SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended MARCH 31, 1998
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission file number: 33-83894-NY
LOIS/USA INC.
(Exact name of Small Business Issuer 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)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ___ No _X_
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of the issuer's classes of common
equity, as of the latest practicable date: 2,444,320 SHARES AS OF MAY 14,1998.
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
<PAGE>
PAGE
PART I-FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31,
1997 and March 31, 1998................................ F-1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1998..............F-2
Consolidated Statements of Changes In
Stockholders' Equity (Deficit) For the Three
Months Ended March 31, 1998.............................F-3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and
1998....................................................F-4
Notes to Consolidated Financial
Statements..............................................F-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........F-10
PART II-OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.....F-14
Item 6. Exhibits and Reports on Form 8-K........................F-15
SIGNATURE.........................................................F-16
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LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000'S OMITTED)
DECEMBER 31, MARCH 31,
1997 1998
___________ ________
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,218 $ 134
Accounts receivable, net 38,475 47,385
Expenditures billable to clients 764 2,798
Other current assets 758 754
--- ---
Total current assets 43,215 51,071
------ ------
PROPERTY AND EQUIPMENT, at cost 4,503 5,095
Less-Accumulated depreciation and (2,470) (2,663)
------ -----
amortization
Net property and equipment 2,033 2,432
----- -----
OTHER ASSETS:
Deferred financing costs 747 677
Goodwill 23,816 23,477
Other assets 451 357
--- ---
Total other assets 25,014 24,511
------ ------
Total assets $ 70,262 $ 78,014
======== ========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<TABLE>
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LIABILITIES AND STOCKHOLDERS' December 31, March 31
EQUITY (DEFICIT) 1997 1998
- ---------------------------- ---------- --------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 48,789 $ 55,275
Accrued expenses and other current liabilities 4,713 1,177
Bank loans 4,642 12,304
Advanced billings 1,787 790
Rent payable - Current 1,622 1,645
----- -----
Total current liabilities 61,553 71,191
------ ------
OTHER LIABILITIES
Lease related reserves 4,854 4,427
Deferred purchase price 9,250 9,237
----- -----
Total other liabilities 14,104 13,664
------ ------
Total liabilities 75,657 84,855
------ ------
REDEEMABLE PREFERRED STOCK 2,160 2,160
STOCKHOLDERS' EQUITY(DEFICIT):
Preferred stock, par value $.01
per share:1,000,000 shares
authorized; no shares
issued and outstanding
Common stock, par value $.01
per share:
20,000,000 shares authorized;
2,439,861 shares
and
2,445,141 shares issued and outstanding 24 24
Additional paid-in capital 5,537 5,571
Accumulated deficit (13,116) (14,596)
------- -------
Total stockholder's equity (deficit) (7,555) (9,001)
------ ------
Total liabilities and stockholders'
equity (deficit) $ 70,262 $ 78,014
======== ========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
(000'S OMITTED, EXCEPT FOR PER SHARE AND SHARE DATA)
INCOME: 1997 1998
---- ----
Commissions and fees $ 7,690 $ 9,645
--------- ---------
OPERATING EXPENSES:
Salaries and related costs, net 4,989 7,026
Other operating expenses 1,782 3,122
Amortization and depreciation 368 532
--- ---
Total operating expenses 7,139 10,680
----- ------
OPERATING INCOME(LOSS) 551 (1,035)
NONOPERATING EXPENSES:
Interest, net 52 319
Amortization of deferred financing costs 22 70
-- --
Total nonoperating expenses 74 389
-- ---
INCOME BEFORE PROVISION FOR
INCOME TAXES 477 (1,424)
PROVISION FOR INCOME TAXES 34 2
-- -
NET INCOME (LOSS) 443 (1,426)
PREFERRED STOCK
DIVIDEND REQUIREMENT --- (54)
--- ---
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ 443 $ (1,480)
======== =========
EARNINGS (LOSS) PER SHARE -
BASIC and DILUTED $ .17 $ (.61)
======== =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,555,875 2,444,320
========= =========
The accompanying notes are an integral part of these consolidated statements.
