SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 1999
|_| 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.
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(Exact name of Registrant as Specified in Its Charter)
DELAWARE 13-3441962
- -------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
40 WEST 57TH STREET, NEW YORK, NEW YORK 10019
(Address of Principal Executive Offices)
N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that 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:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 2,490,960 SHARES AS
OF AUGUST 13,1999.
<PAGE>
PART I-FINANCIAL INFORMATION PAGE
NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1998 and
June 30, 1999.............................................. F-1
Consolidated Statements of Operations for the
Six Months Ended June 30, 1998
and 1999................................................... F-2
Consolidated Statements of Operations for the
Three Months Ended June 30, 1998
and 1999................................................... F-3
Consolidated Statements of Changes In
Stockholders' Equity (Deficit) For the Six
Months Ended June 30, 1999................................. F-4
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1998
and 1999................................................... F-5
Notes to Consolidated Financial Statements................... F-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................. F-8
PART II-OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders.................................................... F-11
Item 6. Exhibits and Reports on Form 8-K............................. F-12
SIGNATURE................................................................. F-13
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<TABLE>
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LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED)
DECEMBER 31, JUNE 30,
ASSETS 1998 1999
(UNAUDITED)
------------ -----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 2,197 $ 2,857
Accounts receivable, net 40,839 34,842
Expenditures billable to clients 1,987 1,326
Other current assets 592 1,763
--- -----
Total current assets 45,615 40,788
------ ------
PROPERTY AND EQUIPMENT, at cost 5,529 6,284
Less-Accumulated depreciation and (2,768) (3,639)
amortization ------ -------
Net property and equipment 2,761 2,645
----- -----
OTHER ASSETS:
Deferred financing costs 466 682
Goodwill 23,182 24,759
Other assets 407 222
--- ---
Total other assets 24,055 25,663
------ ------
Total assets $72,431 $69,096
======= =======
</TABLE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED)
LIABILITIES AND STOCKHOLDERS' DECEMBER 31, JUNE 30,
EQUITY (DEFICIT) 1998 1999
(UNAUDITED)
------------ -----------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 54,716 $ 53,992
Accrued expenses and other current liabilities 5,427 2,963
Bank loans 12,684 13,088
Advanced billings 82 239
Lease related reserves 690 882
--- ---
Total current liabilities 73,599 71,164
------ ------
OTHER LIABILITIES
Lease related reserves 633 288
Deferred purchase price 9,123 9,921
----- -----
Total other liabilities 9,756 10,209
----- ------
Total liabilities 83,355 81,373
------ ------
REDEEMABLE PREFERRED STOCK 2,060 2,060
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; 2,476,251 shares
and 2,481,474 shares issued and outstanding 24 25
Additional paid-in capital 5,773 5,838
Accumulated deficit (18,781) (20,200)
------- -------
Total stockholder's equity (deficit) (12,984) (14,337)
------- -------
Total liabilities and stockholders'
equity (deficit) $72,431 $69,096
======= =======
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
(000'S OMITTED, EXCEPT FOR PER SHARE AND SHARE DATA)
INCOME: 1998 1999
---- -----
Commissions and fees $ 20,295 $ 16,228
----------- -----------
OPERATING EXPENSES:
Salaries and related costs, net 14,190 11,864
Other operating expenses 6,183 3,227
Amortization and depreciation 1,114 1,049
----- -----
Total operating expenses 21,487 16,140
------ ------
OPERATING INCOME(LOSS) (1,192) 88
NONOPERATING EXPENSES:
Interest, net 767 938
Amortization of deferred financing costs 140 465
--- ---
Total nonoperating expenses 907 1,403
--- -----
INCOME BEFORE PROVISION FOR
INCOME TAXES (2,099) (1,315)
PROVISION FOR INCOME TAXES 2 1
- -
NET INCOME (LOSS) (2,101) (1,316)
PREFERRED STOCK
DIVIDEND REQUIREMENT (108) (38)
