SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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 _____ No X
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:
2,508,000
Transitional Small Business Disclosure Format (check one): Yes
_____ No _____
<PAGE>
PART I - FINANCIAL INFORMATION PAGE
NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1995 and
March 31, 1996............................................... F-1
Consolidated Statements of Income for the
Three Months ended March 31, 1995
and 1996.................................................... F-2
Consolidated Statements in Changes In
Stockholders (Deficit) for the Periods
Ended December 31, 1995 and
March 31, 1996.............................................. F-3
Consolidated Statements of Cash Flows for
the Three Months ended March 31, 1995
and 1996.................................................... F-4
Notes to Consolidated Financial Statements................... F-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................................... 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 11
SIGNATURE ............................................................. 12
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND MARCH 31, 1996
(UNAUDITED)
(000's omitted)
<TABLE>
<CAPTION>
1995 1996 LIABILITIES AND STOCKHOLDERS' 1995 1996
---- ---- ----------------------------- ---- ----
ASSETS EQUITY (DEFICIT)
- - ------
CURRENT ASSETS: CURRENT LIABILITIES:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,729 $ 5,495 Accounts payable $ 24,613 $ 42,224
Accounts receivable, net 19,527 35,582 Accrued expenses and other current liabilities 221 569
Investments 150 150 Deferred purchase price - 1,750
------ ------
Expenditures billable to clients 1,388 607
Deferred tax asset 76 112 Total current liabilities 24,834 44,543
Prepaid taxes 270 486 ------ ------
Other current assets 130 293 OTHER LIABILITIES:
------ ------
Total current assets 23,270 42,725 Deferred rent - 1,615
------ ------ Deferred payouts 46 46
Bank loans - 3,796
Deferred purchase price - 5,000
------ -------
Total other liabilities 46 10,457
-------- -------
Total liabilities 24,880 55,000
PROPERTY AND EQUIPMENT, at cost 2,079 2,995
Less-accumulated depreciation and amortization (1,747) (1,837) COMMITMENTS AND CONTINGENCIES
------- -------
Net property and equipment 332 1,158 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:
OTHER ASSETS: 20,000,000 shares authorized; 2,175,000 and
Deferred financing costs 212 423 2,508,000 issued and outstanding 22 25
Good will 325 11,513 Additional paid-in capital 3,746 5,743
Other assets 51 498 Accumulated deficit (4,458) (4,451)
------- ------- ------- -------
Total other assets 588 12,434 Total stockholder's equity (deficit) (690) 1,317
------- ------- ------- -------
Total assets $24,190 $56,317 Total liabilities and stockholders' equity $24,190 $56,317
------- ------- (deficit) ------- --------
The accompanying notes are an integrated part of the consolidated statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
(000's omitted except for share data)
INCOME: 1995 1996
---- ----
<S> <C> <C>
Commissions and fees $3,731 $6,142
OPERATING EXPENSES:
Salaries and related costs, net 2,486 4,552
Client services 279 352
Rent and related charges 360 444
Amortization and depreciation 61 162
Other operating expenses 275 609
----- -----
Total operating expenses 3,461 6,119
----- -----
Operating income 270 23
NONOPERATING EXPENSES:
Interest, net 10 (3)
Amortization of deferred financing costs 14 14
----- -----
Total nonoperating expenses 24 11
----- -----
Net income before provision for income taxes 246 12
PROVISION FOR INCOME TAXES 106 5
----- -----
Net income $ 140 $ 7
=======
NET INCOME PER COMMON SHARE $.06 $.01
==== ====
WEIGHTED AVERAGE NUMBER OF COMMON EQUIVALENT 2,175,000 2,341,667
========= =========
OF SHARES OUTSTANDING
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S (DEFICIT)
FOR THE PERIODS ENDED DECEMBER 31, 1995 AND MARCH 31, 1996
(000'S omitted)
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
------ ---------- ----------- -----
<S> <C> <C> <C> <C>
BALANCE, January, 1995 $18 1,029 (5,176) (4,129)
Net Income - - 718 718
Contribution of Redeemable 1 1,357 - 1,358
Warrants
Issuance of Common Shares to 3 1,360 - 1,363
Public --- ----- -----
BALANCE, January 1, 1996 22 3,746 (4,458) (690)
Net Income 7 7
Issuance of Common Shares to
EJL shareholders 3 1,997 - 2,000
--- ----- ------- -----
BALANCE, March 31, 1996 $25 $5,743 $(4,455) $1,317
=== ====== ======== ======
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOIS/USA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
(000's omitted)
CASH FLOWS FROM OPERATING ACTIVITIES: 1995 1996
---- ----
<S> <C> <C>
Net income $ 140 $ 7
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities
Amortization and depreciation 39 90
Amortization of deferred financing costs 14 14
Decrease in deferred tax asset 106 5
Changes in assets and liabilities, net of effect from acquisitions
