideration of $370,000 and
the remainder of the liability established at the acquisition of EJL was
credited as a reduction of the charges resulting from the Los Angeles office
closure (see Note 9).
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 that 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, $76,502 and $333,835 in 1996, 1997 and 1998, 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.
9. OFFICE CLOSURE - UNUSUAL COSTS
In the third quarter of fiscal 1998, the Company decided to close the Los
Angeles office, which had been acquired in February 1996 as part of the
acquisition of EJL. The decision was made after the Company concluded that
client losses that began in the second half of fiscal 1997 were not being
replaced at a rate necessary to support the expenses of that office. Those
expenses included significant lease obligations, which, before making the
decision to close the office, the Company determined through negotiations with
the lessor could be reduced if the space was abandoned. The office was closed in
September 1998. In connection with this action, the Company recorded charges
totaling $3,292,000, comprised of $370,000 for the cost of the termination of
the lease, $118,000 for the cost of furniture and fixtures surrendered to the
lessor as part of the lease termination, $1,677,000 for severance costs for the
employees of the office and $1,127,000 for other office closure costs, which
charges were offset by the reversal of the $3,870,000 remaining of the liability
for EJL's unfavorable Los Angeles lease the Company recorded at the time EJL was
acquired and the reversal of the $563,000 remaining liability recorded for
certain salary arrangements entered into in connection with the acquisition (see
Note 3 and Note 8).
Unusual Costs also includes $913,000 for the future lease costs related to the
space in the Company's New York office which will become unused as the result of
the reduction of employees in that office, $523,000 of other New York
restructuring costs, $384,000 for the severance costs for reductions in the
workforce in New York, which were completed in the first quarter of 1999 and
$68,000 recorded in the fourth quarter of 1998 for the severance costs of
reductions in the workforce in Chicago.
Unusual Costs in 1996 relate to the closure of EJL's Houston office. See Note 3.
10. INCOME TAXES
The Company, organized under the laws of Delaware, is subject to state and local
taxes where it does business. The Company files a consolidated federal income
tax return with its subsidiaries and is able to offset income and losses of the
consolidated group to reduce federal taxable income. The individual
subsidiaries, however, are subject to state and local taxes based on their
respective incomes and minimum franchise taxes.
The components of provision for income taxes for the years ended December 31,
1995, 1996 and 1997 are as follows (000's omitted):
1996 1997 1998
---------------------------------------------
Current:
Federal $ - $ - $ -
State and local 231 (3) (2)
---------------------------------------------
Total current 231 (3) (2)
---------------------------------------------
Deferred:
Federal - - -
State and local 76 - -
---------------------------------------------
Total deferred 76 - -
---------------------------------------------
Total $ 307 $ (3) (2)
=============================================
The net deferred tax asset as of December 31, 1997 and 1998 consists of the
following amounts (000's omitted):
1997 1998
---------------------------------
Net operating loss carryforwards $ 2,932 $ 4,920
Bad debt reserve 360 640
Lease related reserves 2,008 542
Severance accruals 41 41
Valuation allowance (5,341) (6,143)
-------- ----------
Deferred tax asset $ - $ -
======== ==========
The valuation allowance was increased in 1996, 1997 and 1998 to fully reserve
for the deferred tax assets, reflecting management's belief that the 1996, 1997
and 1998 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):
1996 1997 1998
-------------------------------------------
Income taxes (benefit) computed at $(1,672) $ (471) $(1,845)
federal statutory rate of 34%
State taxes, net of federal benefit 231 37 25
Non-deductible goodwill amortization 387 392 532
Non-deductible costs 50 51 62
Adjustments of prior year accruals and
other, including changes in the
valuation allowance 1,311 (12) 1,228
------ ----- ------
Provision (benefit) for income taxes $ 307 $ (3) $ 2
===== ===== =======
11. SUBSEQUENT EVENTS
On June 17, 1999, the Company entered into a syndicated credit facility with
Greentree Financial Servicing Corporation for a $30 million syndicated facility,
which replaced its credit facility with Sanwa. The credit facility has a term of
three years and bears interest up to 4.0% above LIBOR. As in the facility it
replaced, borrowings are secured by essentially all of the assets of the
Company, including the stock and assets of the Company's subsidiaries. The
amount available under the facility is based upon a specified percentage of
eligible accounts receivable. The agreement contains various financial
covenants, the most significant of which are based upon EBITDA, Interest
Coverage Ratios, and Fixed Charge Coverage Ratios.
<PAGE>
LOIS/USA INC.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth a summary of the unaudited quarterly results of
operations for the two years ended December 31, 1998 and 1997, in thousands of
dollars except for per share amounts.
<TABLE>
<CAPTION>
First Second Third Fourth
<S> <C> <C> <C> <C>
Commissions & Fees
1998........................... $ 9,645 $ 10,650 $ 8,642 $ 10,468
1997........................... 7,690 8,210 6,844 5,540
Income before Income Taxes
1998........................... (1,424) (675) 115 (3,441)
1997........................... 477 809 (111) (2,559)
Income Taxes
1998........................... 2 - 1 (1)
1997........................... 34 - 3 (40)
Net Income
1998........................... (1,426) (675) 114 (3,440)
1997........................... 443 809 (114) (2,519)
Basic and Diluted Earnings
Per Share
1998........................... (0.61) (0.30) 0.02 (1.35)
1997........................... 0.17 0.32 (0.07) (0.99)
</TABLE>
<PAGE>
LOIS/USA INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additions Deductions
Balance at Charged to Removal of Balance
Beginning of Costs and Uncollected at End
Description Period Expenses Unreceivables(1) of Period
----------- ------------ ----------- ---------------- ---------
Valuation accounts
deducted from assets to
which they apply-
allowance for doubtful
accounts
<S> <C> <C> <C> <C>
December 31, 1998 1,087 607 132 1,562
December 31, 1997 823 87 (177) 1,087
December 31, 1996 413 67 (343) 823
(1) Net of acquisition date balances in allowance for doubtful accounts of
companies acquired of $604 and $310 in 1997 and 1996, respectively.
</TABLE>
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
LOIS/USA INC.
By: /s/ Theodore D. Veru
________________________
Theodore D. Veru
CO-CHAIRMAN OF THE BOARD,
CO-CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
SIGNATURE Title Date
/s/ George Lois Co-Chairman of the Board, June 25, 1999
- ---------------------- Co-Chief Executive Officer and
George Lois Director
/s/ Theodore D. Veru Co-Chairman of the Board, June 25, 1999
- ---------------------- Co-Chief Executive Officer
Theodore D. Veru President, and Director
/s/ Robert K. Stewart Executive Vice President, June 25, 1999
- ---------------------- Chief Financial Officer,
Robert K. Stewart Treasurer and Secretary
(Principal Financial Officer
and Principal Accounting
Officer)
/s/ John N. Hatsopoulos Director June 25, 1999
- -----------------------
John N. Hatsopoulos
/s/ David DeBusschere Director June 25, 1999
- -----------------------
David DeBusschere
/s/ Dennison T. Veru Director June 25, 1999
- -----------------------
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 shareholders of Eisaman, Johns & Laws Advertising, Inc. and
Lois/USA Inc.
+2.1 Stock Purchase Agreement dated as of December 17, 1997, by and among
the 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.
#9.1 Shareholders' Agreement dated as of February 14, 1996, by and among
each of Dennis Coe, Dean Laws, Michele de Maio and Michael Waterkotte,
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 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 Letter Agreement dated December 9, 1994 among Lois/USA, Sands Brothers
and Trigger Associates.
H10.23 Loan and Security Agreement dated as of June 17, 1999 by and among ZYX
Inc. (formerly Lois/USA West, Inc.), Lois/USA Chicago, Inc., Lois/USA
New York, Inc., Fogarty Klein, Inc., Year 2K Communications, Inc., the
Lenders named therein and Green Tree Financial Servicing Corporation
(the "Loan and Security Agreement").
Z10.24 Pledge Agreement dated as of June 17, 1999 between Lois/USA Inc., as
pledgor, and Green Tree Financial Servicing Corporation, as agent for
the lenders under the Loan and Security Agreement.
Z10.25 Guaranty dated as of June 17, 1999 by Lois/USA Inc. in favor of Green
Tree Financial Servicing Corporation, as agent for the lenders under
the Loan and Security Agreement.
21.1 List of subsidiaries.
-----------------------
* 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 December 31, 1997.
H Incorporated by reference herein from the Company's Current Report on Form
8-K, dated June 21, 1999.
# Incorporated by reference herein from the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
Z Attached an exhibit hereto.
Exhibit 10.24
PLEDGE AGREEMENT
This PLEDGE AGREEMENT ("PLEDGE AGREEMENT") is made as of this 17 day
of June, 1999 between LOIS/USA INC., a Delaware corporation (the "PLEDGOR"), and
GREEN TREE FINANCIAL SERVICING CORPORATION, as agent, for its benefit and the
benefit of the Lenders (in such capacity, "AGENT").
