-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ja4rBlUXQj+9gjdN/PVm0HwDLskjcUo35JkDRrA4DHiT7FwDD25IkSZc0sTiJqdk Dmo0n83QvcQvq1wTcXM5AQ== 0000906280-99-000165.txt : 19990708 0000906280-99-000165.hdr.sgml : 19990708 ACCESSION NUMBER: 0000906280-99-000165 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990706 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990707 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAMAR ADVERTISING CO CENTRAL INDEX KEY: 0000899045 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING AGENCIES [7311] IRS NUMBER: 721205791 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-12407 FILM NUMBER: 99659745 BUSINESS ADDRESS: STREET 1: 5551 CORPORATE BLVD CITY: BATON ROUGE STATE: LA ZIP: 70808 BUSINESS PHONE: 5049261000 MAIL ADDRESS: STREET 1: 5551 CORPORATE BOULEVARD CITY: BATON ROUGE STATE: LA ZIP: 70808 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) July 6, 1999 LAMAR ADVERTISING COMPANY (Exact name of registrant as specified in its charter) Delaware 0-20833 75-1205791 (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 5551 Corporate Boulevard, Baton Rouge, Louisiana 70808 (Address of principal executive offices) (Zip Code) (225) 926-1000 (Registrant's telephone number, including area code) Not Applicable (Former name or former address, if changed since last report.) ITEM 5. OTHER EVENTS As Lamar Advertising Company (the "Registrant") and Chancellor Media Corporation ("Chancellor") announced on June 1, 1999, the Registrant entered into a definitive agreement with Chancellor Media Corporation of Los Angeles, Chancellor's wholly-owned subsidiary, pursuant to which the Registrant agreed to purchase Chancellor's outdoor advertising business conducted by Chancellor Media Outdoor Corporation ("Chancellor Outdoor") for $1.6 billion in stock and cash. The Registrant is filing this Form 8-K to provide the Financial Statements and Pro Forma Financial Statements for Chancellor Outdoor and its predecessor companies, the outdoor advertising division of Whiteco Industries, Inc. ("Whiteco"), Martin Media L.P. ("Martin Media") and Martin & MacFarlane, Inc. ("Martin & MacFarlane"), as noted below. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements. The following financial statements are filed herewith as Exhibit 99.1 and incorporated herein by reference: (i) The consolidated balance sheets of Chancellor Outdoor as of December 31, 1998 and March 31, 1999 and consolidated statements of operations, equity and cash flows for the period from July 22, 1998 to December 31, 1998 and the three months ended March 31, 1999. (ii) The statements of income, divisional equity and cash flows of Whiteco for the eleven months ended November 30, 1998; balance sheets of Whiteco as of December 31, 1996 and 1997; and statements of income and cash flows for the years ended December 31, 1995, 1996, and 1997. (iii) The statements of operations, partners' capital and cash flows of Martin Media for the seven months ended July 31, 1998; balance sheets of Martin Media as of December 31, 1996 and 1997; and statements of operations, partners' capital (deficit) and cash flows of Martin Media for each of the years ended December 31, 1995, 1996 and 1997. (iv) The statements of operations, retained earnings and cash flows of Martin & MacFarlane for the seven months ended July 31, 1998; balance sheets of Martin & MacFarlane as of December 31, 1996 and 1997; statements of income, retained earnings and cash flows for the six-month period ended December 31, 1995 and each of the years ended December 31, 1996 and 1997; balance sheet of Martin & MacFarlane as of June 30, 1995; and statements of income, retained earnings and cash flows of Martin & MacFarlane for the year ended June 30, 1995. (b) Pro Forma Financial Statements. The following pro forma financial statements are filed herewith as Exhibit 99.2 and incorporated herein by reference: (i) Unaudited pro forma condensed consolidated statements of operations of the Registrant for the year ended December 31, 1998 and the three months ended March 31, 1999. (ii) Unaudited pro forma condensed consolidated balance sheet of the Registrant as of March 31, 1999. (c) Exhibits (i) Consent of Arthur Andersen, LLP. (ii) Consent of Barbich, Longcrier, Hooper & King. (iii) Consent of BDO Seidman LLP. (iv) Consent of PricewaterhouseCoopers LLP. SIGNATURES 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 hereunto duly authorized. LAMAR ADVERTISING COMPANY By: /S/ KEITH A. ISTRE Keith A. Istre Treasurer and Chief Financial Officer Dated: July 6, 1999 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 23.1 Consent of Arthur Andersen, LLP. 23.2 Consent of Barbich, Longcrier, Hooper & King. 23.3 Consent of BDO Seidman LLP. 23.4 Consent of PricewaterhouseCoopers LLP. 99.1 (i) The consolidated balance sheets of Chancellor Outdoor as of December 31, 1998 and March 31, 1999 and