SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
OR
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 the Registrant as specified in its charter)
Delaware 13-3441962
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 West 57th Street, New York, New York 10019
(Address of principal executive offices) (Zip Code)
N/A
(Former name, former address and former fiscal year, if changed from last
report)
Indicate by check mark 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 distributions of securities under a plan
confirmed by a court. Yes___ No___.
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the Issuer=s classes of common
equity, as of the latest practicable date: 2,366,692 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, 1996 and
June 30, 1997...................................................F-1
Consolidated Statements of Operations for the
Three Months Ended June 30, 1996
and 1997......................................................F-2
Consolidated Statements of Operations for the
Six Months Ended June 30, 1996
and 1997......................................................F-3
Consolidated Statements of Changes In
Stockholder's (Deficit) For the Six Months
Ended June 30, 1997..........................................F-4
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1996
And 1997......................................................F-5
Notes to Consolidated Financial Statements......................F-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................................
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................11
SIGNATURE....................................................................12
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(000's omitted)
December 31, June 30,
1996 1997
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 567 $1,602
Accounts receivable, net 21,788 31,829
Expenditures billable to clients 1,702 1,397
Other current assets 470 609
------ ------
Total current assets 24,527 35,437
PROPERTY AND EQUIPMENT, at cost 2,948 3,016
Less-Accumulated depreciation and (2,112) (2,304)
amortization ------- -------
Net property and equipment 836 712
------- -------
OTHER ASSETS:
Deferred financing costs 350 552
Goodwill 18,118 13,307
Other assets 165 159
Total other assets 18,633 14,018
------- -------
Total assets $43,996 $50,167
======= =======
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' 1996 1997
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank overdraft $2,865 $ -
Accounts payable 29,285 42,761
Accrued expenses and other
current liabilities 1,423 836
Bank loans 1,580 550
Advance billings 2,362 1,253
Rent payable - Current 1,333 1,141
------ -----
Total current liabilities 38,848 46,541
------ ------
OTHER LIABILITIES:
Lease related reserves 4,834 4,294
Equity subject to put rights 270 -
Deferred purchase price 5,939 2,680
------ ------
Total other liabilities 11,043 6,974
------ ------
Total liabilities 49,891 53,515
------ ------
REDEEMABLE PREFERRED STOCK - 2,160
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $.01 per share:
1,000,000 shares authorized; no shares
issued and outstanding
Common stock, par value $.01 per share:
20,000,000 shares authorized; 2,555,875 and
2,366,692 issued and outstanding 26 24
Additional paid-in capital 5,757 4,894
Accumulated deficit (11,678) (10,426)
------- -------
Total stockholder's equity (deficit) (5,895) ( 5,508)
------- -------
Total liabilities and stockholders'
equity (deficit) $43,996 $50,167
======= =======
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(UNAUDITED)
(000's omitted except for per share and share data)
REVENUE: 1996 1997
---- ----
<S> <C> <C>
Commissions and fees $13,688 $15,900
------- -------
OPERATING EXPENSES:
Salaries and related costs, net 9,122 9,672
Other operating expenses 3,798 4,137
Amortization and depreciation 324 687
------ ------
Total operating expenses 13,244 14,496
------ ------
OPERATING INCOME 444 1,404
NONOPERATING EXPENSES:
Interest, net (6) 46
Amortization of deferred financing costs 28 72
-- ---
Total nonoperating expenses 22 118
-- ---
INCOME BEFORE PROVISION FOR 422 1,286
INCOME TAXES
PROVISION FOR INCOME TAXES 169 34
---- --
NET INCOME (LOSS) 253 1,252
PREFERRED STOCK
DIVIDEND REQUIREMENT - 4
------ ------
NET INCOME APPLICABLE
TO COMMON STOCK $253 $1,248
====== ======
NET INCOME PER COMMON $.10 $.50
====== ======
SHARE