WHEREAS, Pledgor is the legal and beneficial owner of all of the
issued and outstanding capital stock described on EXHIBIT 1 hereto issued by the
corporations named therein; and
WHEREAS, Agent and the Persons from time to time designated as lenders
thereunder ("LENDERS") have entered into that certain Loan and Security
Agreement dated as of the date hereof (as amended, supplemented, restated or
otherwise modified from time to time, the "LOAN AGREEMENT") with ZYX INC.
(formerly LOIS/USA WEST INC.), LOIS/USA Chicago Inc., LOIS/USA New York Inc.,
Fogarty & Klein, Inc., and Year 2K Communications, Inc.; and
WHEREAS, Pledgor has executed the Parent Guaranty in favor of Agent,
for its benefit and the ratable benefit of Lenders, whereby Pledgor guarantees
all Obligations of the Borrowers under the Loan Agreement (the "GUARANTY"); and
WHEREAS, in connection with the making of the loans and other
extensions of credit under the Loan Agreement and as security for the
obligations of Pledgor under the Guaranty, Lenders and Agent are requiring that
Pledgor shall have executed and delivered this Pledge Agreement and granted the
security interests contemplated hereby.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Pledgor hereby agrees with Agent as follows:
1. DEFINED TERMS. As used in this Pledge Agreement,
"Lien" shall mean, with respect to the property or assets of any
Person, any statutory or contractual lien, security interest, mortgage, pledge,
claim, encumbrance, charge, hypothecation, assignment, deposit arrangement,
filing of, or agreement to give, any financing statement, encumbrance or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever, whether voluntary or involuntary (including,
without limitation, the interest of a vendor or lessor under any conditional
sale, capitalized lease or other title retention agreement), in, of or on any of
the property or assets of such Person in favor of any other Person.
"Pledged Collateral" means the Pledged Stock and the Stock Rights,
including the proceeds of each.
"Pledged Stock" means the respective shares of capital stock of the
Borrowers described on EXHIBIT 1 hereto, together with the certificates or other
instruments or securities representing such shares.
"Secured Obligations" shall have the meaning assigned to such term in
SECTION 2 hereof.
"Stock Rights" means any stock, any dividend or other distribution and
any other right or property which the Pledgor shall receive or shall become
entitled to receive for any reason whatsoever with respect to, in substitution
for or in exchange for any shares of the Pledged Stock and any stock, any right
to receive stock and any right to receive earnings, in which the Pledgor now has
or hereafter acquires any right, issued by the issuer of the Pledged Stock.
The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms. Unless otherwise defined herein,
all terms used herein and defined in the Code shall have the meanings ascribed
thereto in the Code. In addition, unless otherwise defined herein, all defined
terms herein shall have the respective meanings ascribed thereto in the Loan
Agreement as in effect on the date hereof.
2. PLEDGE. To secure all indebtedness, liabilities and obligations of
Pledgor now or hereafter existing under this Pledge Agreement and under the
Guaranty (collectively, the "SECURED OBLIGATIONS") the Pledgor hereby delivers
to Collateral Agent and hereby pledges, assigns, transfers and grants to Agent a
first Lien on the Pledged Collateral. All of the Pledged Stock, together with
undated stock powers duly executed in blank by the Pledgor, are being delivered
to Agent simultaneously herewith.
3. REPRESENTATIONS AND WARRANTIES OF THE PLEDGOR. Pledgor represents
and warrants to Agent that:
3.1 EXISTENCE AND STANDING. Pledgor is duly organized, validly
existing and in good standing under the laws of its jurisdiction of organization
and has all requisite authority to conduct its business in each jurisdiction in
which its business is conducted.
3.2 AUTHORIZATION, VALIDITY AND ENFORCEABILITY. Pledgor has full
power, authority and legal right to execute this Pledge Agreement and to pledge
the Pledged Collateral to Agent. The execution and delivery by Pledgor of this
Pledge Agreement have been duly authorized by all necessary action and this
Pledge Agreement constitutes a legal, valid and binding obligation of Pledgor
enforceable against Pledgor in accordance with its terms, creates a security
interest which is enforceable against Pledgor in the Pledged Collateral and will
create a security interest enforceable against Pledgor in the Stock Rights and
the proceeds of the Pledged Stock and the Stock Rights at the time Pledgor
acquires any right therein, in each such case subject to bankruptcy, insolvency,
liquidation, reorganization and other laws of general application affecting the
rights and remedies of creditors.
3.3 CONFLICTING LAWS AND CONTRACTS. Neither the execution and delivery
by the Pledgor of this Pledge Agreement, the creation and perfection of the Lien
on the Pledged Collateral granted hereunder, nor compliance with the terms and
provisions hereof violate or will violate any law, rule, regulation, order,
writ, judgment, injunction, decree or award binding on Pledgor or Pledgor's
Certificate of Incorporation or Bylaws or, except as disclosed on EXHIBIT 3.3
hereto, the provisions of any indenture, instrument or agreement to which
Pledgor is a party or is subject, or by which it, or its property, is bound, or
conflict with or constitute a default thereunder, or result in the creation or
imposition of any Lien pursuant to the terms of any such indenture, instrument
or agreement.
3.4 OWNERSHIP OF PLEDGED STOCK. Pledgor is the direct legal and
beneficial owner of each share of each Borrower and such Pledged Stock
represents 100% of the issued and outstanding stock of its issuer. The Pledged
Stock represents all of the issued and outstanding shares of stock of such
issuer owned by Pledgor.
3.5 OTHER AGREEMENTS. Except as disclosed on EXHIBIT 3.3 hereto,
Pledgor has not performed any act or executed any instrument, agreement or other
document that might prevent or hinder Agent from obtaining and enjoying fully
and completely all of the benefits, rights and powers conferred, or sought to be
conferred, upon Agent by this Pledge Agreement.
3.6 ISSUANCE OF PLEDGED STOCK. Each share of the Pledged Stock has
been duly and validly issued, is fully paid and non-assessable and is owned by
the Pledgor free and clear of any Lien other than the Lien created by this
Pledge Agreement.
3.7 CONSENTS. No consent, approval or authorization of, notice to,
designation or filing with, or other action by, any Person is required in
connection with the execution, delivery and performance of the pledge and Lien
granted under this Pledge Agreement by the Pledgor, or in connection with the
exercise of remedies with respect to the Pledged Collateral pursuant to this
Pledge Agreement.
3.8 PRIORITY. The pledge, assignment and delivery of the Pledged
Collateral pursuant to this Pledge Agreement creates a valid first perfected
Lien on Pledgor's interest in such Pledged Collateral and the proceeds thereof
in favor of Agent, subject to no prior Lien of any other Person.
4. COVENANTS AND REPRESENTATIONS. From the date of this Pledge
Agreement until the Pledge Agreement is terminated pursuant to SECTION 7.13:
4.1 Pledgor shall:
4.1.1 DELIVERY OF CERTAIN ITEMS. Except as otherwise permitted by
the Loan Agreement, hold in trust for Agent and deliver forthwith (and
without any necessity for any request or demand by Agent) to Agent, in
the exact form received, with the endorsement of Pledgor when
necessary and/or appropriate instruments of transfer, assignment or
endorsement as applicable, duly executed in blank, any additional
stock certificates, cash, checks, draft, remittances, documents,
promissory notes, instruments, debt securities or other proceeds
evidencing or constituting Pledged Collateral, whether as an addition
to, in substitution for, or in exchange for any of the Pledged
Collateral, or otherwise. In case any property shall be distributed
upon or with respect to any Pledged Collateral pursuant to the
recapitalization or reclassification of the capital of the issuer
thereof or pursuant to the reorganization thereof, except as otherwise
permitted by the Loan Agreement, the property so distributed shall be
delivered to Agent to be held by it as additional collateral security
for the Secured Obligations. All sums of money and property so paid or
distributed in respect of any Pledged Collateral which are received by
Pledgor shall, until paid or delivered to Agent in accordance with the
terms hereof, be held by Pledgor in trust as additional collateral
security for the Secured Obligations.
4.1.2 TAXES. Pay when due all taxes, assessments and governmental
charges and levies upon the Pledged Collateral, except those being
contested in good faith by appropriate proceedings and with respect to
which no Lien exists.
4.1.3 NOTICE OF DEFAULT. In accordance with the provisions of the
Loan Agreement, give prompt notice in writing to Agent of the
occurrence of any Default or Event of Default and of any other
development, financial or otherwise, which might materially adversely
affect the value of the Pledged Collateral or the ability of Pledgor
to perform the Secured Obligations.