---- ---
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ (2,209) $ (1,354)
=========== ===========
EARNINGS (LOSS) PER SHARE -
BASIC and DILUTED $ (.90) $ (.54)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,446,979 2,483,088
========= =========
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
(000'S OMITTED, EXCEPT FOR PER SHARE AND SHARE DATA)
INCOME: 1998 1999
----------- -----------
Commissions and fees $ 10,650 $ 8,058
----------- -----------
OPERATING EXPENSES:
Salaries and related costs, net 7,164 5,780
Other operating expenses 3,061 1,652
Amortization and depreciation 582 535
Total operating expenses 10,807 7,967
------ -----
OPERATING INCOME(LOSS) (157) 91
NONOPERATING EXPENSES:
Interest, net 448 478
Amortization of deferred financing costs 70 394
-- ---
Total nonoperating expenses 518 872
--- ---
INCOME BEFORE PROVISION FOR
INCOME TAXES (675) (781)
PROVISION FOR INCOME TAXES -- --
----- -----
NET INCOME (LOSS) (675) (781)
PREFERRED STOCK
DIVIDEND REQUIREMENT (54) (20)
--- ---
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ (729) $ (801)
=========== ===========
EARNINGS (LOSS) PER SHARE -
BASIC and DILUTED $ (.30) $ (.32)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,449,550 2,485,487
========= =========
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
<TABLE>
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LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(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, 1999 2,476 $24 $5,773 $(18,781) $(12,984)
Common stock issued for dividends on
redeemable preferred stock 10 1 65 - 66
Preferred stock dividend - - - (103) (103)
Net income(loss) - - - (1,316) (1,316)
------ ------ ------ ------ ------
BALANCE, June 30, 1999 2,486 $25 $5,838 $(20,200) $(14,337)
===== === ====== ======== ========
The accompanying notes are an integral part of these consolidated statements
</TABLE>
<PAGE>
<TABLE>
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LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
(000'S OMITTED)
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1999
--------- ---------
<S> <C> <C>
Net income(loss) $ (2,101) $ (1,316)
Adjustments to reconcile net income to net cash used in
operating activities:
Present value interest on deferred purchase price 300 253
Depreciation and amortization 432 345
Amortization of goodwill 682 704
Amortization of deferred financing costs 140 465
(Increase) decrease in accounts receivable (16,572) 7,535
(Increase) decrease in expenditures billable to clients (1,668) 855
(Increase) decrease in other current assets 443 (1,092)
Decrease in other assets 58 232
Increase (decrease) in accounts payable 9219 (3,010)
Decrease in accrued expenses and other current liabilities (3,497) (2,782)
Decrease in advanced billings (1,378) (82)
Decrease in lease related reserves (807) (345)
Decrease in deferred payouts (325) (199)
--------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (15,074) 1,563
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition (300) (418)
Purchase of fixed assets (1,634) (170)
------ ----
NET CASH USED IN INVESTING ACTIVITIES (1,934) (588)
------ ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid for preferred dividends (39) (38)
Cash paid for fees on secured credit agreement -- (681)
Proceeds of credit facility 100,320 109,547
Repayment of credit facility (85,970) (109,143)
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,311 (315)
------ ----
NET INCREASE (DECREASE) IN CASH AND CASH (2,697) 660
EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period 3,218 2,197
----- -----
CASH AND CASH EQUIVALENTS, end of period $ 521 $ 2,857
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 466 $ 685
Income taxes $ 2 $ 1
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. and subsidiaries (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 consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K, for the year ended
December 31, 1998.
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").
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
January 15, 1999, the stockholders of F&K received a 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.
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.
In May 1997, the Company and the Sellers agreed to revise the terms of the
acquisition. 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, was $8,612,000.