(Increase) decrease in accounts receivable 1,655 (7,805)
(Increase) decease in expenditures billable to clients 78 1,292
(Increase) decrease in prepaid income taxes (250) (185)
(Increase) decrease in other assets (100) 660
Increase (decrease) in accounts payable and accrued expenses (1,246) 7,850
------- ------
NET CASH PROVIDED BY (USED IN) OPERATING 458 2,000
ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition, net of cash acquired - (1,084)
Cash paid for costs of acquisition - (710)
Purchase of fixed assets - (11)
------ -------
NET CASH USED IN INVESTING ACTIVITIES - (1,805)
CASH FLOWS FROM FINANCING ACTIVITIES:
Drawdown of credit facility 2,000 3,796
Repayment of credit facility (2,000) -
Repayment of subordinated stockholders (3,200) -
Issuance of new shares 1,363 -
Increase in deferred financing costs - (225)
Reclass of deferred financing costs 190 -
------ ------
NET CASH USED IN FINANCING ACTIVITIES (1,647) 3,571
NET CASH (DECREASE) IN CASH AND CASH (1,189) 3,766
EQUIVALENTS
CASH AN CASH EQUIVALENTS, beginning of period 1,457 1,729
----- -----
CASH AND CASH EQUIVALENTS, end of period $268 $5,495
===== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period of-
Interest $10 $27
=== ===
Income taxes $250 $91
==== ===
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. It is
suggested that these financial statements be read in conjunction with the
financial statements and the notes hereto included in the Company's latest
annual report on Form 10-KSB, as amended by Amendment No. 1 to Form 10-KSB.
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.
2. ACQUISITION OF EISAMAN, JOHNS & LAWS ADVERTISING, INC.
On February 12, 1996, the Company acquired all of the outstanding shares of
Eisaman, Johns & Laws Advertising, Inc. ("EJL"), a California corporation, a
national advertising agency established in 1959, with offices in Los Angeles,
Chicago, Houston and Detroit. For the fiscal years ended February 28, 1993, 1994
and 1995, EJL had commission and fee revenues of $19,087,000, $18,151,000 and
$17,011,000, respectively, and net income (loss) of $18,000, ($5,000) and
($788,000), respectively. At February 28, 1995, EJL had net working capital of
$1,238,000, total assets of $19,256,000 and stockholders' equity of $2,263,000.
Pursuant to the Stock Purchase Agreement (the "Agreement") between the Company
and the shareholders of EJL (the "Sellers"), the Company made an initial cash
payment of $4,000,000 and issued 333,333 shares of the Company's common stock,
par value $.01 per share (the "Common Stock"), at an issue price of $6.00 per
share, to the Sellers. The total value of the Common Stock at issuance was
$2,000,000.
The Sellers will receive as additional purchase price, an amount equal to 5% of
the combined revenue of the Company and EJL, as defined in the Agreement, up to
an additional $12,000,000 of purchase price (the "Additional Purchase Price")
over a period of five years from the date of the acquisition. Payments will be
made in the ratio of 75% cash and 25% 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 Agreement. At least $1,750,000 of Additional
Purchase Price must be paid for the year ending December 31, 1996, and the
Sellers have been guaranteed a minimum Additional Purchase Price of $6,000,000
in cash. To the extent that this minimum cash amount is not paid by December 31,
1999, all further Purchase Price will be paid in cash until
the payment ratio has been restored and then all remaining payments will be made
in the payment ratio. The Agreement provides the Sellers with the ability to put
shares of Additional Purchase Price back to the Company in the event that the
minimum cash amounts have not been paid to the Sellers. Such shares can be put
back to the Company based on their value on the date such shares were initially
issued, on a last-in first- out basis. However, the Sellers cannot put the
initial 333,333 shares back to the Company.
Interest will be payable on any missed payment of Additional Purchase Price at
the prime rate plus 2% for the first missed payment and an additional 5% shall
be paid beginning with the second consecutive missed and incurred payment.
The Sellers will receive a final purchase price payment of $750,000 in
additional shares in February 2001.
At the closing of the transaction on February 12, 1996, the Sellers were
required to deliver $2,200,000 of net worth, as defined in the Agreement, based
upon EJL's historical cost as required under generally accepted accounting
principles. The parties have not yet completed a determination of the amount of
net worth delivered by the Sellers. To the extent an amount in excess of
$2,000,000 is delivered, the Company will issue the Sellers a three year
subordinated installment note, payable quarterly and bearing interest at
Chemical Bank's prime rate plus 1.5%. This note will be subordinated to the
Company's existing bank indebtedness. If less than $2,200,000 is delivered, the
cash portion of the additional purchase price will be reduced.