WEIGHTED AVERAGE NUMBER OF 2,521,123 2,492,814
========= =========
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
The accompanying notes are an integral part of these consolidatedstatements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, AND 1997
(UNAUDITED)
(000's omitted except for per share and share data)
INCOME: 1996 1997
---- ----
<S> <C> <C>
Commissions and fees $7,546 $8,210
------ ------
OPERATING EXPENSES:
Salaries and related costs, net 4,570 4,683
Other operating expenses 2,393 2,355
Amortization and depreciation 162 319
----- -----
Total operating expenses 7,125 7,357
------ -----
OPERATING INCOME 421 853
NONOPERATING EXPENSES:
Interest, net (3) (6)
Amortization of deferred financing costs 14 50
-- --
Total nonoperating expenses 11 44
-- --
INCOME BEFORE PROVISION FOR
INCOME TAXES 410 809
PROVISION FOR INCOME TAXES 164 -
--- ----
NET INCOME (LOSS) 246 809
PREFERRED STOCK
DIVIDEND REQUIREMENT - 4
------ ------
NET INCOME APPLICABLE
TO COMMON STOCK $246 $805
==== ====
NET INCOME PER COMMON $.09 $.32
SHARE ==== ====
WEIGHTED AVERAGE NUMBER OF 2,521,123 2,524,344
COMMON AND COMMON EQUIVALENT ========= =========
SHARES OUTSTANDING
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER=S (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(Unaudited 000'S omitted)
<TABLE>
<CAPTION>
Common Common Additional
Stock Stock Paid-in Accumulated
Shares Par Value Capital Deficit Total
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 2,556 $26 $5,757 $(11,678) $(5,895)
EJL Settlement - return of shares (189) (2) (863) (865)
(Note 2)
Net income - - - 1,252 1,252
----- ----- ------- -------- -----
BALANCE, June 30, 1997 2,367 $ 24 $ 4,894 $(10,426) $(5,508)
===== ==== ======= ======== =======
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 SIX MONTHS ENDED MARCH 31, 1996 AND 1997
(UNAUDITED)
(000's omitted)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1996 1997
---- ----
<S> <C> <C>
Net income $253 $1,252
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation 218 192
Amortization of deferred financing costs 28 72
Decrease in deferred tax asset 117 -
Amortization of goodwill 106 495
Loss on sale of asset - 16
(Increase) in accounts receivable (3,091) (10,041)
Decrease in expenditures billable to clients 1,067 305
(Increase) in prepaid income taxes (76) -
(Increase) decrease in other current assets 530 (139)
Decrease in other assets 6
Increase (decrease) in bank overdraft - (2,865)
Increase (decrease) in accounts payable (1,422) 12,742
(Decrease) in accrued expenses - (587)
(Decrease) in advanced billings - (1,109)
NET CASH PROVIDED BY (used in)
OPERATING ACTIVITIES (2,270) 339
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (81) (68)
Cash paid for acquisition, net of cash acquired (1,314) -
Cash paid for acquisition (1,594) (92)
NET CASH USED IN INVESTING
ACTIVITIES (2,989) (160)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Redeemable Preferred Stock - 2,160
Proceeds (repayment) of credit facility 5,202 (1,030)
Increase in deferred financing costs (225) (274)
Net cash provided by (used in)
financing activities 4.977 856
------ -----
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (282) 1,035
CASH AND CASH EQUIVALENTS, beginning
of period 1,729 567
----- -----
CASH AND CASH EQUIVALENTS, end of period $1,447 $1,602
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 92 $ 53
Income taxes $ 91 $ 34
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from this report, as is
permitted by such rules and regulations; however, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
financial statements 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, 1996.
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 shares of its Series A Preferred Stock. 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 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 February 28, 1993, 1994 and
1995, EJL had unaudited commission and fee revenues of $19,087,000, $18,151,000
and $17,011,000, respectively, and unaudited net income (loss) of $18,000,
($5,000) and ($788,000), respectively.
Pursuant to the Original Stock Purchase Agreement (the "Original Agreement"),
between the Company and the shareholders of EJL (the "Sellers"), the Company
made an initial cash payment of $4,000,000 and issued to the Sellers 333,333
shares of the Company's common stock, par value $.01 per share, ("Common Stock")
which were valued at $6.00 per share.