In the third quarter of fiscal 1998, the Company decided to close the Los
Angeles office, which had been acquired as part of the acquisition of EJL. The
decision was made after the Company concluded that client losses that began in
the second half of fiscal 1997 were not being replaced at a rate necessary to
support the expenses of that office. Those expenses included significant lease
obligations, which, before making the decision to close the office, the Company
determined through negotiations with the lessor could be reduced if the space
was abandoned. The office was closed in September 1998. In connection with this
action, the Company recorded charges totaling $3,292,000, comprised of $370,000
for the cost of the termination of the lease, $118,000 for the cost of furniture
and fixtures surrendered to the lessor as part of the lease termination,
$1,677,000 for severance costs for the employees of the office and $1,127,000
for other office closure costs, which charges were offset by the reversal of the
$3,870,000 remaining of the liability for EJL's unfavorable Los Angeles lease
the Company recorded at the time EJL was acquired and the reversal of the
$563,000 remaining liability recorded for certain salary arrangements entered
into in connection with the acquisition.
<PAGE>
4. REDUCING REVOLVING CREDIT FACILITY
Until June 17, 1999, the Company had a revolving credit facility with Sanwa
Business Credit Corporation ("Sanwa") which provided 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 (expiring October 2000), 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.
On June 17, 1999, the Company entered into a syndicated credit facility with
Green Tree Financial Servicing Corporation ("Green Tree") for a $30 million
syndicated facility, which replaced its credit facility with Sanwa. The credit
facility has a term of three years and bears interest up to 4.0% above LIBOR. As
in the facility it replaced, borrowings are secured by essentially all of the
assets of the Company, including the stock and assets of the Company's
subsidiaries. The amount available under the facility is based upon a specified
percentage of eligible accounts receivable. The Agreement contains various
financial covenants, the most significant of which are based upon EBITDA,
Interest Coverage Ratios and Fixed Charge Coverage Ratios.
As of June 17, 1999 the Company had remaining unamortized costs incurred in
obtaining the Sanwa facility of $322,000, which were charged to expense at that
date. The Company incurred fees and costs of $727,000 in connection with
obtaining the Green Tree facility. Those costs are being amortized to expense
over the three year term of the Green Tree facility.
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. These holders have elected to
continue to receive their dividend payments in the form of shares of the
Company's Common Stock.
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
For the six months ended June 30, 1999, the Company had operating income was
$88,000 as compared to an the operating loss of $1,192,000 for the first half of
fiscal 1998. The net loss for the six months ended June 30, 1999 was $1,316,000,
or $.54 per share, as compared to the net loss of $2,101,000, or $.90 per share,
for the six months ended June 30, 1998. Operating income(loss) improved and the
net loss declined in the fiscal 1999 period, despite a decline in revenues, as
the result of cost reductions accomplished by the closure of the Los Angeles
office in the third quarter of fiscal 1998, restructuring steps implemented in
the New York office in the fourth quarter of fiscal 1998 and efforts in fiscal
1999 to eliminate unprofitable client assignments.
Revenues for the six months ended June 30, 1999 were $16,228,000, as compared to
$20,295,000 for the first half of fiscal 1998. The decline of $4,067,000 or
20.0% was due to the closure of the Los Angeles office, and due to the
restructuring of the New York office, which included steps to eliminate
unprofitable client assignments and related costs.
Operating expenses declined to $16,140,000 for the first half of fiscal 1999,
from $21,487,000 for the six months ended June 30, 1998. Salaries and related
costs were $11,864,000, or 73.1% of revenues, for the 1999 period as compared to
$14,190,000 or 69.9% of revenues for the six months ended June 30, 1998. The
closure of the Los Angeles office and the personnel reductions made as a part of
the New York office restructuring allowed the Company to reduce these costs,
although the costs increased as a percentage of revenues due to the decline in
revenues. Other operating expenses declined to $3,227,000 for the first half of
fiscal 1999 from $6,183,000 for the six months ended June 30, 1998. As a
percentage of revenues, other operating expenses declined to 19.9% from 30.5%,
and this reduction was the principal cause in the improvement in the Company's
operating results. The principal reductions were in rent and client services
expenses, due to the closure of the Los Angeles office in the third quarter of
fiscal 1998, restructuring steps implemented in the New York office in the
fourth quarter of fiscal 1998 and efforts in fiscal 1999 to eliminate
unprofitable client assignments.