To the extent the Company consummates a public offering within 12 months of the
acquisition date at a price per share less than $6.00, the Company has agreed to
increase the number of initial shares paid to the Sellers based upon the
offering price to the public. The Company has granted the Sellers certain rights
with respect to registration of the Common Stock under the Securities Act of
1933, as amended. The Company's two majority shareholders also entered into a
shareholder's agreement with EJL's four majority shareholders which, among other
things, entitles the former EJL shareholders to elect one director to the
Company's Board of Directors.
Concurrent with the acquisition of EJL, the Company entered into five-year
employment agreements with four of the senior EJL executives which will provide
for aggregate compensation of $1,165,000 per year, renewable upon the mutual
agreement of the parties. Bonuses are discretionary. Upon termination of the
employment agreements with three of the executives, those executives will enter
into consulting agreements each for a five-year term, with compensation to each
executive of $100,000 per year. Each employment agreement includes a two year
non-competition clause and provisions for health and life insurance and the
payment of cost of medical coverage.
The Company accounted for the transaction using the purchase method of
accounting. The Company's consolidated financial statements include EJL's
activity commencing February 12, 1996. At the date of acquisition, the excess of
the minimum guaranteed purchase price of $12,750,000 over the fair market value
of the net assets acquired was reflected in the Company's consolidated financial
statements as goodwill. Presently, such amount is estimated to be approximately
$11,600,000. As payments of Additional Purchase Price are made, such payments
will be accounted for as increases to goodwill. None of the recorded goodwill
will be deductible for income tax purposes. This goodwill will be amortized over
a 20-year life. As a result of the non-deductibility of goodwill, the Company's
effective tax rate will be adversely impacted.
Additional minimum guaranteed purchase price payments of $6,750,000 have
been reflected as a liability on the Company's balance sheet at the acquisition
date and will be reduced as additional cash payments are made. The accounting
for additional share issuances through the date that the put feature continues
to be available to the Sellers will be similar to the treatment of redeemable
stock which is classified outside of shareholders' equity. At the time that the
minimum cash purchase price payment has been made, and the ability of the
Sellers to put shares back to the Company ceases, the value of additional
shares, if any, issued to the Sellers will be reclassified as stockholder's
equity.
Currently, the Company is studying the fair value of the assets and liabilities
acquired. Upon the completion of this study, amounts recorded might differ from
those given in this interim report.
The unaudited consolidated results of operations on a pro forma basis as
adjusted to reflect the acquisition of EJL as if such acquistion had been
effective as of January 1 of each year indicated are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Amounts in thousands except per share data)
1995 1996
---- ----
<S> <C> <C>
Commissions and fees $6,804 $6,471
Operating (loss) $ (751) $ (768)
Net (loss) $ (506) $ (385)
Net (loss) per weighted
average common share $ (.20) $ (.15)
</TABLE>
3. REDUCING REVOLVING CREDIT FACILITY
Concurrent with the Company's registered direct placement of 3,000,000 shares of
Common Stock in January 1995 (the "Offering"), the Company entered into a $2
million reducing revolving credit facility (the "Reducing Revolving Credit
Agreement") with Chemical Bank. 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 the Subordinated Note. 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 current interest rate under the
credit facility is 10%.
Borrowings under the Reducing Revolving Credit Agreement are secured by (a) all
of the assets of the Company's operating subsidiaries, including EJL (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 Chemical Bank
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).
As of December 31, 1995, the loans under the Reducing Revolving Credit Agreement
were scheduled to mature on December 31, 1997, subject to required amortization
payments which were to reduce the principal balance and the amount available to
be borrowed by approximately $166,000 each quarter commencing in the second
quarter of 1995. Concurrent with the acquisition of EJL in February 1996 as
discussed in Note 2 the Company and Chemical Bank entered into an amended and
restated credit agreement (the "Amended and Restated Credit Agreement") whereby
Chemical Bank agreed to increase the amount available under the Reducing
Revolving Credit Agreement by an additional $2,500,000 and extended the maturity
date of the facility through March 31, 1999. Required amortization will be
$250,000 per quarter commencing with the quarter ending March 31, 1996. The
Company will be required to prepay amounts outstanding under the Amended and
Restated Credit Agreement equal to 50% of Excess Cash Flow (as defined in the
Amended and Restated Credit Agreement) up to $300,000 for any year. For the year
ended December 31, 1995, this requirement was waived. Excess Cash Flow is
defined as actual cash flow of the Company less 110% of debt amortization.
The Company expects to be able to satisfy its future debt service obligations
with cash flows from operations. However, there can be no assurance that future
cash flows of the Company will be sufficient to meet such obligations. The
Amended and Restated Credit Agreement also contains certain affirmative and
negative covenants customary in an agreement of this nature. The terms of the
Amended and Restated Credit Agreement prohibit the Company from paying dividends
on its Common Stock.
