SECURITIES AND EXCHANGE COMMISSION
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 SEPTEMBER 30, 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 X No
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: 2,476,251 SHARES AS OF NOVEMBER
3, 1998.
Transitional Small Business Disclosure Format (check one):
Yes ___ No X
<PAGE>
PART I-FINANCIAL INFORMATION Page
Number
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1997 and
September 30, 1998........................... F-1
Consolidated Statements of Operations for the
Three Months Ended September 30, 1997
and 1998..................................... F-2
Consolidated Statements of Operations for the
Nine Months Ended September 30, 1997
and 1998...................................... F-3
Consolidated Statements of Changes In
Stockholders' Equity (Deficit) For the Nine
Months Ended September 30, 1998................ F-4
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1997
and 1998....................................... F-5
Notes to Consolidated Financial Statements....... F-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... F-11
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................. F-16
SIGNATURE.......................................................... F-17
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000'S OMITTED)
December September
31, 30,
1997 1998
--------- ----------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,218 $ 15
Accounts receivable, net 38,475 45,867
Expenditures billable to clients 764 2,172
Other current assets 758 304
--------- -------
Total current assets 43,215 48,358
--------- -------
PROPERTY AND EQUIPMENT, at cost 4,503 5,727
Less-Accumulated depreciation and
amortization (2,470) (2,563)
------- ---------
Net property and equipment 2,033 3,164
------- ---------
OTHER ASSETS:
Deferred financing costs 747 536
Goodwill 23,816 23,534
Other assets 451 301
------- -------
Total other assets 25,014 24,371
-------- -------
Total assets $70,262 $75,893
======== =======
LIABILITIES AND STOCKHOLDERS' December September
EQUITY (DEFICIT) 31, 1997 30, 1998
- ------------------------------ --------- ---------
CURRENT LIABILITIES:
Accounts payable $ 48,789 $ 46,092
Accrued expenses and other current
liabilities 4,713 3,278
Bank loans 4,642 23,020
Advanced billings 1,787 385
Rent payable - Current 1,622 674
----------- -------
Total current liabilities 61,553 73,449
----------- -------
OTHER LIABILITIES
Lease related reserves 4,854 806
Deferred purchase price 9,250 9,080
------------ ---------
Total other liabilities 14,104 9,886
------------ ---------
Total liabilities 75,657 83,335
------------ ---------
REDEEMABLE PREFERRED STOCK 2,160 2,160
STOCKHOLDEERS' 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 2,455,644 shares issued and
outstanding 24 24
Additional paid-in capital 5,537 5,639
Accumulated deficit (13,116) (15,265)
------------ ------------
Total stockholder's equity (deficit) (7,555) (9,602)
------------ ------------
Total liabilities and stockholders'
Equity (deficit) $ 70,262 $ 75,893
============ ============
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 SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
(000'S OMITTED, EXCEPT FOR PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
INCOME: 1997 1998
---- ----
<S> <C> <C>
Commissions and fees $ 6,844 $ 8,642
OPERATING EXPENSES:
Salaries and related costs, net 4,652 6,255
Other operating expenses 1,885 2,275
Amortization and depreciation 292 538
Office closure ----- (1,118)
-------- ---------
Total operating expenses 6,829 7,950
-------- ---------
OPERATING INCOME 15 692
NONOPERATING EXPENSES:
Interest net 20 506
Amortization of deferred financing costs 106 71
-------- ---------
Total nonoperating expenses 126 577
-------- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES (111) 115
PROVISION FOR INCOME TAXES 3 1
-------- ---------
NET INCOME (LOSS) (114) 114
PREFERRED STOCK
DIVIDEND REQUIREMENT (54) (54)
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ (168) $ 60
======== =========
EARNINGS (LOSS) PER SHARE -
BASIC AND DILUTED $ (0.07) $ .02
======== =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,366,683 2,454,898
========= =========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
(000'S OMITTED, EXCEPT FOR PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
INCOME 1997 1998
<S> <C> <C>
Commissions and fees $ 22,746 $ 28,937
OPERATING EXPENSES:
Salaries and related costs, net 14,324 20,445
Other operating expenses 6,022 8,458
Amortization and depreciation 979 1,652
Office closure - (1,118)
--------- -----------
Total operating expenses 21,325 29,437