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LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Unaudited 000's omitted)
COMMON COMMON ADDITIONAL
STOCK STOCK PAR PAID-IN ACCUMULATED
SHARES VALUE CAPITAL DEFICIT TOTAL
------ --------- ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 2,440 $ 24 $ 5,537 $(13,116) $ (7,555)
Common stock issued for dividends on
redeemable preferred stock 5 -- 34 -- 34
Preferred stock dividend -- -- -- (54) (54)
Net income(loss) -- -- -- (1,426) (1,426)
------ ------ ------ ------- -------
BALANCE, March 31, 1998 2,445 $ 24 $ 5,571 $(14,596) $ (9,001)
=== ==== ===== ======== ========= ========= =========
The accompanying notes are an integral part of these consolidated statements
</TABLE>
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<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
(000'S OMITTED)
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1998
---- ----
<S> <C> <C>
Net income(loss) $ 443 $ (1,426)
Adjustments to reconcile net income to
net cash used in operating activities:
Present value interest on deferred purchase price -- 150
Depreciation and amortization 110 193
Amortization of goodwill 258 339
Amortization of deferred financing costs 22 70
(Increase) decrease in accounts receivable (5,553) (8,910)
(Increase) decrease in expenditures billable to clients (30) (2,034)
(Increase) decrease in other current assets (248) 4
(Increase) decrease in other assets -- 94
Decrease in bank overdraft (2,865) --
Increase (decrease) in accounts payable 9,390 6,486
Increase (decrease) in accrued expenses (457) (3,536)
Increase (decrease) in advanced billings 87 (997)
Increase (decrease) in lease related reserves -- (404)
Increase (decrease) in deferred payouts -- (163)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 1,157 (10,134)
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (30) (592)
NET CASH USED IN INVESTING ACTIVITIES (30) (592)
--- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid for preferred dividends -- (20)
Net proceeds of credit facility (1,580) 7,662
------ -----
NET CASH PROVIDED BY FINANCIN ACTIVITIES (1,580) 7,642
------ -----
NET DECREASE IN CASH AND CASH EQUIVALENTS (453) (3,084)
CASH AND CASH EQUIVALENTS, beginning of period 567 3,218
--- -----
CASH AND CASH EQUIVALENTS, end of period $ 114 $ 134
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 52 $ 170
Income taxes $ 34 $ 2
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from this report, as is
permitted by such rules and regulations; however, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's Annual Report on Form 10-KSB,
for the year ended December 31, 1997.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods. Results of
operations for interim periods are not necessarily indicative of results for the
full year.
In May 1997, the Company issued 2,160 shares of Series A Convertible Preferred
Stock in a Private Placement to a limited number of accredited investors. The
Series A Preferred Stock has a cumulative dividend. Accordingly, net income per
common share is computed on the basis of net income reduced by the dividend
requirement accumulating during the period ("net income applicable to common
stock").
In June 1997 the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No.131 is effective for years
beginning after December 15, 1997 and replaces the requirements of SFAS No. 14
concerning the manner in which an enterprise defines its reportable business
segments and the nature of the information about business and geographic
segments disclosed in the annual and interim financial statements of public
companies. The Company has not yet completed its analysis of the requirements of
SFAS No. 131. The implementation of the requirements of this statement, however,
will not affect the Company's net income, cash flows or financial position.
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 $3,500,000 in cash, and the issuance of 50,000 shares of
the Company's common stock, par value $.01 per share ("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 cash portion of the initial payment was subject to adjustment, to the extent
F&K's Tangible Net Worth, as defined in the Stock Purchase Agreement between the
Company and the stockholders of F&K (the "F&K Agreement"), was as of December
31, 1997 greater or less than $2.5 million as determined by an audit of F&K's
financial statements. No adjustment was necessary.
The F&K Agreement calls for the Company to make additional purchase price
payments on the first, second and third anniversaries of the acquisition. On
December 31, 1998 the stockholders of F&K will receive an additional cash
payment of $1,125,000 and warrants for the purchase of 50,000 shares of the
Company's Common Stock exercisable through December 31, 2001 at an exercise
price of $11.00 per share. On December 31, 1999, the Company is required to make
a cash payment of $1,125,000 and to issue an additional 50,000 warrants,
exercisable through December 31, 2002 at an exercise price of $12.25 per share.
Finally, on December 31, 2000, the Company must make a final cash payment of
$3,250,000, which may be increased or decreased by up to $450,000 for 15% of the
difference between $42 million and the aggregate actual fees and commissions of
F&K for the three years ending on 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
providing for aggregate compensation of $4,950,000 to be paid over the next five
years. Of that amount, $1,200,000 has been treated as a component of the
purchase price of the F&K acquisition. The Company 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,
$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 the result of the acquisition of F&K is being amortized
over 20 years. None of the goodwill recorded will be tax 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
three months ended March 31, 1997 is presented as if the acquisition of F&K had
been made on January 1, 1997. 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 period presented or the future
results of operations under the ownership and management of the Company.