The Original Agreement provided that the Sellers were to receive as additional
purchase price, an amount equal to the lesser of 5% of the combined revenue of
Lois/USA and EJL, as defined in the Original Agreement, or $12,000,000 (the
"Additional Purchase Price") over a period of five years from the date of the
acquisition. Payments were to be made in the ratio of 75% cash and 25% in Common
Stock, valued at $6.00 per share for the first four quarters and thereafter
valued at the fair market value of the Common Stock as defined in the Original
Agreement. At least $1,750,000 of Additional Purchase Price was payable for the
year ending December 31, 1996. Additionally, the Original Agreement provided
that the Sellers would receive minimum Additional Purchase Price cash payments
of $6,000,000. If, by December 31, 1999, the Sellers had not received such cash
payments, the difference between the $6,000,000 amount and the cash paid through
that date was to be paid to the Sellers by (i) first, allowing the Sellers to
require the Company to repurchase, or "put" to the Company, shares of Common
Stock issued to them as Additional Purchase Price (but not the 333,333 shares of
Common Stock issued at the initial closing), on a last issued first repurchased
basis, at the per share values at which the shares were issued, and (ii) second,
if such repurchases do not cause the total cash Additional Purchase Price
payments to equal $6,000,000, making a cash payment to the Sellers of the
remaining difference. The Sellers were also to receive a final payment, payable
in shares of Common Stock, of $750,000, in 2001; that $750,000 is not a
component of the calculations above.
The Company accounted for the acquisition using the purchase method of
accounting, and since February 12, 1996, the Company's consolidated financial
statements have included EJL's assets, liabilities and results of operations. At
the date of acquisition the minimum guaranteed Additional Purchase Price of
$6,750,000 was recorded as a liability on the Company's consolidated balance
sheet (which was reduced to $5,939,000 as of December 31, 1996 as 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 cash paid at the closing (ii) cash
payments of $811,000 made during fiscal 1996, (iii) $1,135,000 through the
retention of 189,183 shares (of the total of 378,366 shares) of common stock
issued to them through December 31, 1996 under the Original Agreement (the
remaining 189,183 shares to be returned to the Company), and (iv) future cash
payments totaling $3,700,000, payable $135,000 quarterly commencing June, 1999
through March 2004 and then $50,000 quarterly commencing June 2004 through March
2009. The revised purchase price, with the future payments discounted at a rate
of 6.5% per annum, is $8,612,000, which is $4,408,000 less than the purchase
price recorded under the Original Agreement. The recording of the effects of the
revisions of the terms of the acquisition is reflected in the Company's
consolidated financial statements in the second quarter of fiscal 1997, and had
the effect, relative to December 31, 1996 amounts, of (i) reducing goodwill by
$4,408,000, (ii) reducing the liability for the future payments by $3,273,000,
(iii) eliminating the $270,000 for redeemable common stock, and (iv) reducing
stockholders' equity by $865,000. The reduction in goodwill will reduce the
annual amortization by $220,000.
The following unaudited pro forma consolidated results of operations for the six
months ended March 31, 1996 is presented as if the EJL acquisition had been made
on the terms in the Original Agreement at the beginning of the period presented.
The unaudited pro forma information is not necessarily indicative of either the
results of operations that would have occurred had the purchase been made during
the periods presented or the future results of the combined operations under the
ownership and management of the Company.
<TABLE>
<CAPTION>
(In thousands except per share amounts) 1996
----
<S> <C>
Commissions and fees $14,017
Operating (loss) (347)
Net loss (139)
Net loss per common share $(.06)
</TABLE>
3. 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 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 bear 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 contains certain affirmative and negative covenants customary in an
agreement of this nature. The terms of the Reducing Revolving Credit Agreement
prohibit the Company from paying dividends on its common stock.
Borrowings under the Reducing Revolving Credit Agreement are secured by (a)
all of the assets of the Company's operating subsidiaries, (b) a pledge of all
shares of capital stock of the Company's operating subsidiaries held by the
Company, (c) a pledge of all shares of the Company's capital stock held by
Messrs. Lois and Veru, and (d) an assignment in favor of Chase of the key man
life insurance policies on Mr. Lois (in an amount not less than $2 million) and
Mr. Veru (in an amount not less than $1 million).
Concurrent with the acquisition of EJL in February 1996, Chase amended the
January 1995 Reducing Revolving Credit Agreement to increase the facility to
$3,833,000, extend the maturity date through June 30, 1999 and require quarterly
amortization of $250,000 commencing March 31, 1996. The Company will be 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. Excess Cash Flow is defined as actual cash flow of the
Company less 110% of debt amortization. For the year ended December 31, 1995,
this requirement was waived. At December 31, 1996, the balance outstanding under
this agreement was $1,580,000 and an additional $1,253,000 was available.
However, as a result of defaults with respect to other covenants in the
agreement, at December 31, 1996 Chase had suspended the Company's right to
obtain additional borrowings. Subsequent to year end 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. The replacement line
of credit bears interest at the rate of 2% above Chase prime rate and expires in
June 1998.