--------- -----------
OPERATING INCOME (LOSS) 1,421 (500)
NONOPERATING EXPENSES:
Interest, net 66 1,273
Amortization of deferred financing costs 178 211
--------- -----------
Total nonoperating expenses 244 1,484
--------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,177 (1,984)
PROVISION FOR INCOME TAXES 37 3
--------- -----------
NET INCOME (LOSS) 1,140 (1,987)
PREFERRED STOCK
DIVIDEND REQUIREMENT (58) (162)
--------- -----------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ 1,082 $ (2,149)
======== =========
EARNINGS (LOSS) PER SHARE -
BASIC AND DILUTED $ .44 $ (.88)
======== =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,450,770 2,448,139
========= =========
The accompanying notes are an integral part of these consolidated statements
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED 000'S OMITTED)
<TABLE>
<CAPTION>
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 16 - 102 - 102
Preferred stock dividend - - - (162) (162)
Net income (loss) - - - (1,987) (1,987)
------ ---- ------- --------- ------
BALANCE, September 30, 1998 2,456 $24 $5,639 $(15,265) $(9,602)
====== ==== ======= ========= ======
The accompanying notes are an integral part of these consolidated statements
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1998
---- ----
<S> <C> <C>
Net income(loss) $1,140 $(1,987)
Adjustments to reconcile net income to
net cash used in operating activities:
Present value interest on deferred purchase price 57 455
Depreciation and amortization 283 642
Loss on sale of asset 16 118
Amortization of goodwill 696 1,034
Amortization of deferred financing costs 178 211
Office closure - (4,460)
Increase in accounts receivable (1,046) (7,392)
(Increase) decrease in expenditures billable to clients 630 (1,408)
(Increase) decrease in other current assets (234) 454
Decrease in other assets 9 150
Decrease in bank overdraft (2,865) -
Increase (decrease) in accounts payable 355 (4,218)
Decrease in accrued expenses (523) (1,435)
Decrease in advanced billings (1,329) (1,402)
Decrease in lease related reserves - (1,126)
Decrease in deferred purchase price payable - (487)
-------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (2,633) (20,851)
-------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition (118) (300)
Purchase of fixed assets (158) (1,892)
-------- -----------
NET CASH USED IN INVESTING ACTIVITIES (276) (2,192)
-------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from redeemable preferred stock 2,160 -
Increase in deferred financing costs (378) -
Cash paid for preferred dividends (1) (59)
Net proceeds of credit facility 920 19,899
-------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,701 19,840
-------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (208) (3,203)
-------- -----------
CASH AND CASH EQUIVALENTS, beginning of period 567 3,218
-------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 359 $ 15
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 53 $ 817
Income taxes $ 37 $ 3
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
Lois/USA Inc. (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 a normal and 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 ("Series A 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").
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 commissions and fees 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 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
nine months ended September 30, 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
share amounts)
--------------
Commissions and fees $ 33,244
Net income 3,258
Net income per common share $ 1.33
3. ACQUISITION OF EISAMAN, JOHNS & LAWS ADVERTISING, INC.
On February 12, 1996, the Company 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
the Company 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 and, as a result, 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.
As of September 30,1998, the borrowings outstanding and additional borrowings
available under the Sanwa credit facility were $19,263,000 and $5,737,000,
respectively.
There was 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 the Series A
Preferred Stock at $1,000 per share. Net proceeds to the Company, after the
payment of placement agent fees and offering costs, were approximately $2
million.
The Series A Preferred Stock is convertible by the holders, into shares of the
Company's Common Stock, at a conversion price of $6.50 thereof per share
beginning September 16, 1997. The Company is required to redeem the Series A
Preferred Stock, if not earlier converted or redeemed, for $1,000 per share on
May 19, 2002.