4.1.4 STOCK POWERS AND OTHER ACTIONS. Execute and deliver to
Agent all stock powers, assignments, financing statements,
endorsements, instruments and other documents and take all further
action, at the expense of Pledgor, from time to time requested by
Agent in order to perfect or maintain a first perfected Lien on the
Pledged Collateral in favor of Agent or to enable Agent to exercise
and enforce its rights and remedies hereunder with respect to the
Pledged Collateral or to effect a transfer of the Pledged Collateral,
or any part thereof. All instruments representing or evidencing the
Pledged Collateral shall be delivered to and held by Agent pursuant
hereto and shall be in suitable form for transfer or assignment in
blank, all in form and substance satisfactory to Agent.
4.1.5 REPORTS. Furnish to Agent such reports relating to the
Pledged Collateral as Agent shall from time to time request.
4.1.6 DEFENSE OF COLLATERAL. Defend for the benefit of Agent,
Agent's right, title and Lien acquired by this Pledge Agreement in and
to the Pledged Collateral and the proceeds thereof against the claims
and demands of all other Persons.
4.2 Pledgor shall not:
4.2.1 LIENS. Create, incur, or suffer to exist any Lien on the
Pledged Collateral except the Lien created by this Pledge Agreement or
waive or forgive any indebtedness evidenced by any of the Pledged
Collateral, or amend the terms thereof or extend the maturity thereof,
or perform any act or execute any instrument that might prevent or
hinder Agent from obtaining and enjoying, fully and completely, all of
the benefits, rights and privileges conferred or sought to be
conferred upon Agent by this Pledge Agreement.
4.2.2 DISPOSITION OF COLLATERAL. Sell or otherwise dispose of all
or any part of the Pledged Collateral.
4.2.3 CHANGES IN CAPITAL STRUCTURE OF ISSUER. (a) Permit or
suffer any issuer of the Pledged Stock to dissolve, liquidate, retire
any of its capital stock, reduce its capital or merge or consolidate
with any other Person, or (b) vote any of the Pledged Stock or Stock
Rights in favor of any of the foregoing.
4.2.4 ISSUANCE OF ADDITIONAL STOCK. Permit or suffer the issuer
of the Pledged Stock to issue any stock, any right to receive stock or
any right to receive earnings, except to Pledgor.
5. REMEDIES.
5.1 ACCELERATION AND REMEDIES. If any Event of Default has occurred
and is continuing, then, upon the election of Agent, the Secured Obligations
shall immediately become due and payable without presentment, demand, protest or
notice of any kind, all of which are hereby expressly waived, and Agent may (a)
exercise all rights set forth in SECTION 7.3 and (b) exercise any or all of the
rights and remedies provided (i) in this Pledge Agreement, (ii) in the Code to a
secured party when a debtor is in default under a security agreement and (iii)
by any other applicable law or agreement.
5.2 FORECLOSURE SALES. (a) Without limiting the provisions of SECTION
5.1, Agent may, following the occurrence and during the continuance of an Event
of Default, without notice except as specified below, and to the extent
permitted under applicable law, sell the Pledged Collateral or any part thereof
in one or more transactions at public or private sale, for cash or property and
at such price or prices and upon such other terms as Agent may deem commercially
reasonable, irrespective of the impact of any of such sales on the value of any
of the Pledged Collateral. To the extent permitted under applicable law, Agent
may be the purchaser of any or all of the Pledged Collateral at any such sale.
Each purchaser at any such sale shall hold the property sold absolutely free
from any claim or right on the part of Pledgor, and Pledgor hereby waives (to
the extent permitted by law) all rights of redemption, stay and/or appraisal
which it now has or may at any time in the future have under any rule of law or
statute now existing or hereafter enacted. Agent shall not be obligated to make
any sale with respect to the Pledged Collateral regardless of a notice of sale
having been given. Agent may adjourn any public or private sale from time to
time by announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned.
(b) Pledgor recognizes that, by reason of certain prohibitions
contained in the Securities Act of 1933, as amended (the "Securities Act"), and
applicable state securities laws, Agent may be unable to effect a public sale or
disposition of any or all of the securities included within the Pledged
Collateral but may be compelled to resort to one or more private sales or
dispositions thereof to a restricted group of purchasers who will agree, among
other things, to acquire the Pledged Collateral for their own account, for
investment and not with a view to the distribution or resale thereof. Pledgor
acknowledges that any sales under such restrictions may be at prices and on
terms less favorable than those obtainable through a sale without such
restrictions (including, without limitation, a public offering made pursuant to
a registration statement under the Securities Act), and notwithstanding such
circumstances, agrees that any sale under such restrictions shall be deemed to
have been made in a commercially reasonable manner and that Agent shall have no
obligation to engage in sales without such restrictions and no obligation to
delay the sale of any securities included within the Pledged Collateral for the
period of time necessary to permit the issuer thereof to register it for a form
of public sale requiring registration under the Securities Act or under
applicable state securities laws, even if Pledgor would agree to do so.
6. WAIVERS, AMENDMENTS AND REMEDIES. No course of dealing between
Agent and Pledgor and no delay or omission of Agent to exercise any right,
power, privilege or remedy granted under this Pledge Agreement, the Loan
Agreement or any other Financing Agreement or any collateral document or
guaranty related thereto shall impair such right or remedy or be construed to be
a waiver of any Event of Default or an acquiescence therein, and any single or
partial exercise of any such right or remedy shall not preclude other or further
exercise thereof or the exercise of any other right, power, privilege or remedy,
and no waiver, amendment or other variation of the terms, conditions or
provisions of this Pledge Agreement whatsoever shall be valid unless in writing
signed by Agent, and then only to the extent in such writing specifically set
forth. All rights, power, privilege and remedies contained in this Pledge
Agreement shall be cumulative, are in addition to such other rights, power,
privileges and remedies Agent may have by law or otherwise and shall be
available to Agent until the Secured Obligations have been paid in full.
7. GENERAL PROVISIONS.
7.1 SPECIAL COLLATERAL ACCOUNT. All cash received by Agent with
respect to the Pledged Collateral pursuant to SECTION 4.1.1 or upon the exercise
of the remedies provided for in SECTION 5.1, shall be deposited into a special
collateral account with Agent and shall be held by Agent as security for the
Secured Obligations. Pledgor shall have no control whatsoever over said special
collateral account. Agent shall apply any part of the credit balance in said
special collateral account to the payment of the Secured Obligations, whether or
not any of them shall be then due.
7.2 APPLICATION OF PROCEEDS. All cash, property or other proceeds
received by Agent pursuant to the enforcement of this Pledge Agreement, the Loan
Agreement or any other Financing Agreement or any collateral document or
guaranty related to any of the foregoing after acceleration of the Secured
Obligations shall be distributed in the manner set forth in the Loan Agreement.
7.3 EXERCISE OF RIGHTS IN PLEDGED COLLATERAL. After the occurrence and
during the continuance of an Event of Default, Agent or its nominee may, but
shall not be obligated to, at any time and from time to time, without notice to
the Pledgor, exercise all voting and corporate rights relating to the Pledged
Collateral including, without limitation, exchange, subscription or any other
rights, privileges, or options pertaining to any shares of the Pledged Stock and
the Stock Rights, as if it were the absolute owner thereof. Upon the occurrence
and during the continuance of an Event of Default, in the event that Pledgor, as
record and beneficial owner of the Pledged Stock, shall receive or shall become
entitled to receive, any cash dividends or other distributions, Pledgor shall
deliver to Agent, and Agent shall be entitled to receive and retain, all such
cash or other distributions. At all times when no Event of Default has occurred
and is continuing, Pledgor shall be entitled to vote its Pledged Stock and
otherwise exercise the incidents of ownership of the Pledged Stock.
7.4 NOTICE OF DISPOSITION OF COLLATERAL. Notice of the time and place
of any public sale or the time after which any private sale or other disposition
of all or any part of the Pledged Collateral may be made shall be reasonable if
sent to the Pledgor, addressed as set forth in SECTION 8, at least ten days
prior to any such public sale or the time after which any such private sale or
other disposition may be made.
7.5 POSSESSION OF COLLATERAL. Beyond the exercise of reasonable care
to assure the safe custody of the Pledged Collateral in the physical possession
of Agent pursuant hereto, neither Agent nor any nominee of Agent, shall have any
duty or liability to collect any sums due in respect thereof or to protect,
preserve or exercise any rights pertaining thereto, and shall be relieved of all
responsibility for the Pledged Collateral upon surrendering it to the Pledgor.
7.6 SPECIFIC PERFORMANCE OF CERTAIN COVENANTS. The Pledgor
acknowledges and agrees that a breach of any of the covenants contained in
SECTIONS 4.1.1, 4.1.4, 4.1.6, 4.2.2, 4.2.3 or 4.2.4 will cause irreparable
injury to Agent and that Agent has no adequate remedy at law in respect of such
breaches and therefore agrees, without limiting the right of Agent to seek and
obtain specific performance of other obligations of the Pledgor contained in
this Pledge Agreement, that the covenants of the Pledgor contained in the
Sections referred to in this SECTION 7.6 shall be specifically enforceable
against the Pledgor.