consolidated statements of operations, equity and cash flows for the period from July 22, 1998 to December 31, 1998 and the three months ended March 31, 1999. (ii) The statements of income, divisional equity and cash flows of Whiteco for the eleven months ended November 30, 1998; balance sheets of Whiteco as of December 31, 1996 and 1997 and statements of income and cash flows for the years ended December 31, 1995, 1996, and 1997. (iii)The statements of operations, partners' capital and cash flows of Martin Media for the seven months ended July 31, 1998; balance sheets of Martin Media as of December 31, 1996 and 1997; and statements of operations, partners' capital (deficit) and cash flows of Martin Media for each of the years ended December 31, 1995, 1996 and 1997. (iv) The statements of operations, retained earnings and cash flows of Martin & MacFarlane for the seven months ended July 31, 1998; balance sheets of Martin & MacFarlane as of December 31, 1996 and 1997; statements of income, retained earnings and cash flows for the six-month period ended December 31, 1995 and each of the years ended December 31, 1996 and 1997; balance sheet of Martin & MacFarlane as of June 30, 1995; and statements of income, retained earnings and cash flows of Martin & MacFarlane for the year ended June 30, 1995. 99.2 (i) Unaudited pro forma condensed consolidated statements of operations of the Registrant for the year ended December 31, 1998 and the three months ended March 31, 1999. (ii) Unaudited pro forma condensed consolidated balance sheet of the Registrant as of March 31, 1999. EX-23.1 2 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to incorporation by reference in the two Registration Statements on Form S-8 (File Nos. 333- 10337 and 333-79571), the four Registration Statements on Form S-3 (File Nos. 333-50559, 333-52851, 333-66059 and 333-71929) and the Registration Statement on Form S-4 (File No. 333-60331) of Lamar Advertising Company (the "Registrant") of our report dated February 13, 1998, with respect to the balance sheets of Martin Media (a California limited partnership) as of December 31, 1997 and 1996 and the related statements of operations, partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 1997, and our report dated February 13, 1998, with respect to the balance sheets of Martin & MacFarlane, Inc. as of December 31, 1997 and 1996, and the related statements of income, retained earnings and cash flows for each of the two years in the period ended December 31, 1997 and the six month period ended December 31, 1995, which reports appear in the Registrant's filing on Form 8-K dated July 6, 1999. /s/ Arthur Andersen, LLP Arthur Andersen, LLP Bakersfield, California July 6, 1999 EX-23.2 3 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the two Registration Statements of Lamar Advertising Company (the "Registrant") on Form S-8 (File Nos. 333-10337 and 333-79571), the four Registration Statements of the Registrant on Form S-3 (File Nos. 333-50559, 333-52851, 333-66059 and 333-71929) and the Registration Statement of the Registrant on Form S-4 (File No. 333-60331) of our report dated August 25, 1995, with respect to the balance sheet of Martin and MacFarlane, Inc. as of June 30, 1995 and the related statements of income, retained earnings and cash flows for the year then ended, which report appears in the Registrant's filing on Form 8-K dated July 6, 1999. BARBICH LONGCRIER HOOPER & KING Accountancy Corporation /S/ GEOFFREY B. KING By: Geoffery B. King, CPA Bakersfield, California July 6, 1999 EX-23.3 4 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the two Registration Statements of Lamar Advertising Company (the "Registrant") on Form S-8 (File Nos. 333-10337 and 333-79571), the four Registration Statements of the Registrant on Form S-3 (File Nos. 333-50559, 333-52851, 333-66059 and 333-71929) and the Registration Statement of the Registrant on Form S-4 (File No. 333-60331) of our report dated September 17, 1998, with respect to the balance sheets of the outdoor advertising division of Whiteco Industries, Inc. as of December 31, 1996 and 1997, and the related statements of income and cash flows for each of the three years in the period ended December 31, 1997, which report appears in the Registrant's filing on Form 8-K dated July 6, 1999. /S/ BDO SEIDMAN LLP BDO Seidman LLP Chicago, Illinois July 6, 1999 EX-23.4 5 EXHIBIT 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the two Registration Statements on Form S-8 (File Nos. 333-10337 and 333-79571), the four Registration Statements on Form S-3 (File Nos. 333-50559, 333- 52851, 333-66059 and 333-71929) and the Registration Statement on Form S-4 (File No. 333-60331) of Lamar Advertising Company of our reports dated June 9, 1999 relating to the financial statements of Chancellor Media Outdoor Corporation, The Outdoor Division of Whiteco Industries, Inc., Martin Media