Dividends on the Series A Preferred Stock are payable quarterly at a rate of $25
per share. Holders were given the right to elect to receive the first four
dividend payments in the form of shares of the Company's Common Stock, valued at
$6.50 per share, and the holders of 1,375 shares of the Series A Convertible
Preferred Stock have so elected.
6. OFFICE CLOSURE
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. 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 this action the Company recorded charges totaling $3,342,000,
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, $1,964,000 for severance costs for the employees of the
office and $890,000 for other office closure costs including amounts needed to
terminate operating leases. However, when the Company acquired EJL in 1996 it
had recorded a liability for EJL's unfavorable Los Angeles lease, and the
termination of that lease allowed the Company to reverse the $3,870,000
remaining accrual at September 30, 1998. In addition, salary reserves had also
been recorded at the date of acquisition. The unamortized reserves of $590,000
along with the reversal of the rent accrual resulted in an aggregate credit to
operating expense of $1,118,000.
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1998.
Revenues from commissions and fees for the first nine months of fiscal 1998 were
$28,937,000, representing an increase of $6,191,000, or 27.2%, compared to
revenues from commissions and fees of $22,746,000 for the first nine months of
fiscal 1997. The results of operations for the first nine months of fiscal 1998
include the operating results of F&K, acquired December 31, 1997. The inclusion
of F&K's operations increased revenues by $10,142,000. Without the effect of the
acquisition of F&K, revenues for the first nine months of 1998 declined by
$3,951,000, 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 discussed below, in the third quarter of fiscal 1998 the Company
decided, as the result of those client losses, to close the Los Angeles office,
and in connection therewith recorded certain non-recurring items in the results
of operations for the nine months and three months ended September 30, 1998.
Operating expenses, including the effects of the items recorded as the result of
the closing of the Los Angeles office, for the first nine months of fiscal 1998
increased to $29,437,000 from $21,325,000 for the first nine months of fiscal
1997. Excluding the effects of the closing of the Los Angeles office, operating
expenses increased for the nine months ended September 30, 1998 by $9,230,000 to
$30,555,000, or 105.6% of revenue, from $21,325,000 or 93.8% of revenue for the
first nine months of fiscal 1997. Substantially all of the $9,230,000 increase
results from the inclusion of the operations of F&K in fiscal 1998. Salaries and
related costs increased from $14,324,000 in the first nine months of fiscal 1997
to $20,445,000 for the first nine months 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 63.0% in the first nine months of fiscal 1997 to
70.7% in the first nine months of fiscal 1998, due to the decline in revenues in
the Company's Los Angeles office. The decline in the revenues of the Los Angeles
office also contributed to the increase in other operating expenses, as a
percentage of revenues, from 26.5% for the nine months ended September 30, 1997
to 29.2% for the first nine months of fiscal 1998. Those expenses increased by
$2,436,000, principally due to the inclusion of the operations of F&K.
Additionally, the inclusion of the operations of F&K contributed to the increase
in this percentage, and the percentage of salaries and related costs to
revenues, since certain recurring F&K clients historically undertake the
majority of their advertising campaigns in the later part of the year.
Depreciation and amortization increased from $979,000 in the first nine months
of fiscal 1997 to $1,652,000 for the first nine months 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 six months of fiscal 1998
to upgrade workplace technology and consolidate the Company's Chicago
operations.
As discussed above, in the first nine months 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.
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 totaling $3,342,000, 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, $1,964,000 for
severance costs for the employees of the office and $890,000 for other office
closure costs including amounts needed to terminate operating leases. However,
when the Company acquired EJL in 1996 it had recorded a liability for EJL's
unfavorable Los Angeles lease, and the termination of that lease allowed the
Company to eliminate the $3,870,000 of that accrual remaining at September 30,
1998. In addition, salary reserves were also established at the date of
acquisition. The unamortized reserves of $590,0000 along with the reversal of
the rent accrual resulted in an aggregate credit to operating expense of
$1,118,000.
The revenues of the Los Angeles office included in the results of operations for
the nine months ended September 30, 1998 were $1,652,000. The closure of the
office will mean the loss of these revenues, however since the office was
operating at a loss ($1,211,000 for the nine months ended September 30, 1998)
the loss of those revenues is not expected to have an adverse effect on the
results of operations.