7.7 DEFINITION OF CERTAIN TERMS. Terms defined in the Code which are
not otherwise defined in this Pledge Agreement are used in this Pledge Agreement
as defined in the Code as in effect on the date hereof.
7.8 BENEFIT OF AGREEMENT. The terms and provisions of this Pledge
Agreement shall be binding upon and inure to the benefit of Agent and the
Pledgor and their respective successors and assigns, except that the Pledgor
shall not have the right to assign its rights or obligations under this Pledge
Agreement or any interest herein.
7.9 SURVIVAL OF REPRESENTATIONS. All representations and warranties of
the Pledgor contained in this Pledge Agreement shall survive the execution and
delivery of this Pledge Agreement.
7.10 TAXES AND EXPENSES. The Pledgor will upon demand pay to Agent (a)
any taxes (excluding income taxes, franchise taxes or other taxes levied on
gross earnings, profits or the like) payable or ruled payable by any Federal or
State authority in respect of this Pledge Agreement, together with interest and
penalties, if any, and (b) all reasonable expenses, including the reasonable
fees and expenses of counsel for Agent and of any experts and agents that Agent
may incur in connection with (i) the administration of this Pledge Agreement,
(ii) the custody or preservation of, or the sale of, collection from, or other
realization upon, any of the Collateral, (iii) the exercise or enforcement of
any of the rights of Agent hereunder, or (iv) the failure of the Pledgor to
perform or observe any of the provisions hereof.
7.11 CHOICE OF LAW. THIS PLEDGE AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS PROVISIONS)
OF THE STATE OF ILLINOIS.
7.12 HEADINGS. The title of and section headings in this Pledge
Agreement are for convenience of reference only, and shall not govern the
interpretation of any of the terms and provisions of this Pledge Agreement.
7.13 TERMINATION. This Pledge Agreement shall continue in effect until
no Secured Obligations shall be outstanding.
7.14 SEVERABILITY. The provisions of this Pledge Agreement are
severable and if any clause or provision thereof shall be held invalid or
unenforceable in whole or in part, then such invalidity or unenforceability
shall attach only to such clause or provision, or part thereof, and shall not in
any manner affect such clause or provision in any other jurisdiction or any
other clause or provision in this Pledge Agreement or any jurisdiction.
7.15 ATTORNEY-IN-FACT. Pledgor hereby irrevocably appoints Agent as
Pledgor's attorney-in-fact, with full authority in the place and stead of
Pledgor and in the name of Pledgor or otherwise, from time to time in Collateral
Agent's discretion reasonably exercised, to take any action and to execute any
instrument that Agent deems reasonably necessary or advisable to accomplish the
purposes of this Pledge Agreement, including, without limitation, to receive,
endorse and collect all instruments made payable to Pledgor representing any
dividend, principal, interest payment or other proceeds or distribution in
respect of the Pledged Collateral or any part thereof and to give full discharge
for the same, when and to the extent permitted by this Pledge Agreement.
7.16 INCORPORATION BY REFERENCE. The security interests granted
hereunder are granted in conjunction with the security interests granted to
Agent, for the benefit of Lenders, pursuant to the Loan Agreement. Pledgor
hereby acknowledges and affirms that the rights and remedies of Agent with
respect to the Pledged Collateral made and granted hereunder are more fully set
forth in the Loan Agreement, the terms and provisions of which are incorporated
by reference herein as if fully set forth herein.
8. NOTICES. Except as otherwise expressly provided herein, any notice
required or desired to be served, given or delivered hereunder shall be in
writing, and shall be deemed to have been validly served, given or delivered
three (3) days after deposit in the United States mails (by certified mail,
return receipt requested), with proper postage prepaid, or upon delivery by
courier or upon transmission by telex, telecopy or similar electronic medium to
the following addresses:
(i) If to Agent, at:
Green Tree Financial Servicing Corporation
100 North Point Center East, Suite 200
Alpharetta, Georgia 30022
Attn: Commercial Finance Division
Telecopy No.: (770) 772-3785
With a copy to:
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attn: Ronald H. Jacobson
Richard E. Morgan
Telecopy No.: (312) 558-5700
(ii) If to Pledgor at:
LOIS/USA, Inc.
40 West 57th Street
New York, New York 10019
Attn: Chief Financial Officer
Telecopy No.: (212) 373-4783
With a copy to:
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
Attn: Hillel M. Bennett
Telecopy No.: (212) 806-6006
or to such other address as each Person designates to the other in the manner
herein prescribed.
9. WAIVERS. The Pledgor waives presentment and demand for payment of
any of the Secured Obligations, protest and notice of dishonor or default with
respect to any of the Secured Obligations, and all other notices to which the
Pledgor might otherwise be entitled, except as otherwise expressly provided
herein.
10. COUNTERPARTS. This Pledge Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Pledge Agreement by
signing any such counterpart.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Pledge
Agreement to be duly executed and delivered by their duly authorized officers on
the date first above written.
LOIS/USA INC.
By: /s/ Robert K. Stewart
-------------------------
Name: Robert K. Stewart
Title: Executive Vice President
ACCEPTED AS OF THE DATE
FIRST SET FORTH ABOVE:
GREEN TREE FINANCIAL SERVICING CORPORATION,
as Agent
By: /s/ Chris Gouskos
Name: Chris Gouskos
Title: SVP
Exhibit 10.25
GUARANTY
This Guaranty (this "GUARANTY") is dated as of June 17, 1999, by
LOIS/USA, INC., a Delaware corporation ("GUARANTOR"), in favor of GREEN TREE
FINANCIAL SERVICING CORPORATION, for itself, as lender, and as agent (the
"AGENT") for the Lenders (as hereinafter defined).
RECITALS
WHEREAS, ZYX INC. (formerly LOIS/USA WEST INC.), a Delaware
corporation ("WEST"), LOIS/USA CHICAGO INC., a Delaware corporation ("CHICAGO"),
LOIS/USA NEW YORK INC., a Delaware corporation ("NEW YORK"), FOGARTY & KLEIN,
INC., a Texas corporation ("FKP") and YEAR 2K COMMUNICATIONS, INC., a Delaware
corporation ("Y2K") (West, Chicago, New York, FKP and Y2K are collectively
referred to herein as the "BORROWERS" and individually as a "BORROWER"), the
Agent and the lenders named therein (the "LENDERS"), have entered into that
certain Loan and Security Agreement of even date herewith (as amended,
supplemented or otherwise modified from time to time, the "LOAN AGREEMENT")
providing for the extension of loans and other financial accommodations from
Lenders to Borrowers; and
WHEREAS, Borrowers will become liable for their Obligations including,
without limitation, loans and other financial accommodations from the Lenders
(including the Agent in its individual capacity) under the Loan Agreement (all
Obligations being referred to herein as the "GUARANTY INDEBTEDNESS");
WHEREAS, Guarantor owns 100% of the outstanding shares of each
Borrower;
WHEREAS, Guarantor will derive substantial direct and indirect
economic benefit and advantage from the financial accommodations to Borrowers
set forth in the Loan Agreement, including, without limitation, the loans and
advances made to Borrowers thereunder, and it will be to Guarantor's direct and
indirect economic benefit to assist Borrowers in procuring such financial
accommodations from the Lenders; and
WHEREAS, a condition precedent to Agent and Lenders entering into the
Loan Agreement is that the Guarantor execute and deliver this Guaranty;
NOW, THEREFORE, for and in consideration of the premises and in order
to induce Agent and Lenders to enter into the Loan Agreement and Lenders to make
loans thereunder, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Guarantor hereby agrees as
follows:
SECTION 1. DEFINITIONS.
Unless otherwise defined herein, all capitalized terms used herein
shall have the respective meanings assigned to such terms in the Loan Agreement.
SECTION 2. GUARANTY OF PAYMENT.
(a) Guarantor, jointly and severally, hereby absolutely and
unconditionally guarantees the full and prompt payment to Agent, for its benefit
and the benefit of Lenders, when due, upon demand, at maturity or by reason of
acceleration or otherwise and at all times thereafter, of any and all existing
and future Guaranty Indebtedness.
(b) Guarantor acknowledges that valuable consideration supports this
Guaranty, including, without limitation, the consideration set forth in the
recitals above as well as any commitment to lend, extension of credit or other
financial accommodation, whether heretofore or hereafter made by Lenders to
Borrowers; any extension, renewal or replacement of any of the Guaranty
Indebtedness; any forbearance with respect to any of the Guaranty Indebtedness
or otherwise; any purchase of any assets of Borrowers by the Lenders; or any
other valuable consideration.