Interest expense increased to $938,000 in 1999 from $767,000 in 1998 as the
result of higher outstanding borrowings. The Company's borrowings increased,
principally during the last half of fiscal 1998 and the first quarter of fiscal
1999, to finance the Company's net losses during those periods. The amortization
of deferred financing costs increased to $465,000 for the first half of fiscal
1999 from $140,000 for the six months ended June 30, 1998 as the result of the
Company's June 1999 refinancing of its Sanwa credit facility under a new credit
agreement with Green Tree. As a result of the refinancing, $322,000 of
previously unamortized costs incurred in obtaining the Sanwa facility were
charged to operations in June 1999. The Company incurred fees and costs of
$727,000 in connection with obtaining the Green Tree facility. Those costs are
being amortized to expenses over the three year term of the Green Tree facility.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999.
<PAGE>
For the three months ended June 30, 1999, the Company had an operating income of
$91,000, as compared to an operating loss of $157,000 for the second quarter of
fiscal 1998. The net loss for the three months ended June 30, 1999 was $781,000,
or $.32 per share, as compared to the net loss of $675,000, or $.30 per share,
for the three months ended June 30, 1998. Operating income(loss) improved
despite a decline in revenues, as the result of cost reductions accomplished by
the closure of the Los Angeles office in the third quarter of fiscal 1998,
restructuring steps implemented in the New York office in the fourth quarter of
fiscal 1998 and efforts in fiscal 1999 to eliminate unprofitable client
assignments. The net loss increased for the second quarter of fiscal 1999
principally due to the write-off of the unamortized costs related to the Sanwa
credit facility, as discussed above.
Revenues for the three months ended June 30, 1999 were $8,058,000, as compared
to $10,650,000 for the second quarter of fiscal 1998. The decine of $2,592,000
or 24.3% was due to the closure of the Los Angeles office, and due to the
restructuring of the New York office, which included steps to eliminate
unprofitable client engagements and related costs.
Operating expenses declined to $7,967,000 for the second quarter of fiscal 1999,
from $10,807,000 for the three months ended June 30, 1998. Salaries and related
costs were $5,780,000 or 71.7% of revenues for the 1999 period, as compared to
$7,164,000 or 67.3% of revenues for the three months ended June 30, 1998. Other
operating expenses declined to $1,652,000 for the second quarter of fiscal 1999
from $3,061,000 for the three months ended June 30, 1998. As a percentage of
revenues, other operating expenses declined to 20.5% from 28.7%, and this
reduction was the principle cause in the improvement in the Company's operating
results. The principal reductions were in rent and client services expenses, due
to the closure of the Los Angeles office in the third quarter of fiscal 1998,
restructuring steps implemented in the New York office in the fourth quarter of
fiscal 1998 and efforts in fiscal 1999 to eliminate unprofitable client
assignments.
No tax benefit was recorded for the Company's loss in 1998 and 1999.
Approximately $12,000,000 of net operating loss carryforwards are available to
offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had a working capital deficit of $30,376,000,
reflecting an increase in the working capital deficit of $2,392,000 from
December 31, 1998. The Company's working capital deficit increased as the net
loss for the six months ended June 30, 1999 of $1,316,000, acquisition and
property addition expenditures of $588,000 and net cash outflows of $315,000
from the refinancing of the Company's credit facility and the payment of
preferred stock dividends.