(In thousands except per share amounts) 1997
--------------
Commissions and fees $10,560
Net income(loss) 597
Net income(loss) per common share $ .23
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, 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. The final payment of $750,000
is not a component of the calculations above.
The Company accounted for the acquisition using the purchase method of
accounting, and since February 12, 1996, the Company's consolidated financial
statements have included EJL's assets, liabilities and results of operations. At
the date of acquisition the minimum guaranteed Additional Purchase Price of
$6,750,000 was recorded as a liability on the Company's consolidated balance
sheet (which was reduced to $5,939,000 as of December 31, 1996 as the result of
payments made through that date) and the excess of the minimum guaranteed
purchase price of $12,750,000 over the fair market value of the net assets
acquired and liabilities assumed was reflected in the Company's consolidated
financial statements as goodwill. This purchase resulted in recording goodwill
in the amount of $18,825,064. The goodwill is being amortized on a straight-line
basis over a period of 20 years. None of the recorded goodwill will be
deductible for income tax purposes. As a result of the non-deductibility of
goodwill, the Company's effective tax rate will be adversely impacted.
In May 1997, the Company and the Sellers agreed to revise the terms of the
Original Agreement. Under the revised terms, the Sellers will receive a total of
$9,646,000, comprised of (i) the $4,000,000 in 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 the Sellers 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 was 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. The reduction in goodwill reduced the
annual amortization by $220,000.
4. REDUCING REVOLVING CREDIT FACILITY
Concurrent with the Company's January 1995 registered direct placement of shares
of its Common Stock (the "Offering") and the repayment of a subordinated loan,
the Company entered into a $2 million reducing revolving credit facility (the
"Reducing Revolving Credit Agreement") with The Chase Manhattan Bank ("Chase").
Upon consummation of the Company's Offering, the Company borrowed $2 million
under the Reducing Revolving Credit Agreement which, when added to the net
proceeds of the Company's Offering, enabled the Company to repay an outstanding
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
Reducing Revolving Credit Agreement to increase the amount available under 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 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.
In the first half of fiscal 1997 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 of 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 initially borrowed approximately $2.5 million,
which was used to repay amounts outstanding under the Chase Reducing Revolving
Credit Facility and the Chase Reducing Revolving Credit Facility was terminated.
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.
5. SERIES A PREFERRED STOCK
In May 1997, the Company privately offered and sold 2,160 shares of 10% Series A
Convertible Preferred Stock (the "Series A Convertible Preferred Stock") at
$1,000 per share. Net proceeds to the Company, after the payment of placement
agent fees and offering costs, were approximately $2 million.
The Series A Convertible Preferred Stock is convertible by the holders, into
shares of the Company's Common Stock, at a conversion price of $6.50 thereof per
share beginning September 16, 1997. The Company is required to redeem the Series
A Convertible Preferred Stock, if not earlier converted or redeemed, for $1,000
per share on May 19, 2002.
Dividends on the Series A Convertible Preferred Stock are payable quarterly at a
rate of $25 per share. Holders were given the right to elect to receive the
first four dividend payments in the form of shares of the Company's Common
Stock, valued at $6.50 per share, and the holders of 1,375 shares of the Series
A Convertible Preferred Stock have so elected.
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998.
Revenues from commissions and fees for the first quarter of fiscal 1998 were
$9,645,000, representing an increase of $1,955,000, or 25.4%, compared to
revenues from commissions and fees of $7,690,000 for the first quarter of fiscal
1997. The results of operations for the first quarter of fiscal 1998 include the
operating results of F&K, acquired December 31, 1997. The inclusion of F&K's
operations increased revenues by $2,905,000. Without the effect of the
acquisition of F&K, revenues for the first quarter of 1998 declined by $950,000,
reflecting principally the absence from the first quarter of fiscal 1998 of
revenues from clients of the Company's Los Angeles office lost in the second
half of fiscal 1997. The Los Angeles office has not yet replaced those lost
clients and the Company has been pursuing staff reductions and other
adjustments.
Additionally, the Company's revenues are, for the most part, derived from
commissions earned on the placement of advertising for clients. Accordingly,
revenues will fluctuate from quarter to quarter depending on the timing of
advertising expenditures by clients. The Company's work in progress for clients
increased during the first quarter of fiscal 1998, as reflected in the increase
in Expenditures Billable to Clients (a current asset) to $2,798,000 at March 31,
1998, compared to $764,000 at December 31, 1997. The Company anticipates that
most of the client projects in progress at March 31, 1998 will be completed, and
the related revenues recognized, in the second quarter of 1998.