(c) Guarantor agrees that all payments under this Guaranty shall be
made in United States currency and in the same manner as provided for in the
Guaranty Indebtedness.
SECTION 3. COSTS AND EXPENSES.
Guarantor agrees, jointly and severally, to pay on demand, if not paid
by Borrowers, all costs and expenses of every kind incurred by Agent or Lenders:
(a) in enforcing this Guaranty, (b) in collecting any of the Guaranty
Indebtedness from the Borrowers or Guarantor, (c) in realizing upon or
protecting any collateral for this Guaranty or for payment of any of the
Guaranty Indebtedness, and (d) for any other purpose related to the Guaranty
Indebtedness or this Guaranty. "Costs and expenses" as used in the preceding
sentence shall include, without limitation, reasonable attorneys' fees incurred
by Agent or any Lender in retaining counsel for advice, suit, appeal, any
insolvency or other proceedings under Title 11 of the United States Code (the
"BANKRUPTCY CODE") or otherwise, or for any purpose specified in the preceding
sentence.
SECTION 4. NATURE OF GUARANTY: CONTINUING, ABSOLUTE AND UNCONDITIONAL.
(a) This Guaranty is and is intended to be a continuing guaranty of
payment of the Guaranty Indebtedness, independent of and in addition to any
other guaranty, indorsement, collateral or other agreement held by Agent or
Lenders therefor or with respect thereto, whether or not furnished by Guarantor.
The obligations of Guarantor to repay the Guaranty Indebtedness hereunder shall
be unconditional.
(b) Until the Guaranty Indebtedness has been paid in full in cash,
Guarantor shall have no right, claim or remedy of subrogation, reimbursement,
contribution or any similar rights against Borrowers or any other guarantor with
respect to the Guaranty Indebtedness and hereby waives all such rights
including, without limitation, any right to enforce any remedy which Agent or
any Lender now has or may hereafter have against Borrowers, any endorser or any
other guarantor of all or any part of the Guaranty Indebtedness, and Guarantor
hereby waives any benefit of, and any right to participate in, any security or
collateral given to Agent, on behalf of the Lenders, to secure payment of the
Guaranty Indebtedness or any part thereof or any other liability of the Borrower
to Agent or the Lenders. If any amount shall be paid to any Guarantor on account
of any payment made hereunder at any time when the Guaranty Indebtedness shall
not have been paid in full in cash, such amount shall be held in trust for the
benefit of Agent and Lenders and shall forthwith be paid to Agent to be credited
and applied, whether the Guaranty Indebtedness is matured or unmatured, in
accordance with the terms of the Loan Agreement. Guarantor authorizes Agent, on
behalf of itself and Lenders, to take any action or exercise any remedy with
respect to such collateral which Agent, on behalf of itself and Lenders, in its
sole discretion shall determine, without notice to Guarantor. Guarantor further
agrees that any and all claims of Guarantor against Borrowers, any endorser or
any other guarantor of all or any part of the Guaranty Indebtedness, or against
any of their respective properties, whether arising by reason of any payment by
Guarantor to Agent, on behalf of itself and Lenders, pursuant to the provisions
hereof, or otherwise, shall be subordinate and subject in right of payment to
the prior payment, in full, of any and all principal and interest, all fees, all
reasonable costs of collection (including reasonable attorneys' fees and time
charges) and any other liabilities or obligations owing to Agent and Lenders by
the Borrowers which may arise either with respect to or on any note, instrument,
document, item, agreement or other writing heretofore, now or hereafter
delivered to any Lender or Agent. In the event Agent, on behalf of itself and
Lenders, in its sole discretion elects to give notice of any action with respect
to the collateral securing the Guaranty Indebtedness or any part thereof, ten
(10) days' written notice mailed to Guarantor by ordinary mail at the address
shown hereon shall be deemed reasonable notice of any matters contained in such
notice. Guarantor consents and agrees that Agent, on behalf of itself and
Lenders, shall be under no obligation to marshall any assets in favor of
Guarantor or against or in payment of any or all of the Guaranty Indebtedness.
(c) For the further security of Agent and Lenders and without in any
way diminishing the liability of Guarantor, following the occurrence of an Event
of Default and acceleration of the Guaranty Indebtedness of Borrowers, all debts
and liabilities, present or future of Borrowers to Guarantor and all monies
received from Borrowers or for its account by Guarantor in respect thereof shall
be received in trust for Lenders and forthwith upon receipt shall be paid over
to Agent, for the benefit of itself and Lenders, until all of such Guaranty
Indebtedness has been paid in full. The obligations of Guarantor in the
preceding sentence shall be independent of and severable from this Guaranty and
shall remain in full force and effect whether or not Guarantor is liable for any
amount under this Guaranty.
(d) This Guaranty and Guarantor's obligations hereunder are absolute
and unconditional and shall not be changed or affected by any representation,
oral agreement, act or thing whatsoever. This Guaranty is intended by Guarantor
to be the final, complete and exclusive expression of the guaranty agreement
between Guarantor and Agent, on behalf of Lenders. No modification or amendment
of any provision of this Guaranty shall be effective unless in writing and
signed by a duly authorized officer of Agent, on behalf of the Lenders.
SECTION 5. CERTAIN RIGHTS AND OBLIGATIONS.
(a) Guarantor authorizes Agent and Lenders, without notice, demand or
any reservation of rights against Guarantor and without impairing or affecting
the validity or enforceability of this Guaranty or Guarantor's obligations
hereunder, from time to time: (i) to renew, extend, increase, accelerate or
otherwise change the time for payment of, the terms of or the interest on the
Guaranty Indebtedness or any part thereof or grant other indulgences to any
Borrower or other Persons; (ii) to accept from any Person and hold collateral
for the payment of the Guaranty Indebtedness or any part thereof, and to modify,
exchange, enforce or refrain from enforcing, or release, compromise, settle,
waive, subordinate or surrender, with or without consideration, such collateral
or any part thereof; (iii) to accept and hold any endorsement or guaranty of
payment of the Guaranty Indebtedness or any part thereof, and to discharge,
release or substitute any such obligation of any such endorser or guarantor, or
any Person who has given any security interest in any collateral as security for
the payment of the Guaranty Indebtedness or any part thereof, or any other
Person in any way obligated to pay the Guaranty Indebtedness or any part
thereof, and to enforce or refrain from enforcing, or compromise or modify, the
terms of any obligation of any such indorser, guarantor, or Person; (iv) subject
to the notice provision set forth in SECTION 4 hereof, to dispose of any and all
collateral securing the Guaranty Indebtedness in any manner as Agent or Lenders,
in its or their sole discretion, may deem appropriate, and to direct the order
or manner of such disposition and the enforcement of any and all endorsements
and guaranties relating to the Guaranty Indebtedness or any part thereof as
Agent or Lenders, in its or their sole discretion, may determine; (v) except as
otherwise provided in the Loan Agreement, to determine the manner, amount and
time of application of payments and credits, if any, to be made on all or any
part of any component or components of the Guaranty Indebtedness (whether
principal, interest, fees, costs, and expenses, or otherwise) including, without
limitation, the application of payments received from any source to the payment
of indebtedness other than the Guaranty Indebtedness even though the Agent and
the Lenders might lawfully have elected to apply such payments to the Guaranty
Indebtedness or to amounts which are not covered by this Guaranty; and (vi) to
take advantage or refrain from taking advantage of any security or accept or
make or refrain from accepting or making any compositions or arrangements when
and in such manner as Agent or Lenders, in its or their sole discretion, may
deem appropriate and generally do or refrain from doing any act or thing which
might otherwise, at law or in equity, release the liability of Guarantor as a
guarantor or surety in whole or in part, and in no case shall Agent or Lenders
be responsible or shall Guarantor be released either in whole or in part for any
act or omission in connection with Agent or Lenders having sold any collateral
at less than fair market value.
(b) If any default shall be made in the payment of any of the Guaranty
Indebtedness and any grace period has expired with respect thereto, Guarantor
hereby agrees to pay the same in full to the extent hereinafter provided: (i)
without deduction by reason of any setoff, defense (other than payment) or
counterclaim of any Borrower; (ii) without requiring presentment, protest or
notice of nonpayment or notice of default to Guarantor, to any Borrower or to
any other Person; (iii) without demand for payment or proof of such demand or
filing of claims with a court in the event of receivership, bankruptcy or
reorganization of any Borrower; (iv) without requiring the Agent or the Lenders
to resort first to any Borrower (this being a guaranty of payment and not of
collection) or to any other guarantor or any other Person obligated with respect
to the Guaranty Indebtedness or any collateral which the Lenders may hold; (v)
without requiring notice of acceptance hereof or assent hereto by the Agent or
the Lenders; and (vi) without requiring notice that any of the Guaranty
Indebtedness has been incurred, extended or continued or of the reliance by the
Agent or the Lenders upon this Guaranty; all of which Guarantor hereby waives.