The Company's positive operating cash flows for the six months ended June 30,
1999 reflect the net loss of $1,316,000, non-cash charges totaling $1,767,000,
cash inflows from decreases in accounts receivable and expenditures billable to
clients and cash outflows for decreases in accounts payable and accrued
expenses. Accounts receivable and expenditures billable to clients decreased by
a total of $8,390,000, reflecting both the decline in revenues and seasonal
reduction in advertising expenditures by clients. Accounts payable, which
includes the liabilities to the media providers, decreased by $3,010,000. The
smaller decrease in accounts payable as compared to accounts receivable and
expenditures billable to clients reflects the Company's acceleration, in late
1998, of payments to media providers, relative to its receipt of payment from
the clients, to maintain good relationships with those media providers. Accrued
expenses declined due to the payment of restructuring costs accrued in 1998.
The Company acquired EJL in February 1996. Under the acquisition agreement, as
revised in May 1997, the total purchase price was $9.6 million, of which $5.9
million has been paid through December 31, 1998 through cash payments of $4.8
million and the issuance of 189,183 shares of Common Stock. The remaining $3.6
million will be paid in cash in quarterly installments from June 1999 through
March 2009. The Company presently anticipated funding these payments from
borrowings under its bank credit facility.
On December 31, 1997, the Company acquired all of the outstanding common stock
of F&K. The aggregate purchase price was $10.8 million. The Company made an
initial payment of $4,103,000, comprised of a cash payment of $3,500,000, and
the issuance of 50,000 shares of the Company's Common Stock and warrants for the
purchase of 39,000 shares of the Company's Common Stock, exercisable through
December 31, 2000 at an exercise price of $10.00 per share. The F&K Agreement
requires that the Company make additional purchase price payments on the first,
second and third anniversaries of the acquisition. On January 15, 1999, the
sellers received a 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. The Company currently
anticipates that the cash payments required at December 31, 1999 and 2000 will
be funded from its bank credit facility.
In October 1997, the Company entered into a revolving credit facility with Sanwa
that provided for borrowings of up to $25 million based on a specified
percentage of eligible accounts receivable. The Sanwa credit facility had a
three-year term, with borrowings bearing interest at 2.5% above LIBOR.
Borrowings were 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.
On June 17, 1999, the Company repaid the borrowings under and replaced the Sanwa
credit facilty with a syndicated credit facility with Green Tree Financial
Servicing Corporation ("Green Tree") for a $30 million syndicated facility,
which replaced its credit facility with Sanwa. The credit facility has a term of
three years and bears interest up to 4.0% above the London Interbank Offered
Rate ("LIBOR"). As in the facility it replaced, borrowings are secured by
essentially all of the assets of the Company, including the stock and assets of
the Company's subsidiaries. The amount available under the facility is based
upon a specified percentage of eligible accounts receivable. The agreement
contains various financial covenants, the most significant of which are based
upon EBITDA, Interest Coverage Ratios and Fixed Charge Coverage Ratios. As of
June 30, 1999, borrowings under the Green Tree facility totaled $13,088,000,
Unused borrowings of $16,912,000 are available at June 30, 1999.
<PAGE>
Effective June 30, 1999, the stock of Taylor Speier Group, Inc. was acquired by
Fogarty & Klein, Inc. The aggregate purchase price is approximately $2.5 million
and is payable over a three year period. Net assets of approximately $.4 million
were received as part of the purchase.
The Company's growth strategy includes the acquisition of existing advertising
agencies. Such 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 Green Tree will be sufficient
to meet the Company's cash needs for its existing business, its debt obligation,
the payments due under the F&K and EJL acquisition agreements 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 has not been held.
<PAGE>
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 June 21, 1999 filed June 22, 1999.
<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 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
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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,857
<SECURITIES> 0
<RECEIVABLES> 34,842
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,788
<PP&E> 6,284
<DEPRECIATION> 3,639
<TOTAL-ASSETS> 69,096
<CURRENT-LIABILITIES> 71,164
<BONDS> 0
0
2,060
<COMMON> 24
<OTHER-SE> (14,362)
<TOTAL-LIABILITY-AND-EQUITY> 69,096
<SALES> 0
<TOTAL-REVENUES> 16,228
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<INTEREST-EXPENSE> 938
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