L.P., and Martin & MacFarlane, Inc., which appear in the Form 8-K of Lamar Advertising Company dated July 6, 1999. /s/ PricewaterhouseCoopers LLP Dallas, Texas July 6, 1999 EX-99.1 6 EXHIBIT 99.1 INDEX TO FINANCIAL STATEMENTS CHANCELLOR MEDIA OUTDOOR CORPORATION Report of Independent Accountants............................................F-3 Consolidated Balance Sheets as of December 31, 1998 and March 31, 1999 (unaudited).............................................................F-4 Consolidated Statements of Operations for the period from July 22, 1998 to December 31, 1998, and the three months ended March 31, 1999 (unaudited).............................................................F-5 Consolidated Statements of Equity for the period from July 22, 1998 to December 31, 1998, and the three months ended March 31, 1999 (unaudited).............................................................F-6 Consolidated Statements of Cash Flows for the period from July 22, 1998 to December 31, 1998, and the three months ended March 31, 1999 (unaudited).............................................................F-7 Notes to Consolidated Financial Statements...................................F-8 THE OUTDOOR ADVERTISING DIVISION OF WHITECO INDUSTRIES, INC. Report of Independent Accountants...........................................F-15 Statement of Income for the eleven months ended November 30, 1998...........F-16 Statement of Divisional Equity for the eleven months ended November 30, 1998...............................................................F-17 Statement of Cash Flows for the eleven months ended November 30, 1998.......F-18 Notes to Financial Statements...............................................F-19 Independent Auditors' Report................................................F-22 Balance Sheets as of December 31, 1996 and 1997.............................F-23 Statements of Income for the years ended December 31, 1995, 1996 and 1997...F-24 Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997...............................................................F-25 Notes to Financial Statements...............................................F-26 MARTIN MEDIA L.P. Report of Independent Accountants...........................................F-29 Statement of Operations for the seven months ended July 31, 1998............F-30 Statement of Partners' Capital for the seven months ended July 31, 1998.....F-31 Statement of Cash Flows for the seven months ended July 31, 1998............F-32 Notes to Financial Statements...............................................F-33 Report of Independent Public Accountants....................................F-37 Balance Sheets as of December 31, 1997 and 1996.............................F-38 Statements of Operations for each of the years ended December 31, 1997, 1996 and 1995...............................................................F-39 Statements of Partners' Capital (Deficit) for each of the years ended December 31, 1997, 1996 and 1995.......................................F-40 Statements of Cash Flows for each of the years ended December 31, 1997, 1996 and 1995...............................................................F-41 Notes to Financial Statements...............................................F-43 MARTIN & MACFARLANE, INC. Report of Independent Accountants...........................................F-54 Statement of Operations for the seven months ended July 31, 1998............F-55 Statement of Retained Earnings for the seven months ended July 31, 1998.....F-56 Statement of Cash Flows for the seven months ended July 31, 1998............F-57 Notes to Financial Statements...............................................F-58 Report of Independent Public Accountants....................................F-62 Balance Sheets as of December 31, 1997 and 1996.............................F-63 Statements of Income for each of the years ended December 31, 1997 and 1996 and the six-month period ended December 31, 1995..................F-64 Statements of Retained Earnings for each of the years ended December 31, 1997 and 1996 and the six-month period ended December 31, 1995.........F-65 Statements of Cash Flows for each of the years ended December 31, 1997 and 1996 and the six-month period ended December 31, 1995..............F-66 Notes to Financial Statements...............................................F-68 Independent Auditors' Report................................................F-80 Balance Sheet as of June 30, 1995...........................................F-81 Statement of Income for the year ended June 30, 1995........................F-83 Statement of Retained Earnings for the year ended June 30, 1995............F-84 Statement of Cash Flows for the year ended June 30, 1995....................F-85 Notes to Financial Statements...............................................F-87 REPORT OF INDEPENDENT