(c) This Guaranty and Guarantor's obligation hereunder shall at all
times be valid and enforceable and shall not be impaired or affected by any
other agreements or circumstances of any nature whatsoever which otherwise
constitute a defense to this Guaranty, including, without limitation, any of the
following, all of which Guarantor hereby waives to the extent permitted by law:
(i) any failure or omission to perfect or continue the perfection of any
security interest in or other lien on, or preserve rights to, any collateral
securing payment of any of the Guaranty Indebtedness or Guarantor's obligation
hereunder; (ii) the invalidity, unenforceability, propriety of manner of
enforcement of, or loss or change in priority of any such security interest or
other lien or guaranty of the Guaranty Indebtedness; (iii) any failure or
omission to protect, preserve or insure any such collateral; (iv) failure of
Guarantor to receive notice of any intended disposition of such collateral; (v)
any defense arising by reason of the cessation from any cause whatsoever of
liability of any Borrower including, without limitation, any failure, negligence
or omission by the Agent or the Lenders in enforcing their claims against any
Borrower; (vi) any waiver of any right, remedy or power or of any default with
respect to the Guaranty Indebtedness or any part thereof or any release,
settlement or compromise of any obligation of any Borrower; (vii) the invalidity
or unenforceability of any of the Guaranty Indebtedness or the invalidity or
unenforceability of any agreement relating thereto or with respect to any
collateral securing the Guaranty Indebtedness or any part thereof; (viii) any
change of ownership of any Borrower or the insolvency, bankruptcy or any other
change in the legal status of any Borrower; (ix) any change in, or the
imposition of, any law, decree, regulation or other governmental act which does
or might impair, delay or in any way affect the validity, enforceability or the
payment when due of the Guaranty Indebtedness; (x) the existence of any claim,
setoff or other right which Guarantor may have at any time against the Agent,
any Lender, any Borrower or any other guarantor in connection herewith or any
unrelated transaction; (xi) the failure of any Borrower or Guarantor to maintain
in full force, validity or effect or to obtain or renew when required all
governmental and other approvals, licenses or consents required in connection
with the Guaranty Indebtedness or this Guaranty, or to take any other action
required in connection with the performance of all obligations pursuant to the
Guaranty Indebtedness or this Guaranty; (xii) the Agent's election, on behalf of
the Lenders, in any case instituted under chapter 11 of the Bankruptcy Code, of
the application of section 1111(b)(2) of the Bankruptcy Code; (xiii) any
borrowing, use of cash collateral, or grant of a security interest by the
Borrower, as debtor in possession, under section 363 or 364 of the Bankruptcy
Code; (xiv) the disallowance of all or any portion of the Agent's or any of the
Lenders' claims for repayment of the Guaranty Indebtedness under section 502 or
506 of the Bankruptcy Code; or (xv) any other fact or circumstance which might
otherwise constitute grounds at law or in equity for the discharge or release of
Guarantor from its obligations hereunder, all whether or not Guarantor shall
have had notice or knowledge of any act or omission referred to in the foregoing
clauses (i) through (xiv) of this SUBSECTION 5(C). It is agreed that Guarantor's
liability hereunder is independent of any other guaranties or other obligations
at any time in effect with respect to the Guaranty Indebtedness or any part
thereof and that Guarantor's liability hereunder may be enforced regardless of
the existence, validity, enforcement or non-enforcement of any such other
guaranties or other obligations or any provision of any applicable law or
regulation purporting to prohibit payment by any Borrower of the Guaranty
Indebtedness in the manner agreed upon between the Agent and the Lenders and the
Borrower.
(d) Credit may be granted or continued from time to time by the Agent
and the Lenders to any Borrower without notice to or authorization from
Guarantor regardless of the Borrower's financial or other condition at the time
of any such grant or continuation. Neither the Agent nor any Lender shall have
an obligation to disclose or discuss with Guarantor its assessment of the
financial condition of any Borrower.
SECTION 6. REPRESENTATIONS AND WARRANTIES.
Guarantor represents and warrants that:
(a) EXISTENCE. Guarantor (i) is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of organization
or incorporation, as the case may be, and has been duly qualified to conduct
business and is in good standing in each other jurisdiction where its ownership
or lease of property or the conduct of its business requires such qualification;
(ii) has the requisite corporate authority and the legal right to own, pledge,
mortgage or otherwise encumber and operate its properties, to lease the property
it operates under lease and to conduct its business as now, heretofore and
proposed to be conducted; (iii) has all licenses, permits, consents or approvals
from or by, and has made all filings with, and has given all notices to, all
Governmental Authorities having jurisdiction, to the extent required for such
ownership, operation and conduct; (iv) is in compliance with its organizational
documents; and (v) is in compliance with all applicable provisions of law.
(b) AUTHORITY. Guarantor has full power, authority and legal right to
enter into this Guaranty and the other Financing Agreements to which it is a
party. The execution, delivery and performance by Guarantor of this Guaranty and
such other Financing Agreements: (i) have been duly authorized by all necessary
action on the part of Guarantor; (ii) are not in contravention of the terms of
Guarantor's articles of incorporation or bylaws or of any indenture, agreement
or undertaking to which Guarantor is a party or by which it or any of its
property is bound; (iii) do not and will not require any governmental consent,
registration or approval or the consent of any other Person that has not been
obtained; (iv) do not and will not contravene any contractual or governmental
restriction to which Guarantor or any of its property may be subject; and (v) do
not and will not, except as contemplated herein, result in the imposition of any
Lien upon any property of Guarantor under any existing indenture, mortgage, deed
of trust, loan or credit agreement or other material agreement or instrument to
which it is a party or by which it or any of its property may be bound or
affected. Guarantor has the full corporate authority to own or lease and operate
its property and to conduct the business in which it is currently engaged and in
which it proposes to engage.
(c) BINDING EFFECT. This Guaranty and all of the other Financing
Agreements to which Guarantor is a party have been duly executed and delivered
by Guarantor, are the legal, valid and binding obligations of Guarantor and are
enforceable against Guarantor in accordance with their terms except as
enforceability may be limited by bankruptcy, insolvency, or similar laws
affecting the rights of creditors generally or by application of general
principles of equity.
(d) SOLVENCY. Guarantor is Solvent and will continue to be Solvent
following the consummation of the transactions contemplated by this Guaranty and
the other Financing Agreements.
(e) TAX OBLIGATIONS. Guarantor and its Subsidiaries have filed
complete and correct federal, state and local tax reports and returns required
to be filed, prepared in accordance with applicable laws or regulations, and,
except for extensions duly obtained, have either duly paid all taxes, duties and
charges owed, or made adequate provisions for the payment thereof. There are no
material unresolved questions or claims concerning any tax liability of
Guarantor or any Subsidiary.
(f) LITIGATION AND PROCEEDINGS. Except as set forth on SCHEDULE 6(F)
hereto, no action, claim or proceeding is now pending or, to the best knowledge
of Guarantor, threatened against or affecting Guarantor or any of its
Subsidiaries, before any Governmental Authority, or before any arbitrator or
panel of arbitrators, nor, to the best knowledge of Guarantor, does a state of
facts exist which is reasonably likely to give rise to such proceedings. None of
the actions, claims or proceedings set forth on SCHEDULE 6(F) (i) challenges
Guarantor's or such Subsidiary's right or power to enter into or perform any of
its obligations under the Financing Agreements, or the validity or
enforceability of any Financing Agreement or any action taken thereunder or (ii)
if adversely determined, could reasonably be expected to have a Material Adverse
Effect.
(g) COMPLIANCE WITH LAWS AND REGULATIONS. The execution and delivery
by Guarantor of this Guaranty and all of the other Financing Agreements to which
it is a party and the performance of Guarantor's obligations hereunder and
thereunder are not in contravention of any order applicable to Guarantor or, to
Guarantor's best knowledge, any laws, regulations or ordinances applicable to
Guarantor. Guarantor is in compliance with all applicable laws, orders,
regulations and ordinances of all federal, foreign, state and local governmental
authorities relating to the business operations and the property of Guarantor or
any of its Subsidiaries.
(h) FULL DISCLOSURE. This Guaranty and the representations and
warranties of Guarantor in any other Financing Agreement delivered or to be
delivered by Guarantor, do not and will not contain any untrue statement of a
material fact or omit a material fact necessary to make the statements contained
therein or herein, in light of the circumstances under which they were made, not
misleading. There is no material fact which Guarantor has not disclosed to the
Agent in writing which has had or, so far as Guarantor can now foresee, will
have a Material Adverse Effect.
(i) SUBSIDIARIES. SCHEDULE 6(i) hereto contains an accurate list of
all of the existing Subsidiaries of Guarantor as of the date of this Guaranty,
setting forth their respective jurisdictions of incorporation or organization
and the percentage of their capital stock or partnership interests owned by
Guarantor or other of its Subsidiaries.