Operating expenses for the first quarter of fiscal 1998 increased to $10,680,000
from $7,139,000 for the first quarter of fiscal 1997. Substantially all of the
$3,541,000 increase results from the inclusion of the operations of F&K in
fiscal 1998. Salaries and related costs increased from $4,989,000 in the first
quarter of fiscal 1997 to $7,026,000 for the first quarter of fiscal 1998, again
due to the inclusion of the operations of F&K. As a percentage of revenues,
salaries and related costs increased from 64.9% in the first quarter of fiscal
1997 to 72.8% in the first quarter of fiscal 1998, due to the decline in
revenues in the Company's Los Angeles office and the 70.7% relationship of
salaries to revenues at F&K, where revenues in the first quarter of the year are
historically lower due to the timing of advertising campaigns by certain
clients. The inclusion of the operations of F&K and the timing of F&K's revenues
also contributed to the increase in other operating expenses, from $1,782,000 or
23.2% of revenues for the first quarter of fiscal 1997 to $3,122,000 or 32.4% of
revenues for the first quarter of fiscal 1998. Depreciation and amortization
increased from $368,000 in the first quarter of fiscal 1997 to $532,000 for the
first quarter of fiscal 1998 due to the amortization of the goodwill recorded in
the acquisition of F&K and the depreciation of capital expenditures made in the
first quarter of fiscal 1998 to upgrade workplace technology and consolidate the
Company's Chicago operations.
Interest expense increased to $319,000 for the first quarter of fiscal 1998,
from $52,000 in the comparable 1997 period, as the result of higher outstanding
borrowings. The Company's borrowings increased throughout fiscal 1997 to finance
its acquisitions of EJL and F&K, as well to finance the overall expansion of its
operations. The amortization of the fees incurred to obtain the new Sanwa credit
facility caused the amortization of deferred financing costs to increase from
$22,000 for the first quarter of fiscal 1997 to $70,000 for the first quarter of
fiscal 1998.
The provision for income taxes decreased from $34,000 for the first quarter of
fiscal 1997 to $2,000 for the first quarter of fiscal 1998. No benefit was
recorded for the Company's loss in 1997 and 1998. Approximately $7,000,000 of
net operating loss carryforwards are available to offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had a working capital deficit of $20,120,000,
reflecting an increase in the working capital deficit of $1,782,000 caused
principally by the net loss of $1,426,000 for the first quarter. Accounts
receivable increased by $8.9 million from December 31, 1997 to March 31, 1998,
while accounts payable, which include the amounts due for media placed for and
billed (in accounts receivable) to clients increased $6.5 million. The $2.3
million difference between the increases in accounts payable and accounts
receivable reflects the Company's acceleration, relative to the receipt of
payments from clients, of its payments to certain media vendors, which was
undertaken to maintain good relationships with those vendors. The Company
financed those payments to media vendors, as well as an overall reduction in
accrued expenses and advanced billings to clients of approximately $4.5 million,
the approximate $2.0 million increase in work in progress, and $592,000 of
capital expenditures for the upgrade workplace technology and the consolidation
of the Company's Chicago operations, through the use of $3.1 million of cash on
hand at December 31, 1997 and through borrowings under its credit facility with
Sanwa, which increased from $4,642,000 at December 31, 1997 to $12,304,000 at
March 31, 1998.
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. The remaining $3.7 million will be paid in cash
in varying monthly installments from June 1999 through March 2009.
Concurrent with the acquisition of EJL in February 1996, the Company entered
into an amendment to the Reducing Revolving Credit Agreement with Chase. 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 have reduced 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 have elected to receive the dividends for
the first year in the form of shares of the Company's Common Stock, valued at
$6.50 per share. Therefore, assuming no conversions, the Series A Convertible
Preferred Stock will only require cash dividends of $78,500 in 1998. The Series
A Convertible Preferred Stock may be converted into shares of the Company's
Common Stock at a conversion price of $6.50 per share.
In October 1997, the Company entered into a revolving credit facility with Sanwa
which provides for borrowings of up to $25 million based on a specified
percentage of eligible accounts receivable. The Sanwa credit facility has a
three-year term, with borrowings bearing interest at 2.5% above LIBOR.
Borrowings are secured by essentially all of the assets of the Company,
including the common stock and assets of the Company's subsidiaries. The Company
initially borrowed approximately $2.5 million, which was used to repay amounts
outstanding under the Chase Reducing Revolving Credit Agreement, which was
terminated. As of March 31, 1998, borrowings of $12,304,000 were outstanding
under the Sanwa facility and additional borrowings of $12,696,000 were
available.