The Company also has a credit line facility for $2 million under substantially
identical terms. 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
which 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 establishment of the facility. These amounts are being
amortized over the initial three-year period of the loan. Costs to extend the
facility of approximately $225,000 will be amortized over the period from 1996
through 1999.
<PAGE>
LOIS/USA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operation
First Quarter 1996 Compared to First Quarter 1995:
As a result of the acquisition of Eisaman, Johns and Laws, Advertising, Inc.
("EJL") on February 12, 1996, the amounts reported for the three months ended
March 31, 1996 include consolidated amounts of the two entities from the date
the Company acquired EJL. Cost savings from the combination of the two agencies
are being implemented, particularly in the areas of real estate leasing and
agency administrative costs. Management expects these cost reductions to begin
in the second and third quarters of 1996.
The combination of the two entities resulted in a net income of $7,000 as
compared to net income of $140,000 during the same three month period in 1995.
While commissions and fees rose from $3,731,000 to $6,142,000, or 64.6%,
operating expenses rose $2,658,000 to $6,119,000, an increase of 76.89%. This
disparity in revenue growth versus operating increases is related to the
seasonal nature of EJL's business. Non-operating expenses fell from $24,000 to
$11,000 as a result of lower interest expenses.
The provision for taxes fell from $106,000 in 1995 to a benefit of $207,000 in
1996 due to lower operating revenues in 1996.
Earnings per share fell to $.01 per share based on weighted average shares of
2,341,667. For the three months in 1995, earnings per share were $.06 on
2,175,000 shares.
Liquidity and Capital Resources
On February 12, 1996, the Company acquired all of the outstanding shares of
capital stock of Eisaman, Johns & Laws Advertising, Inc. ("EJL"), a California
corporation, pursuant to a Stock Purchase Agreement between the Company and the
shareholders of EJL. In exchange for 49,512 shares of the common stock of EJL,
the Company issued 333,333 shares of its common stock, $.01 par value per share
(the "Common Stock"), and made an initial cash payment of approximately $4
million. The shares of Common Stock were issued from the Company's existing
authorized capital stock, and the cash was paid out of working capital and
additional bank debt. In addition, the Company has agreed to pay EJL
shareholders 5% of the combined revenue of the combined entity over the next
five years, subject to certain adjustments. The purchase price paid to EJL
stockholders will range from a minimum of $12 million to a maximum of $18
million.
Cash and cash equivalents increased from $1,729,000 at December 31, 1995 to
$5,495,000 at March 31, 1996. This increase was the result of the cash flows
from operations and combination of the Lois and EJL entities.
The Company's working capital deficit increased from (1,564,000) at December 31,
1995 to ($1,818,000) at March 31, 1996. This increase was the result of funds
generated from the new bank debt offset by the $4,000,000 payment to the former
shareholders of EJL and the operating loss for the three months ended March 31,
1996.
Management believes that cash flows from operations, together with funds
available under the Company's credit facilities with Chemical Bank, will be
sufficient to meet the Company's cash needs for its existing business.
The Company is regularly presented with opportunities to acquire advertising
agencies and intends to consider potential acquisitions which would be
complementary to the Company's current business activities and fit the Company's
acquisition strategy. Although no specific acquisition plans or commitments
currently exist, any future acquisitions may require material capital
expenditures or commitments that could place significant constraints on future
working capital. In addition, the Amended and Restated Credit Agreement contains
covenants restricting the Company from making capital expenditures in excess of
$250,000 in any fiscal year and contains certain financial condition ratios that
could place significant constraints on the Company's ability to make
acquisitions. The Company believes that the restrictions will not impair its
ability to make acquisitions for stock or deferred contingent payment in
accordance with its acquisition financing strategy.
The Company's business operations are not seasonal; however, based upon
individual client expenditures and the history of EJL, significant quarter to
quarter fluctuations in billings and net income may occur.
<PAGE>
PART II OTHER INFORMATION
Item 3. Legal Proceedings
Item 6. Exhibits and Current Reports on Form 8-K
(a) No exhibits
(b) The Company filed a Current Report on Form 8-K dated as of
February 12, 1996, regarding the acquisition of Eisaman, Johns &
Laws Advertising, Inc., which did not include the pro forma
financial data pertaining to the acquisition. The Company is
currently delinquent in the filing of the pro forma financial data
due to unforeseen difficulties in obtaining necessary information
from Eisaman, Johns & Laws Advertising, Inc.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOIS/USA INC.
Date: May 15, 1996 By /s/ Robert K. Stewart
----------------------
Robert K. Stewart
Executive Vice President
Chief Financial and
Accounting Officer