ACCOUNTANTS June 9, 1999 To the Board of Directors of Chancellor Media Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, equity and cash flows present fairly, in all material respects, the financial position of Chancellor Media Outdoor Corporation (the "Company"), a wholly-owned subsidiary of Chancellor Media Corporation of Los Angeles, at December 31, 1998, and the results of their operations and their cash flows for the period from July 22, 1998 through December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /S/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP CHANCELLOR MEDIA OUTDOOR CORPORATION (A WHOLLY-OWNED SUBSIDIARY OF CHANCELLOR MEDIA CORPORATION OF LOS ANGELES) CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 1999 1998 (Unaudited) ------------ ----------- ASSETS Current assets: Cash $ 2,023 $ 3,620 Accounts receivable, net of allowance for uncollectible accounts of $5,053 and $5,286 27,073 29,015 Prepaid land rent 7,325 10,655 Deferred tax asset 2,122 2,243 Inventories 3,680 3,438 Other current assets 2,119 2,609 ---------- ---------- Total current assets 44,342 51,580 ---------- ---------- Property and equipment: Land 16,215 16,909 Advertising structures 1,178,751 1,206,113 Buildings and improvements 10,117 10,251 Equipment and vehicles 9,005 10,328 Construction-in-progress 13,114 17,382 ---------- ---------- Total cost 1,227,202 1,260,983 ---------- ---------- Accumulated depreciation (20,794) (47,765) ---------- ---------- Net property and equipment 1,206,408 1,213,218 ---------- ---------- Intangible assets: Goodwill 464,359 469,795 Other 27,000 39,673 ---------- ---------- Total cost 491,359 509,468 ---------- ---------- Accumulated amortization (5,196) (9,616) Net intangible assets 486,163 499,852 Prepaid land rent, non-current 1,168 1,168 ---------- ---------- Total assets $1,738,081 $1,765,818 ========== ========== LIABILITIES AND EQUITY Current liabilities: Notes payable, current $ 698 $ 671 Accounts payable 8,799 3,479 Accrued payroll and employee benefits 5,327 7,029 Other accrued liabilities 8,007 11,661 ---------- ---------- Total current liabilities 22,831 22,840 Commitments and contingencies - - Deferred tax liabilities 99,009 95,554 Notes payable, long-term 1,715 1,854 Equity 1,614,526 1,645,570 ---------- ---------- Total liabilities and equity $1,738,081 $1,765,818 ========== ==========
See accompanying notes to consolidated financial statements. CHANCELLOR MEDIA OUTDOOR CORPORATION (A WHOLLY-OWNED SUBSIDIARY OF CHANCELLOR MEDIA CORPORATION OF LOS ANGELES) CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE PERIOD FOR THE THREE FROM JULY 22, MONTHS ENDED 1998 TO MARCH 31, DECEMBER 31, 1999 1998 (UNAUDITED) --------------- -------------- Revenues $ 52,750 $ 57,992 Less: agency commissions 5,145 4,391 ------------ ----------- Net revenues 47,605 53,601 Operating expenses 23,505 28,451 Corporate general and administrative expenses 1,981 2,825 Depreciation and amortization 25,990 31,396 ------------ ----------- Loss from operations (3,871) (9,071) Other (income) expense (156) 86 Interest expense 105 64 ------------ ----------- Loss before taxes (3,820) (9,221) Income tax expense (benefit) 345 (3,076) ------------ ----------- Net loss $ (4,165) $ (6,145) ============ ===========
See accompanying notes to consolidated financial statements. CHANCELLOR MEDIA OUTDOOR CORPORATION (A WHOLLY-OWNED SUBSIDIARY OF CHANCELLOR MEDIA CORPORATION OF LOS ANGELES) CONSOLIDATED STATEMENTS OF EQUITY (DOLLARS IN THOUSANDS)
FOR THE PERIOD FOR THE THREE FROM JULY 22, MONTHS ENDED 1998 TO MARCH 31, DECEMBER 31, 1999 1998 (UNAUDITED) --------------- -------------- Beginning balance $ - $ 1,614,526 Contributions from parent, net 1,618,691 37,189 Net loss (4,165) (6,145) ----------- ----------- $ 1,614,526 $ 1,645,570 =========== ===========
See accompanying notes to consolidated financial statements. CHANCELLOR MEDIA OUTDOOR CORPORATION (A WHOLLY-OWNED SUBSIDIARY OF CHANCELLOR MEDIA CORPORATION OF LOS ANGELES) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE PERIOD FOR THE THREE FROM JULY 22, MONTHS ENDED 1998 TO MARCH 31, DECEMBER 31, 1999 1998 (UNAUDITED) --------------- -------------- Net loss $ (4,165) $ (6,145) --------- --------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 20,794 26,981 Amortization of intangibles 5,196 4,415 Deferred tax benefit (1,155) (3,576) Changes in assets and liabilities: Accounts receivable (1,165) (1,578) Other assets 1,649 (2,223) Accounts payable and accrued expenses 1,780 (379) --------- --------- Total adjustments 27,099 23,640 --------- --------- Net cash provided by operating activities 22,934 17,495 --------- --------- Cash flows from investing activities: Purchases of property and equipment and construction of advertising structures (5,344) (8,176) --------- --------- Net cash used in investing activities (5,344) (8,176) --------- --------- Cash flows from financing activities: Distributions to parent (15,347) (7,584) Principal payments on note payable (220) (138) --------- --------- Net cash used in financing activities (15,567) (7,722) --------- --------- Net increase in cash 2,023 1,597 Cash, at beginning of period - 2,023 --------- --------- Cash, at end of period $ 2,023 $ 3,620 ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest $ 105 $ 64 ========= =========