In 1996, the Company had a $2 million uncommitted line of credit. There were no
borrowings outstanding as of December 31,1996. Of this facility, $150,000 has
been set aside for a contingent letter of credit in favor of the landlord of the
office space leased in New York would be payable in an event of default. Amounts
borrowed will bear interest at a rate to be negotiated upon borrowing.
There were approximately $268,000 in fees and expenses incurred in connection
with the initial Reducing Revolving Credit Agreement. These costs were being
amortized over the initial three-year period of the loan. Costs to extend the
facility of approximately $175,000 were being amortized over the period from
1996 through 1999. Concurrent with the new credit facility from Chase in May
1997, all deferred financing fees are being amortized over a 13 month period
ending June 30, 1998.
4. REDEEMABLE PREFERRED STOCK
In May 1997, the Company privately offered and sold 2,160 shares of 10% Series A
Convertible Preferred Stock (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 conversation 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. Thereafter, all dividends are payable in cash.
MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended June 30, 1996 compared to Three Months Ended June 30, 1997.
Revenues from commissions and fees increased to $8,210,000 for the second
quarter of fiscal 1997 from $7,546,000 for the three months ended June 30, 1996.
The increase of $664,000 or 8.8% resulted from commissions and fees earned from
both increased assignments for existing clients and assignments for new clients.
The Company's Year 2K Communications unit, which was formed to offer services in
non-traditional advertising, began operations in March 1997 but did not have
material revenues in the second quarter.
Operating expenses increased from $7,125,000 for the three months ended June 30,
1996 to $7,357,000 for the second quarter of fiscal 1997, but decreased from
99.4% of revenues in the second quarter of fiscal 1996 to 89.6% of revenues for
the three months ended June 30, 1997. The 89.6% for the current year also
represents a decline from the percentage of all of fiscal 1996, which was 119.9%
including non-recurring charges of $3.6 million and 104.4% exclusive of those
non-recurring charges. The reduction in operating expenses, relative to
revenues, resulted principally from reducing salaries and related costs, to 57%
of revenues for the second quarter of fiscal 1997 from 60.6% of revenues for the
three months ended June 30, 1996 and 70.3% for the full fiscal 1996 year. The
reduction of personnel costs, relative to revenues, reflects the effects of both
the increase in revenues and the elimination of certain staffing duplications
and inefficiencies created when the Company acquired EJL in fiscal 1996.
Operating expenses exclusive of depreciation and amortization decreased from
92.3% of revenues in the second quarter of fiscal 1996 to 85.7% of revenues for
the three months ended June 30, 1997. Depreciation and amortization increased by
$157,000, reflecting a full quarter of amortization of the EJL assets and
goodwill in the current year.
Interest expense, net of interest income, decreased by $3,000 from net interest
income of $3,000 in the first quarter of fiscal 1996 to net interest income of
$6,000 for the three months ended June 30, 1997.
Six months ended June 30, 1996 compared to six months ended June 30, 1997
Revenues from commissions and fees increased to $15,900,000 for the first half
of fiscal 1997 from $13,688,000 for the six months ended June 30, 1996. The
increase of $2,212,000 or 16.2% resulted from commissions and fees earned from
both increased assignments for existing clients and assignments for new clients.
Revenues increased by 8.8% in the second quarter of fiscal 1997 and by 25.2% in
the first quarter of fiscal 1997. The lower growth rate in the second quarter,
as compared to the first quarter, reflects the fluctuations in the Company's
revenue levels that are normal to its business as the result of the effects of
the timing of client advertisng expenditures.
Operating expenses increased from $13,244,000 for the six months ended June 30,
1996 to $14,496,000 for the first half of fiscal 1997, but decreased from 96.8%
of revenues in the first half of fiscal 1996 to 91.2% of revenues for the six
months ended June 30, 1997. The reduction in operating expenses, relative to
revenues, resulted principally from reducing salaries and related costs, to
60.8% of revenues for the first half of fiscal 1997 from 66.6% of revenues for
the six months ended June 30, 1996. The decrease in personnel expenses, as a
percentage of revenues, was slightly less in the second quarter of fiscal 1997
than in the first quarter of fiscal 1997 due to the lower level of revenue
growth.