(j) NEGATIVE PLEDGE. Guarantor is not a party to or bound by any
indenture, contract, instrument or other agreement which prohibits the creation,
incurrence or sufferance to exist of any Lien upon its property, except the
Financing Agreements.
(k) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties contained in this Guaranty or any of the other Financing
Agreements to which Guarantor is a party shall survive the execution and
delivery of this Guaranty and the termination hereof.
SECTION 7. COVENANTS
Guarantor covenants and agrees that until the Guaranty Indebtedness is
paid in full in cash and the Commitments are terminated:
(a) Guarantor shall: (i) do or cause to be done all things necessary
to preserve and keep in full force and effect its existence as a corporation and
its rights and franchises and (ii) continue to conduct its business as permitted
hereunder or under the Loan Agreement;
(b) Guarantor shall comply in all material respects with all federal,
state, local and foreign laws and regulations applicable to it, including,
without limitation, those relating to licensing, ERISA, Environmental Laws and
labor matters.
(c) Guarantor shall not (i) engage in any business activity other than
the ownership and management of the Borrowers and Persons with respect to
Permitted Acquisitions and the related activities incidental thereto; (ii)
directly or indirectly incur or assume or suffer to exist any Indebtedness other
than (A) the Seller Obligations, (B) the FKP Obligations, (C) the S&C
Obligations and (D) Indebtedness to any Borrower in connection with a Permitted
Acquisition, Investments (other than its Investment in the Borrowers and Persons
with respect to Permitted Acquisitions and Investments in cash and Cash
Equivalents in an aggregate amount not to exceed $100,000 at any one time) or
Guaranty (other than this Guaranty or guaranties of Indebtedness of Borrowers
permitted under the Loan Agreement); (iii) incur on behalf of Guarantor or its
Subsidiaries obligations with respect to management or consulting or similar
fees to non-affiliates in excess of $350,000 in the aggregate in any Fiscal
Year; (iv) create or permit to exist any Lien on its assets, other than
Permitted Liens; (v) merge or consolidate with, acquire any assets or Stock of,
or otherwise combine with any Person other than with respect to Permitted
Acquisitions; (vi) make any change in its capital structure; (vii) amend its
articles of incorporation or bylaws other than any amendment that is not, in the
reasonable judgment of the Agent, adverse in any material respect to the value
of the interests or rights of the Agent or the Lenders thereunder or the rights
or interests of the Agent or the Lenders; (viii) except as otherwise permitted
by the Loan Agreement with respect to the Borrowers, sell, transfer, convey,
assign or otherwise dispose of any of its Property; (ix) execute any agreements
or contracts that would be prohibited by the Financing Agreements; or (x) change
its Fiscal Year. Notwithstanding the foregoing sentence, Guarantor may engage in
any activity incidental to the maintenance of the existence of Guarantor and may
enter into and perform the obligations of Guarantor under this Agreement.
(d) Guarantor shall not (i) make any payment of principal or premium,
if any, or interest on, fees with respect to, redemption, prepayment,
conversion, exchange, purchase, repurchase, retirement, defeasance, sinking fund
or other similar payment with respect to any Subordinated Debt, (ii) violate any
of the subordination provisions of the Subordination Agreement, (iii) amend,
waive or otherwise modify any provision of any Subordinated Debt or waive any
cause of action arising therefrom or related thereto; PROVIDED, that so long as
no Default or Event of Default has occurred and is continuing or would result
therefrom, Guarantor may make regularly scheduled payments of principal and
interest on the Seller Obligations in accordance with the terms of the
Subordination Agreement.
(e) Guarantor shall not enter into any indenture, agreement,
instrument or other arrangement which, (i) directly or indirectly, prohibits or
restrains, or has the effect of prohibiting or restraining, or imposes
materially adverse conditions upon, the incurrence of the obligations of
Guarantor hereunder, or (ii) contains any provisions which would be violated or
breached by the performance by Guarantor of its obligations hereunder.
(f) Guarantor shall cause the Borrowers to comply with all covenants
set forth in the Loan Agreement.
(g) On or before the Closing Date, Guarantor shall obtain a letter
from Arthur Andersen & Co. on which Agent shall be designated as a recipient,
acknowledging that Lenders intend to rely upon the financial statements of
Guarantor and its Subsidiaries certified by such accountants and that the
Lenders may rely upon such certification.
SECTION 8. TERMINATION.
This Guaranty shall remain in full force and effect until all of the
Guaranty Indebtedness shall be finally and irrevocably paid in full in cash and
the Commitments under the Loan Agreement shall have been terminated. Payment of
all of the Guaranty Indebtedness from time to time shall not operate as a
discontinuance of this Guaranty. Guarantor further agrees that, to the extent
that any Borrower makes a payment or payments to the Agent or any of the Lenders
on the Guaranty Indebtedness, or the Agent or the Lenders receive any proceeds
of collateral securing the Guaranty Indebtedness, which payment or receipt of
proceeds or any part thereof is subsequently invalidated, declared to be
fraudulent or preferential, set aside or required to be returned or repaid to
such Borrower, its estate, trustee, receiver, debtor in possession or any other
Person, including, without limitation, any guarantor, under any insolvency or
bankruptcy law, state, federal or foreign law, common law or equitable cause,
then to the extent of such payment, return or repayment, the Guaranty
Indebtedness or part thereof which has been paid, reduced or satisfied by such
amount shall be reinstated and continued in full force and effect as of the date
when such initial payment, reduction or satisfaction occurred, and this Guaranty
shall continue in full force notwithstanding any contrary action which may have
been taken by the Agent or the Lenders in reliance upon such payment, and any
such contrary action so taken shall be without prejudice to the Agent's or the
Lenders' rights under this Guaranty and shall be deemed to have been conditioned
upon such payment having become final and irrevocable.
SECTION 9. GUARANTY OF PERFORMANCE.
Guarantor also guarantees the full, prompt and unconditional
performance of all obligations and agreements of every kind owed or hereafter to
be owed by the Guarantor or any Borrower to the Agent or the Lenders under or in
connection with the Financing Agreements. Every provision for the benefit of the
Agent or the Lenders contained in this Guaranty shall apply to the guaranty of
performance given in this SECTION 9.
SECTION 10. TAXES.
All payments hereunder shall be made without any counterclaim or
setoff, free and clear of, and without reduction by reason of, any taxes (except
income taxes of the Agent and the Lenders), levies, imposts, charges and
withholdings, restrictions or conditions of any nature ("TAXES"), which are now
or may hereafter be imposed, levied or assessed by any country, political
subdivision or taxing authority, all of which will be for the account of and
paid by Guarantor. If for any reason, any such reduction is made or any Taxes
are paid by the Agent or any Lender, Guarantor will pay to the Agent, for its
benefit and the benefit of the Lenders, such additional amounts as may be
necessary to ensure that the Agent and the Lenders receive the same net amount
which they would have received had no reduction been made or Taxes paid.
SECTION 11. SECURITY.
To secure payment of Guarantor's obligations under this Guaranty,
concurrently with the execution of this Guaranty, Guarantor is entering into the
Parent Pledge Agreement in favor of the Agent, for its benefit and the benefit
of the Lenders.
SECTION 12. MISCELLANEOUS.
(a) In addition to and without limiting any other right, power or
remedy of the Agent or any Lender, whenever the Agent or the Lenders have the
right to declare any of the Guaranty Indebtedness to be immediately due and
payable (whether or not it has been so declared), the Lenders at their sole
election without notice to Guarantor may appropriate and setoff against the
Guaranty Indebtedness: (i) any and all indebtedness or other monies due or to
become due to Guarantor by the Agent or the Lenders in any capacity; and (ii)
any monies, credits or other property belonging to Guarantor (including all
account balances, whether provisional or final and whether or not collected or
available) at any time held by or coming into the possession of the Agent or any
of the Lenders, or any affiliate of the Agent or any of the Lenders, whether for
deposit or otherwise, whether or not the Guaranty Indebtedness or the obligation
to pay such monies owed by the Agent or the Lenders is then due, and the Agent,
on its behalf and on behalf of the Lenders, is hereby granted a security
interest in and Lien upon such monies, credits and other property. The Agent or
the Lenders shall be deemed to have exercised such right of setoff immediately
at the time of such election even though any charge therefor is made or entered
on the Agent's or the Lenders' records subsequent thereto.
(b) In the event that acceleration of the time for payment of any of
the Guaranty Indebtedness is stayed, upon the insolvency, bankruptcy or
reorganization of the Borrower, or otherwise, all such amounts shall nonetheless
be payable by Guarantor forthwith upon demand by the Agent, on its behalf and on
behalf of the Lenders.