Interest expense increased to $1,273,000 for the first nine months of fiscal
1998, from $66,000 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 $178,000 for the first nine months of fiscal 1997 to $211,000 for
the first nine months of fiscal 1998.
The provision for income taxes decreased from $37,000 for the first nine months
of fiscal 1997 to $3,000 for the first nine months of fiscal 1998. The tax
provisions in both periods represent certain state taxes. No benefit was
recorded for the Company's loss in 1997 and 1998. Approximately $7,000,000 of
net operating loss carryforwards is available to offset future taxable income.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1998.
Revenues from fees and commissions for the three months ended September 30, 1998
were $8,642,000, representing an increase of 26.3% or $1,798,000 from revenues
of $6,844,000 for the third quarter of fiscal 1997. Revenues increased
principally as the result of the inclusion of $3,474,000 of F&K revenues offset
by the decline in revenues in Los Angeles.
Operating expenses, including the effects of the items recorded as the result of
the closing of the Los Angeles office, for the third quarter of 1998 rose to
$7,950,000 from $6,829,000. Excluding the effects of the closing of the Los
Angeles office, operating expenses increased for the three months ended
September 30, 1998 by $2,239,000 to $9,068,000, or 104.9% of revenue, from
$6,829,000 or 99.8% of revenue for the third quarter of fiscal 1997. Salaries
and related costs rose from $4,652,000 or 68% of revenue for the third quarter
of 1997 to $6,255,000 or 72.4% of revenue for the third quarter of 1998. Other
operating expenses increased from $1,885,000 for the third quarter of 1997 to
$2,275,000 for the third quarter of 1998, but declined as a percentage of
revenues from 27.5% to 26.3%. Amortization and depreciation increased from
$292,000 during the third quarter of 1997 to $538,000 in 1998. In each case the
amount of expenses, and their relationship to revenues, changed for essentially
the same reasons discussed above in the discussion of the results of operations
for the nine months ended September 30.
Interest expense rose by $486,000 to $506,000 for the three months ended
September 30, 1998 as a result of higher outstanding borrowings.
For the three months ended September 30, 1998, the Company earned $.02 per share
versus a loss of ($.07) for the comparable 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had a working capital deficit of $25,091,000,
reflecting an increase of $6,753,000 from the December 31, 1997 working capital
deficit caused principally by the net loss of $2,149,000 for the first nine
months of 1998 and bank loan financed capital and acquisition expenditures of
$2,192,000. Accounts receivable increased by $7.4 million from December 31, 1997
to September 30, 1998, while accounts payable, which include the amounts due for
media placed for and billed (in accounts receivable) to clients decreased $5.6
million. The $13 million difference between the increase in accounts receivable
and decrease in accounts payable 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 vendors, as well as the approximate $2.0
million increase in work in progress, 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 $23,020,000 at
September 30, 1998. An additional amount of $3,757,000, that represents checks
in transit, has been reflected in the bank loans of the balance sheet as of
September 30, 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 Preferred Stock. The
Series A 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 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 Preferred Stock will only require cash dividends of
$78,500 in 1998. The Series A 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 September 30, 1998, borrowings of $19,263,000 were outstanding
under the Sanwa facility and additional borrowings of $5,737,000 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.
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'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.
YEAR 2000
A significant portion of the Company's data processing is performed through the
use of hardware and software supplied by an independent data processing service.
The Company has been informed by the independent service that its systems are
Year 2000 compliant. The Company has reviewed its remaining data processing
functions and has determined that they are either Year 2000 compliant, or that
the costs to make them Year 2000 compliant will not be material.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain 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.
OTHER
In June 1997 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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.
In June 1998 the 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 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.
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<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: November 16, 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 SEPTEMBER 30, 1998, CONSOLIDATED BALANCE SHEET AND THE
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES
THERETO.
</LEGEND>
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<PERIOD-END> SEP-30-1998
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0
2,160
<COMMON> 24
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