Operating expenses exclusive of depreciation and amortization decreased from
94.6% of revenues in the first half of fiscal 1996 to 86.8% of revenues for the
six months ended June 30, 1997. Depreciation and amortization increased by
$363,000, reflecting a full half of amortization of the EJL assets and goodwill
in the current year.
Interest expense, net of interest income, increased by $52,000, from net
interest income of $6,000 in the first half of fiscal 1996 to net interest
expense of $46,000 for the six months ended June 30, 1997. The increase in net
interest expense reflects an increase experienced in the first quarter of fiscal
1997. The May 1997 placement of the Company's Series A Convertible Preferred
Stock allowed the Company to reduce borrowings and invest the remaining proceeds
in temporary interest bearing securities, which brought interest costs in the
second quarter back to fiscal 1996 levels.
Liquidity And Capital Resources
The Company's 1996 net loss and its acquisition of EJL were primarily
responsible for its negative working capital at December 31, 1996 of
$14,321,000. The Company's working capital deficit was reduced to $11,104,000 at
June 30,1997 as a result of cash flow from operations of $339,000, net of the
elimination of the Company's December 31, 1996 $2,865,000 bank overdraft and
additional capital of $2,160,000 raised through the issuance of the Series A
Convertible Preferred Stock. The positive cash flow before the overdraft of
$3,204,000 eliminated the overdraft and allowed the Company to reduce its bank
borrowings.
At December 31, 1996, $1,253,000 was outstanding under the Company's credit
facility with Chase. An additional $2 million, of which $150,000 is being used
to support a contingent letter of credit securing the Company's New York lease,
was available under a separate line of credit obtained from Chase. However, as
the result of certain defaults with respect to covenants in the agreements,
Chase had, at December 31, 1996, suspended the Company's right to obtain
additional borrowings under the agreements. Subsequent to December 31, 1996 the
Company repaid all amounts outstanding, and in May 1997, Chase extended a new
$2.5 million one-year line of credit to the Company. The collateral terms are
essentially the same as those of the Reducing Revolving Credit Agreement. The
replacement line of credit bears interest at the rate of 2% above Chase's prime
rate and expires in June 1998.
The Company acquired EJL in February 1996. Under the Original Agreement, the
Company was to be 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
$12,000,000. 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 the bank overdraft. In May 1997, the Company and the former owners of EJL
agreed to a revision to the Original Agreement. Under the Revised Agreement, the
total purchase price has been reduced to $9.6 million, of which $5.9 million had
been paid through December 31, 1996 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. Accordingly, the acquisition of EJL will not place demands on the
Company's capital resources until 1999.
In May 1997, the Company raised additional capital of approximately $2 million
through the private placement of 2,160 shares of Series A Convertible Preferred
Stock (the "Series A Stock"). The Series A Stock accrues annual dividends of
$100 per share, which will reduce the net income attributable to the Company's
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 Stock have elected to
receive dividends, for the first year, in the form of shares of the Company's
common stock, valued at the rate of $6.50 per share. Therefore, assuming no
conversions, the Series A Convertible Preferred Stock will only require cash
dividends of approximately $393,000 in 1997. The Series A Convertible Preferred
Stock may be converted, at the Company's option, into shares of the Company's
common stock, at a conversion price of $6.50 per share, beginning September 16,
1997.
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 incentivizing future performance.
The Company believes that cash flows from operations, together with funds
available under the Company's credit facility with Chase, and the working
capital obtained from the issuance of the Series A Stock will be sufficient to
meet the Company's cash needs for its existing business and any potential
acquisitions over the next twelve months.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(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 7, 1997 By /s/ ROBERT K. STEWART
------------------------------------
ROBERT K. STEWART
Executive Vice President
Chief Financial and
Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1997, CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE FOOTNOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,602
<SECURITIES> 0
<RECEIVABLES> 31,829
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,437
<PP&E> 3,016
<DEPRECIATION> 2,304
<TOTAL-ASSETS> 50,167
<CURRENT-LIABILITIES> 46,541
<BONDS> 0
0
2,160
<COMMON> 24
<OTHER-SE> (5,532)
<TOTAL-LIABILITY-AND-EQUITY> 50,167
<SALES> 0
<TOTAL-REVENUES> 15,900
<CGS> 0
<TOTAL-COSTS> 14,496
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 1,286
<INCOME-TAX> 34
<INCOME-CONTINUING> 1,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,252
<EPS-PRIMARY> .50
<EPS-DILUTED> 0
</TABLE>