(c) No delay on the part of the Agent or any Lender in the exercise of
any right, power or remedy shall operate as a waiver thereof, and no single or
partial exercise by the Agent or any Lender of any right, power or remedy shall
preclude any further exercise thereof; nor shall any amendment, supplement,
modification or waiver of any of the terms or provisions of this Guaranty be
binding upon the Agent or the Lenders, except as expressly set forth in a
writing duly signed and delivered by the Agent. The failure by the Agent or any
Lender at any time or times hereafter to require strict performance by the
Borrower or any Guarantor of any of the provisions, warranties, terms and
conditions contained in any Financing Agreement or promissory note, security
agreement, agreement, indenture, guaranty, instrument or document now or at any
time or times hereafter executed by the Borrower or any Guarantor and delivered
to the Agent or any Lender shall not waive, affect or diminish any right of the
Agent or any Lender at any time or times hereafter to demand strict performance
thereof, and such right shall not be deemed to have been waived by any act or
knowledge of the Agent or any Lender, their agents, officers or employees,
unless such waiver is contained in an instrument in writing duly signed and
delivered by the Agent and/or the Lenders, as the case may be. No waiver by the
Agent or the Lenders of any default shall operate as a waiver of any other
default hereunder or the same default on a future occasion, and no action by the
Agent or the Lenders permitted hereunder shall in any way affect or impair the
Agent's or any Lender's rights, powers or remedies or the obligations of
Guarantor under this Guaranty. Any determination by a court of competent
jurisdiction of the amount of any Guaranty Indebtedness owing by the Borrower to
the Lenders shall be conclusive and binding on Guarantor irrespective of whether
the Borrower was a party to the suit or action in which such determination was
made. The rights and remedies of the Agent and the Lenders hereunder are
cumulative and may be exercised singly or concurrently, and are not exclusive of
any rights or remedies provided by law.
(d) This Guaranty shall bind Guarantor and the successors and assigns
of Guarantor and shall inure to the benefit of the Agent and the Lenders and
their successors and assigns. All references herein to any Lender shall for all
purposes also include all Participants. All references herein to the Borrower
shall be deemed to include its successors and assigns including, without
limitation, a receiver, trustee or debtor in possession of or for the Borrower.
(e) Section headings in this Guaranty are included herein for
convenience of reference only and shall not constitute a part of this Guaranty
for any other purpose or be given any substantive effect.
(f) Whenever possible, each provision of this Guaranty shall be
interpreted in such manner as to be effective and valid under applicable law.
Any provision of this Guaranty which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remainder of such
provision or the remaining provisions of this Guaranty, and any such prohibition
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
(g) It is understood that while the amount of the Guaranty
Indebtedness is not limited, if, in any action or proceeding involving any state
or federal bankruptcy, insolvency or other law affecting the rights of creditors
generally, this Guaranty would be held or determined to be void, invalid or
unenforceable on account of the amount of the aggregate liability under this
Guaranty, then, notwithstanding any other provision of this Guaranty to the
contrary, the aggregate amount of such liability shall, without any further
action of Guarantor, the Lenders, the Agent or any other Person, be
automatically limited and reduced to the highest amount which is valid and
enforceable as determined in such action or proceeding.
(h) This Guaranty sets forth the entire understanding and agreement of
Guarantor and the Agent with respect to the subject matter hereof and supersedes
all other understandings, oral or written, with respect to the subject matter
hereof.
(i) Guarantor, jointly and severally, agrees to pay all costs, fees
and expenses (including reasonable attorneys' fees) incurred by the Agent or the
Lenders after a default by Guarantor under this Guaranty.
(j) GUARANTOR AND THE AGENT HEREBY SUBMIT TO THE EXCLUSIVE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK,
STATE OF ILLINOIS, AND IRREVOCABLY AGREE THAT ALL ACTIONS OR PROCEEDINGS
RELATING TO THIS GUARANTY OR THE OTHER FINANCING AGREEMENTS TO WHICH GUARANTOR
IS A PARTY SHALL BE LITIGATED IN SUCH COURTS, AND GUARANTOR AND THE AGENT EACH
WAIVE ANY OBJECTION WHICH IT MAY HAVE BASED ON IMPROPER VENUE OR FORUM NON
CONVENIENS TO THE CONDUCT OF ANY PROCEEDING IN ANY SUCH COURT AND EACH WAIVES
PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND CONSENTS THAT ALL SUCH
SERVICE OF PROCESS BE MADE BY MAIL OR MESSENGER DIRECTED TO IT AT THE ADDRESS
SET FORTH IN SECTION 13 HEREOF AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE
SUFFICIENT NOTICE. NOTHING CONTAINED IN THIS SECTION 12 SHALL AFFECT THE RIGHT
OF THE AGENT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
AFFECT THE RIGHT OF THE AGENT TO BRING ANY ACTION OR PROCEEDING AGAINST
GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION TO THE EXTENT NECESSARY TO
ENFORCE ITS LIENS AGAINST ASSETS LOCATED IN SUCH JURISDICTION.
(k) THIS GUARANTY SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED UNDER
AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS,
WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS THEREOF.
SECTION 13. NOTICES.
Except as otherwise expressly provided herein, any notice required or
desired to be served, given or delivered hereunder shall be in writing, and
shall be deemed to have been validly served, given or delivered (a) if delivered
in person, when delivered, (b) if delivered by telecopy or similar electronic
medium, on the date of confirmed transmission, (c) if delivered by overnight
courier, one (1) Business Day after delivery to such courier properly addressed
or (d) if by U.S. Mail, three (3) days after deposit in the United States mails
(by certified mail, return receipt requested), with proper postage prepaid, to
the following addresses:
Notices shall be addressed as follows:
(a) If to Guarantor:
LOIS/USA, Inc.
40 West 57th Street
New York, New York 10019
Attn: Chief Financial Officer
Telecopy No.: (212) 373-4783
With a copy to:
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
Attn: Hillel M. Bennett
Telecopy No.: (212) 806-6006
(b) If to Agent:
Green Tree Financial Servicing Corporation
100 North Point Center East, Suite 200
Alpharetta, Georgia 30022
Attn: Commercial Finance Division
Telecopy No.: (770) 772-3786
With a copy to:
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attn: Ronald H. Jacobson
Richard E. Morgan
Telecopy No.: (312) 558-5700
or in any case, to such other address as the party addressed shall have
previously designated by written notice to the serving party, given in
accordance with this SECTION 13. A notice not given as provided above shall, if
it is in writing, be deemed given if and when actually received by the party to
whom given.
SECTION 14. WAIVERS.
(a) GUARANTOR WAIVES THE BENEFIT OF ALL VALUATION, APPRAISAL AND
EXEMPTION LAWS.
(b) IN THE EVENT OF A DEFAULT UNDER THE LOAN AGREEMENT, GUARANTOR
HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE
BY THE AGENT OR THE LENDERS OF THEIR RIGHTS TO REPOSSESS ANY COLLATERAL WITHOUT
JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON ANY COLLATERAL WITHOUT PRIOR
NOTICE OR HEARING. GUARANTOR ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL OF
ITS CHOICE WITH RESPECT TO THIS TRANSACTION AND THIS GUARANTY.
(c) GUARANTOR AND THE AGENT ACKNOWLEDGE THAT THE TIME AND EXPENSE
REQUIRED FOR TRIAL BY JURY EXCEED THE TIME AND EXPENSE REQUIRED FOR A BENCH
TRIAL AND HEREBY WAIVE, TO THE EXTENT PERMITTED BY LAW, TRIAL BY JURY, ANY
OBJECTION BASED ON FORUM NON CONVENIENS, ANY OBJECTION TO VENUE OF ANY ACTION
INSTITUTED HEREUNDER, AND WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND
WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE AGENT OR THE LENDERS.
(d) TO THE EXTENT PERMITTED BY LAW, GUARANTOR ABSOLUTELY,
UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY RIGHT TO ASSERT ANY DEFENSE, SETOFF,
COUNTERCLAIM OR CROSSCLAIM OF ANY NATURE WHATSOEVER WITH RESPECT TO THIS
GUARANTY OR THE OBLIGATIONS OF GUARANTOR HEREUNDER OR THE OBLIGATIONS OF ANY
OTHER PERSON OR PARTY (INCLUDING THE BORROWER) RELATING TO THIS GUARANTY, THE
GUARANTY INDEBTEDNESS OR THE OBLIGATIONS OF GUARANTOR IN ANY ACTION OR
PROCEEDING BROUGHT BY THE AGENT OR THE LENDERS TO COLLECT THE GUARANTY
INDEBTEDNESS OR TO ENFORCE THE OBLIGATIONS OF GUARANTOR HEREUNDER.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, this Guaranty has been executed as of the date and
year first written above.
LOIS/USA INC.
By: /s/ Robert K. Stewart
-------------------------
Title: Executive Vice President