On December 31, 1997, the Company acquired all of the outstanding common stock
of F&K. The aggregate purchase price was $10.8 million. The Company made an
initial payment of $4,103,000, comprised of a cash payment of $3,500,000, and
the issuance of 50,000 shares of the Company's Common Stock and warrants for the
purchase of 39,000 shares of the Company's Common Stock, exercisable through
December 31, 2000 at an exercise price of $10.00 per share.
The F&K Agreement requires that the Company make additional purchase price
payments on the first, second and third anniversaries of the acquisition. On
December 31, 1998 the sellers will receive an additional cash payment of
$1,125,000, and warrants for the purchase of 50,000 shares of the Company's
Common Stock exercisable through December 31, 2001 at an exercise price of
$11.00 per share. On December 31, 1999, the Company is required to make a cash
payment of $1,125,000 and to issue an additional 50,000 warrants, exercisable
through December 31, 2002 at an exercise price of $12.25 per share. Finally, on
December 31, 2000, the Company must make a final cash payment of $3,250,000,
which may be increased or decreased by up to $450,000 for 15% of the difference
between $42 million and the actual commissions and fees of F&K for the three
years ending December 31, 2000, from clients existing at the time of the
acquisition. Concurrent with the acquisition of F&K, the Company entered into
certain employment contracts with the three senior officers of F&K that provide
for aggregate compensation of $4,950,000 over the next three years. Of that
amount, $1,200,000 has been treated as a component of the purchase price. The
Company currently anticipates that the cash payments required at December 31,
1998, 1999 and 2000 will be funded from the Sanwa credit facility.
The Company's growth strategy includes the acquisition of existing advertising
agencies. Although the Company currently has no specific acquisition plans or
commitments, any future acquisitions may require material capital expenditures
or commitments that could place significant constraints on future working
capital. As a result, and to reduce both the immediate cash needs and the risk
that the Company will significantly overpay for an acquisition, the Company has,
and will, generally attempt to negotiate acquisitions that involve the payment
of a portion of the total purchase price on a deferred basis based on the
post-acquisition performance of the acquired operations. Additionally, the
Company attempts to negotiate the payment of a portion of the acquisition price
in the form of the issuance of shares of the Company's Common Stock, and will
offer various forms of participation in the Company's Stock Option Plan to key
employees as a means of creating an incentive for future performance.
The Company believes that cash flows from operations, together with funds
available under the Company's credit facility with Sanwa will be sufficient to
meet the Company's cash needs for its existing business and any potential
acquisitions over the next twelve months.
<PAGE>
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Company's Stockholders was held on March 20,
1998. Set forth below is a description of the matters which were voted
on at the Annual Meeting of the Stockholders and the number of votes
cast for, against or withheld as to each such matter.
ELECTION OF DIRECTORS VOTES VOTES
VOTES FOR AGAINST WITHHELD
--------- -------- --------
To serve as directors of the
Company until next Annual
Meeting of the Stockholders
Election of George Lois 1,907,265 0 442,596
Election of Theodore Veru 1,907,265 0 442,596
Election of John Hatsopoulos 1,907,265 0 442,596
Election of David DeBusschere 1,907,265 0 442,596
Election of Dennison Veru 1,907,265 0 442,596
OTHER MATTERS VOTES VOTES
VOTES FOR AGAINST WITHHELD
--------- ------ -------
Approval of the amendment to the
Company's 1994 Stock Option Plan. 1,907,265 0 442,596
Approval of the amendment to the
Company's Amended and Restated
Certificate of Incorporation
increasing the number of 1,907,265 0 442,596
authorized shares of Common
Stock.
Ratification of the appointment
of Arthur Andersen LLP as the
independent auditors of the
Company for the fiscal
year ending December 31, 1998. 1,907,265 0 442,596
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
(i) Current Report on Form 8-K dated December 31, 1997 filed March
16, 1998.
(ii) Current Report on Form 8-K dated December 31, 1997 filed January
15, 1998.
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS 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.
Date: May 15, 1998 By /S/ ROBERT K. STEWART
---------------------------
ROBERT K. STEWART
Executive Vice President
Chief Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1998, CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 134
<SECURITIES> 0
<RECEIVABLES> 47,385
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,071
<PP&E> 5,059
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0
2,160
<COMMON> 24
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<TOTAL-LIABILITY-AND-EQUITY> 78,014
<SALES> 0
<TOTAL-REVENUES> 9,645
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