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 JUNE 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: 2,455,644 SHARES AS OF AUGUST 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
June 30, 1998....................................... F-1
Consolidated Statements of Operations for the
Three Months Ended June 30, 1997
and 1998............................................ F-2
Consolidated Statements of Operations for the
Six Months Ended June 30, 1997
and 1998............................................. F-3
Consolidated Statements of Changes In
Stockholders' Equity (Deficit) For the Six
Months Ended June 30, 1998........................... F-4
Consolidated Statements of Cash Flows for
the Six Months Ended June30, 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>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------------- ------------
<S> <C> <C>
ASSETS
- -------
CURRENT ASSETS:
Cash and cash equivalents $ 3,218 $ 521
Accounts receivable, net 38,475 55,047
Expenditures billable to
clients 764 2,432
Other current assets 758 315
------- --------
Total current assets 43,215 58,315
------- --------
PROPERTY AND EQUIPMENT, at cost 4,503 6,048
Less-Accumulated
depreciation and (2,470) (2,813)
amortization ------- -------
Net property and
equipment 2,033 3,235
------- -------
OTHER ASSETS:
Deferred financing costs 747 607
Goodwill 23,816 23,887
Other assets 451 393
------- --------
Total other assets 25,014 24,887
------- -------
Total assets $70,262 $86,437
======= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 48,789 $ 58,008
Accrued expenses and other 4,713 1,216
current liabilities
Bank loans 4,642 18,992
Advanced billings 1,787 409
Rent payable - Current 1,622 1,670
-------- ---------
Total current liabilities 61,553 80,295
-------- ---------
OTHER LIABILITIES
Lease related reserves 4,854 3,999
Deferred purchase price 9,250 9,678
-------- ------
Total other liabilities 14,104 13,677
-------- ------
Total liabilities 75,657 93,972
-------- ------
REDEEMABLE PREFERRED STOCK 2,160 2,160
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value
$0.1 per share:
1,000,000 shares authorized;
no shares issued and outstanding
Common stock, par value $0.1 per
share: 20,000,000 shares authorized;
2,439,861 shares and 2,450,421
shares issued and outstanding 24 24
Additional paid-in capital 5,537 5,606
Accumulated deficit (13,116) (15,325)
--------- --------
Total stockholder's deficit (7,555) (9,695)
--------- --------
Total liabilities and stockholders'
Equity (deficit) $70,262 $86,437
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
(000'S OMITTED, EXCEPT FOR PER SHARE AND SHARE DATA)
INCOME: 1997 1998
---- ----
<S> <C> <C>
Commissions and fees $ 8,210 $ 10,650
-------- --------
OPERATING EXPENSES:
Salaries and related costs, net 4,683 7,164
Other operating expenses 2,355 3,061
Amortization and depreciation 319 582
----- -----
Total operating expenses 7,357 10,807
------------ ---------
OPERATING INCOME(LOSS) 853 (157)
NONOPERATING EXPENSES:
Interest, net (6) 448
Amortization of deferred financing costs 50 70
------------- ----------
Total nonoperating expenses 44 518
-------------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 809 (675)
PROVISION FOR INCOME TAXES - -
-------------- --------
NET INCOME (LOSS) 809 (675)
PREFERRED STOCK
DIVIDEND REQUIREMENT (4) (54)
-------------- --------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ 805 $ (729)
============== ========
EARNINGS (LOSS) PER SHARE -
BASIC and DILUTED $ .32 $ (.30)
============== =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,524,344 2,449,550
============= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
(000'S OMITTED, EXCEPT FOR PER SHARE AND SHARE DATA)
INCOME: 1997 1998
---- ----
<S> <C> <C>
Commissions and fees $ 15,900 $ 20,295
--------- ----------
OPERATING EXPENSES:
Salaries and related costs, net 9,672 14,190
Other operating expenses 4,137 6,183
Amortization and depreciation 687 1,114
--------- ----------
Total operating expenses 14,496 21,487
--------- ----------
OPERATING INCOME(LOSS) 1,404 (1,192)
NONOPERATING EXPENSES:
Interest, net 46 767
Amortization of deferred financing costs 72 140
--------- ----------
Total nonoperating expenses 118 907
--------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 1,286 (2,099)
PROVISION FOR INCOME TAXES 34 2
--------- ----------
NET INCOME (LOSS) 1,252 (2,101)
PREFERRED STOCK
DIVIDEND REQUIREMENT (4) (108)
--------- ----------
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ 1,248 $ (2,209)
========= ==========
EARNINGS (LOSS) PER SHARE -
BASIC and DILUTED $ .50 $ (.90)
========= ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,492,814 2,446,979
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Unaudited 000's omitted)
<TABLE>
<CAPTION>
Common Common Additional
Stock Stock Paid-in Accumulated
Shares Par Capital Deficit Total
Value
-------- ------ ---------- ------------ -----
<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 10 - 69 - 69
Preferred stock dividend - - - (108) (108)
Net income (loss) - - (2,101) (2,101)
----------- ------- ------ --------- --------
BALANCE, June 30, 1998 2,450 $ 24 $ 5,606 $(15,325) $(9,695)
============ ======= ======= ========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
(000'S OMITTED)
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1998
---- ----
<S> <C> <C>
Net income (loss) $1,252 $(2,101)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 192 432
Loss on sale of asset 16 -
Amortization of goodwill 495 682
Amortization of deferred financing costs 72 140
(Increase) in accounts receivable (10,041) (16,572)
(Increase) decrease in expenditures 305 (1,668)
billable to clients
(Increase) decrease in other current assets (139) 443
Decrease in other assets 6 58
Decrease in bank overdraft (2,865) -
Increase in accounts payable 12,742 9,219
Decrease in accrued expenses (587) (3,497)
Decrease in advanced billings (1,109) (1,378)
Decrease in lease related reserves - (807)
Decrease in deferred payouts - (325)
Increase in deferred purchase price - 300
------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 339 (15,074)
--- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition (92) (300)
Purchase of fixed assets (68) (1,634)
----- -------
NET CASH USED IN INVESTING ACTIVITIES (160) (1,934)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from redeemable preferred stock 2,160 -
Increase in deferred financing costs (274) -
Cash paid for preferred dividends - (39)
Net proceeds of credit facility (1,030) 14,350
-------- ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 856 14,311
---- ------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,035 (2,697)
CASH AND CASH EQUIVALENTS, beginning of period 567 3,218
--- -----
CASH AND CASH EQUIVALENTS, end of period $1,602 $521
====== ====
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 53 $466
Income taxes $ 34 $ 2
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<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 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 of
10%. 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 former 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 six
months ended June 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
--------
Commissions and fees $ 21,858
Net income(loss) 2,155
Net income(loss) per common share $ .86
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.
As of June 30,1998, the borrowings outstanding and additional borrowings
available under the Sanwa credit facility were $13,521,000 and $11,479,000,
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 Series A
Preferred 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 thereof into shares
of the Company's Common Stock at a conversion price of $6.50 per share beginning
September 16, 1997. The Company is required to redeem the Series A Preferred
Stock, if not earlier converted or redeemed, for $1,000 per share on May 19,
2002.
Dividends on the Series A Preferred Stock are payable quarterly at a rate of $25
per share. Holders were given the right to elect to receive the first four
dividend payments in the form of shares of the Company's Common Stock, valued at
$6.50 per share, and the holders of 1,375 shares of the Series A Preferred Stock
have so elected.
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998.
Revenues from commissions and fees for the first six months of fiscal 1998 were
$20,295,000, representing an increase of $4,395,000, or 27.5%, compared to
revenues from commissions and fees of $15,900,000 for the first six months of
1997. The results of operations for the first six months of 1998 include the
operating results of F&K, acquired December 31, 1997. The inclusion of F&K's
operations increased revenues by $6,668,000. Without the effect of the
acquisition of F&K, revenues for the first six months of 1998 declined by
$2,273,000, reflecting principally the absence from the first six months of 1998
the revenues from clients of the Company's Los Angeles office lost in the second
half of 1997. The Los Angeles office has not yet replaced those lost clients and
the Company has been pursuing staff reductions and other adjustments at that
office.
Operating expenses for the first six months of 1998 increased to $21,487,000
from $14,496,000 for the first six months of 1997. Substantially all of the
$6,991,000 increase results from the inclusion of the operations of F&K in 1998.
Salaries and related costs increased from $9,672,000 in the first six months of
1997 to $14,190,000 for the first six months of 1998, again due to the inclusion
of the operations of F&K. As a percentage of revenues, salaries and related
costs increased from 60.8% in the first six months of 1997 to 69.9% in the first
six months of 1998, due to the decline in revenues in the Company's Los Angeles
office and the 66.2% relationship of salaries to revenues at F&K, where revenues
in the first six months 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 $4,137,000 or 26.0% of revenues for the first six
months of 1997 to $6,183,000 or 30.5% of revenues for the first six months of
1998. Depreciation and amortization increased from $687,000 in the first six
months of 1997 to $1,114,000 for the first six months of 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 1998 to
upgrade workplace technology and consolidate the Company's Chicago operations.
Interest expense increased to $767,000 for the first six months of 1998, from
$46,000 in the comparable 1997 period, as the result of higher outstanding
borrowings. The Company's borrowings increased throughout 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
$72,000 for the first six months of 1997 to $140,000 for the first six months of
1998.
The provision for income taxes decreased from $34,000 for the first six months
of 1997 to $2,000 for the first six months of 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 JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998.
Revenues from fees and commissions rose to $10,650,000 for the three months
ended June 30, 1998 versus $8,210,000 for the comparable 1997 period. The
increase of $2,440,000 or 29.7% is primarily the result of including F&K's
revenues for the second quarter of 1998 of $3,764,000, offset by declining
revenues in the Los Angeles office.
Operating expenses for the second quarter of 1998 rose to $10,807,000 from
$7,357,000. This rise was again primarily a result of the inclusion of F&K's
expenses. Salaries and related costs rose from $4,683,000 or 57% of revenue in
the second quarter of 1997 to $7,164,000 or 67.3% of revenue for the second
quarter of 1998. However, the relationship of salaries and related costs to
revenue improved in the second quarter of 1998, as compared to the first quarter
of 1998 when it was 72.8%, principally as the result of adjustments in the Los
Angeles office. Amortization and depreciation increased from $319,000 during the
second quarter of 1997 to $619,000 in the second quarter of 1998 due to the
amortization of the goodwill recorded in the acquisition of F&K and the
depreciation of capital expenditures made during 1998 to upgrade workplace
technology and consolidate the Company's Chicago operations.
Interest expense rose by $454,000 to $448,000 for the three months ended June
30, 1998 as a result of higher outstanding borrowings.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had a working capital deficit of $21,980,000,
reflecting an increase from the December 31, 1997 working capital deficit of
$3,642,000 caused principally by the net loss of $2,209,000 for the first six
months of 1998 and capital expenditures of $1,634,000. Accounts receivable
increased by $16.6 million from December 31, 1997 to June 30, 1998, while
accounts payable, which include the amounts due for media placed for and billed
(in accounts receivable) to clients increased $5.7 million. The $10.9 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 vendors, as well as the approximate $2.0 million increase in work in
progress, and $1,634,000 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 $13,521,000 at June 30, 1998. An additional amount of
$5,471,000, that represents checks in transit, has been reflected in the bank
loans on the balance sheet.
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 June 30, 1998, borrowings of $13,521,000 were outstanding
under the Sanwa facility and additional borrowings of $11,479,000 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 was
$800,000, of which $300,000 was paid at closing and the remaining $500,000 will
be paid over the next two years. 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, but management does not anticipate that implementation will have a
significant impact on its disclosure.
In June 1998, the FASB issued 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.
<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: August 13, 1998
By:/S/ ROBERT K. STEWART
Name: Robert K. Stewart
Title: Executive Vice President,
Chief Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE
30, 1998, CONSOLIDTED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FOR
THE SIX-MONTH PERIOD ENDED JUNE 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> JUN-30-1998
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