See accompanying notes to consolidated financial statements. CHANCELLOR MEDIA OUTDOOR CORPORATION (A WHOLLY-OWNED SUBSIDIARY OF CHANCELLOR MEDIA CORPORATION OF LOS ANGELES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SIGNIFICANT ACQUISITIONS The Chancellor Media Outdoor Corporation (the "Company"), a wholly-owned subsidiary of Chancellor Media Corporation of Los Angeles ("CMCLA"), operated approximately 38,000 outdoor advertising display faces in 37 states as of December 31, 1998. The Company was formed on July 22, 1998; however, the Company held no assets until the acquisition of Martin Media, Martin & MacFarlane and certain affiliated companies on July 31, 1998 and the Company had no results of operations until August 1, 1998. On June 1, 1999, Chancellor Media Corporation ("CMC"), the indirect parent of CMCLA, announced that it had entered into a definitive agreement to sell the Company (see Note 8). The accompanying consolidated financial statements do not include any effects related to the proposed transaction. On July 31, 1998, CMCLA acquired Martin Media L.P., Martin & MacFarlane and certain affiliated companies ("Martin") for a total purchase price of $615,117, which consisted of $612,848 in cash and included various other direct acquisition costs and the assumption of notes payable of $2,270. As part of the Martin transaction, CMCLA acquired an asset purchase agreement with Kunz & Company and paid an additional $6,000 in cash for a purchase option deposit previously paid in by Martin. Martin operated 13,700 billboards and outdoor displays in 12 states serving 23 markets. On November 13, 1998, CMCLA acquired approximately 1,000 billboards and outdoor display faces from Kunz & Company for $40,264 in cash, of which $6,000 was previously paid as a purchase option deposit in connection with the Martin acquisition on July 31, 1998. The Company had previously been operating these properties under a management agreement effective July 31, 1998. On December 1, 1998, CMCLA acquired the assets and working capital of the outdoor advertising division of Whiteco Industries, Inc. ("Whiteco"), which operated approximately 22,500 billboards and outdoor displays in 34 states, for $981,698 in cash, including various other direct acquisition costs. The unaudited 1998 pro forma condensed consolidated results of operations data, as if the Whiteco and Martin transactions had occurred on July 22, 1998 are as follows: Net revenues $ 92,990 Net loss (9,856) The pro forma results are not necessarily indicative of future results. Between September and December 1998, CMCLA acquired approximately 670 additional billboards and outdoor displays in various markets for approximately $23,582 in cash. On January 21, 1999 and February 9, 1999, CMCLA acquired approximately 4,500 outdoor display faces from Triumph Outdoor Holdings and certain affiliated companies for $37,006 in cash including working capital and direct acquisition costs ("the Triumph Acquisition"). In connection with the Triumph Acquisition, CMCLA paid approximately $1,000 to an entity controlled by James A. McLaughlin, the President and Chief Operating Officer of the Company. An additional $700 that may be paid to such entity is currently held in escrow, subject to satisfaction of indemnity claims, if any. Between January and May 1999, CMCLA acquired approximately 250 additional billboards and outdoor displays in various transactions for approximately $11,900 in cash. The above acquisitions were accounted for under the purchase method of accounting. After acquisition, CMCLA pushed down the applicable stock, assets and/or liabilities of the acquired entities to the Company as non-cash contributions. The contributions were made at cost and therefore no related gain or loss was recognized by CMCLA. These acquisitions are non-cash transactions that are not reflected in the consolidated statement of cash flows. The accompanying consolidated financial statements include the results of operations of the acquired entities from their respective date of acquisition. A summary of net assets acquired during 1998 follows:
Cash $ 6,716 Accounts receivable, net 25,908 Other current assets 14,747 Property and equipment 1,221,858 Intangible assets 499,044 Other assets 1,195 Accounts payable and accrued expenses (10,752) Deferred tax liabilities (98,042) Other liabilities (13) ---------- Total net assets acquired 1,660,661 ========== Less: Cash acquired 6,716 Notes payable 2,268 ---------- Cash paid for acquisitions by CMCLA $1,651,677 ==========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles. All significant intercompany balances and transactions have been eliminated in consolidation. Corporate overhead costs related to the Company are included as expenses in the accompanying financial statements. Management considers the inclusion of such expenses reasonable. The corporate overhead expenses may not necessarily be indicative of expenses that would have been incurred if the Company had operated as a separate entity. INTERIM FINANCIAL STATEMENTS The financial information as of March 31, 1999 and with respect to the three months then ended is unaudited. In the opinion of management, the financial statements contain all adjustments, consisting of normal recurring accruals, necessary for the fair presentation of the results for such period. The information is not necessarily indicative of the results of operations to be expected for the fiscal year end. ADVERTISING CONTRACTS AND REVENUE RECOGNITION Outdoor advertising revenue is derived from contracts with advertisers for the rental of outdoor advertising space and is recognized on an accrual basis ratably over the terms of the contracts, which generally cover periods of one month up to five years. Costs associated with the outdoor advertising operations, including contract costs and land rental, are expensed over the related contract term. PREPAID LAND LEASES The majority of the Company's outdoor advertising structures are located on leased land. Land rent is typically paid in advance for periods ranging from one to twelve months. Prepaid land leases are expensed ratably over the related rental term. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows: Advertising structures 15 years Building and improvements 35 years Equipment and vehicles 5-10 years Repaid and maintenance costs are charged to expense as incurred. GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets consist of goodwill, non-compete agreements, municipal contracts and franchise agreements. Intangible assets resulting from acquisitions are valued based upon estimated fair values. The Company amortizes such intangible assets using the straight-line method over estimated useful lives of 40 years for goodwill, five years for non- compete agreements and ten years for municipal contracts and franchise agreements. The Company evaluates the propriety of the carrying amount of intangible assets and related amortization periods to determine whether current events or circumstances warrant adjustments to the carrying value and/or revised estimates of amortization periods. These evaluations consist of the projection of undiscounted cash flows over the remaining amortization periods of the related intangible assets. The projections are based on historical trend lines of actual results, adjusted for expected changes in operating results. At this time, the Company believes that no impairment of goodwill or other intangible assets has occurred and that no revisions to the amortization periods are warranted. CASH EQUIVALENTS The Company considers temporary cash investments purchased with original maturities of three months or less to be cash equivalents. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, credit risk with respect to trade receivables is limited due to the large number of diversified customers and the geographic diversification of the Company's customer base. The Company performs ongoing credit evaluations of its customers and believes that adequate allowances for any uncollectible trade receivables are maintained. At December 31, 1998, no receivable from any customer exceeded 5% of equity and no customer accounted for more than 10% of net revenues during the period July 22, 1998 through December 31, 1998. 3. LEASE COMMITMENTS The Company has long-term operating leases for office space, equipment and the majority of the land occupied by its outdoor advertising structures. The leases expire at various dates, generally during the next ten years, and have varying options to renew and cancel. Rental expense for operating leases (excluding those with lease terms of one month or less that were not renewed) was approximately $8,234 for the period July 22, 1998 to December 31, 1998. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 1998 are as follows:
YEARS - ----- 1999 $ 33,624 2000 35,187 2001 35,836 2002 36,457 2003 36,970 Thereafter 1,259,991 ---------- $1,438,065 ==========
4. INCOME TAXES The Company is a member of a group that files a consolidated income tax return. For purposes of separate financial statement presentation, the Company's current and deferred income taxes have been determined as if the Company were a separate taxpayer. Income tax expense for the period from July 22, 1998 to December 31, 1998 consists of the following:
Current tax expense: Federal $ - State 1,500 --------- Total current tax expense 1,500 Deferred tax benefit: Federal (1,103) State (52) Total deferred tax benefit (1,155) --------- Income tax expense $ 345 =========
Total income tax expense differed from the amount computed by applying the U.S. federal statutory income tax rate of 35% to the loss from operations for the period from July 22, 1998 to December 31, 1998 as a result of the following:
$ % ----------- ----------- Computed "expected" tax benefit $ (1,337) (35.0)% Amortization of goodwill 357 9.3% Nondeductible meals and entertainment 350 9.2% State income taxes, net of federal benefit 975 25.5% --------- --------- Income tax expense $ 345 9.0% ========= =========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1998 are presented below:
Deferred tax assets: Net operating loss carryforwards $ 8,290 Differences in book and tax bases 2,122 --------- Total deferred tax assets 10,412 --------- Deferred tax liabilities: Property and equipment and intangibles, primarily related to acquisitions 107,299 --------- Net deferred tax liability $ 96,887 =========
Deferred tax assets and liabilities are computed by applying the U.S. federal and state income tax rate in effect to the gross amounts of temporary differences and other tax attributes, such as net operating loss carryforwards. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. At December 31, 1998, the Company has tax net operating loss carryforwards available to offset future taxable income of approximately $19,700, expiring in the year 2013. 5. CONTINGENCIES The Company is involved in various claims and lawsuits, which are generally incidental to its business. The Company is vigorously contesting all of these matters and believes that the ultimate resolution of these matters will not have a materially adverse effect on its consolidated financial position, cash flows or results of operations. The Company, together with its consolidated subsidiaries, has guaranteed certain debt obligations issued by CMCLA of approximately $4,096,000. In addition to the Company, other subsidiaries of CMCLA guarantee the debt. 6. STOCK OPTIONS CMC has established Key Employee Stock Option Plans ("the Employee Option Plans") which provide for the issuance of stock options to officers and other key employees of CMC and its subsidiaries. The Employee Option Plans make available for issuance an aggregate 15,105,000 shares of common stock of CMC. The total options available for grant were 2,171,939 at December 31, 1998. During 1998, CMC granted options to purchase 360,000 shares of CMC common stock to an officer of the Company with an exercise price of $48.375. Options to purchase 300,000 shares of CMC common stock vest ratably 25% per year for a period of three years with the first 25% vested on the grant date. Options to purchase 60,000 shares of CMC common stock vest ratably 25% per year on each of the first four annual anniversaries of the date of grant. At December 31, 1998, 75,000 shares were exercisable. The Company applies Accounting Principles Board Opinion No. 25 in accounting for the Employee Option Plans and, accordingly, no compensation cost for Company employees is recognized in the consolidated financial statements for stock options which have exercise prices equal to or in excess of the market value of CMC's common stock on the date of grant. Had the Company determined compensation cost based on fair value at grant date for its stock options under Statement of Financial Accounting Standards No. 123, the Company's pro forma net loss for the period from July 22, 1998 through December 31, 1998 would have been $5,440. The fair value for the stock options was estimated at the date of grant using the Black-Scholes option pricing model assuming a dividend yield of 0%, an expected volatility of 39.91%, a risk free interest rate of 4.80% and an expected life of seven years. 7. BENEFIT PLAN CMC offers substantially all of its and its subsidiaries' employees voluntary participation in a 401(k) Plan. Through the Company, CMC may make discretionary contributions to the plans; however, no such contributions were made by the Company during 1998. 8. SUBSEQUENT EVENT On June 1, 1999, CMCLA entered into a definitive agreement to sell the Company to Lamar Advertising Company ("Lamar") for approximately $1,600,000 in stock and cash. Under the terms of the agreement, Lamar will pay $700,000 in cash and will issue approximately 26,227,000 shares of its common stock, valued at approximately $900,000 based on the value of the stock on May 27, 1999. Following the transaction, CMCLA will own approximately 30% of Lamar's common stock and will have the right to appoint two members to Lamar's board of directors, increasing the size of the board to ten members. REPORT OF INDEPENDENT ACCOUNTANTS June 9, 1999 To the Board of Directors of Chancellor Media Corporation In our opinion, the accompanying statements of income, divisional equity and cash flows present fairly, in all material respects, the results of operations and cash flows of The Outdoor Division of Whiteco Industries, Inc. (the "Division") for the eleven months ended November 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Division's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /S/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP THE OUTDOOR DIVISION OF WHITECO INDUSTRIES, INC. STATEMENT OF INCOME ELEVEN MONTHS ENDED NOVEMBER 30, 1998 (DOLLARS IN THOUSANDS)
Revenues $ 128,603 Less: agency commissions (8,973) ----------- Net revenues 119,630 Cost of revenues 43,665 Selling and administrative expenses 23,719 Depreciation and amortization 10,342 Management fee expense 2,164 Other 413 ----------- Income from operations 39,327 Interest expense 35 Interest income (134) Gain on sale of properties (1,418) ----------- Net income $ 40,844 ===========
See accompanying notes to financial statements. THE OUTDOOR DIVISION OF WHITECO INDUSTRIES, INC. STATEMENT OF DIVISIONAL EQUITY ELEVEN MONTHS ENDED NOVEMBER 30, 1998 (DOLLARS IN THOUSANDS)
Divisional equity at December 31, 1997 $ 87,262 Net income 40,844 Interdivisional transactions, net (21,968) ---------- Divisional equity at November 30, 1998 $ 106,138 ==========
See accompanying notes to financial statements. THE OUTDOOR DIVISION OF WHITECO INDUSTRIES, INC. STATEMENT OF CASH FLOWS ELEVEN MONTHS ENDED NOVEMBER 30, 1998 (DOLLARS IN THOUSANDS)
Cash flows from operating activities: Net income $ 40,844 --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,146 Provision for doubtful accounts 299 Gain on sale of assets (1,418) Changes in assets and liabilities: Accounts receivable (4,812) Other assets (5,617) Accounts payable and accrued expenses 2,088 --------- Total adjustments 686 --------- Net cash provided by operating activities 41,530 --------- Cash flows from investing activities: Proceeds from sale of assets 558 Expenditures for property and equipment (20,230) --------- Net cash used in investing activities (19,672) --------- Cash flows from financing activities: Interdivisional transactions, net (21,968) --------- Net cash used in financing activities (21,968) --------- Net decrease in cash (110) Cash at beginning of period 250 --------- Cash at end of period $ 140 =========
See accompanying notes to financial statements. THE OUTDOOR DIVISION OF WHITECO INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. THE COMPANY AND SALE The Outdoor Advertising Division of Whiteco Industries, Inc. (the "Division") owns and operates outdoor advertising signs throughout the United States. The Division is wholly-owned by Whiteco Industries, Inc. ("Industries"). During the period covered by the financial statements, the Division was conducted as an integral part of Industries' overall operations and separate financial statements were not prepared. These financial statements have been prepared from Industries' historical accounting records. Corporate overhead expenses are actual expenses incurred by the Division; however, the expenses incurred by the Division for corporate overhead may not necessarily be indicative of expenses that would have been incurred had the Division been operated as a separate entity. On December 1, 1998, Industries entered into an agreement whereby substantially all of the assets of the Division were purchased and certain of the liabilities were assumed by Chancellor Media Corporation of Los Angeles. The accompanying financial statements do not reflect any adjustments relating to this transaction. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTRACTS AND REVENUE RECOGNITION Outdoor advertising signs are contracted to customers under individual advertising contracts that primarily run from one month to five years. Revenue is recognized ratably over the life of the contract. Costs associated with the outdoor advertising operations, including contract costs and land rental, are expensed over the related contract term. PREPAID SIGN COSTS The majority of the Division's outdoor advertising structures are located on leased land. Land rent is typically paid in advance for periods ranging from one to twelve months. Prepaid land leases are expensed ratably over the related rental term. PROPERTY AND EQUIPMENT Property and equipment are carried at cost, including interest charges capitalized during construction. Depreciation on these assets is computed over various lives under the straight-line method over the various useful lives. Depreciation expense for the eleven months ended November 30, 1998 was $10,146. The estimated useful lives of the various classes of buildings, improvements and equipment are as follows: Building and improvements 15-40 years Advertising structures 5-12 years Equipment 3-8 years INCOME TAXES The Division is part of Industries, which is an "S" corporation and, as such, federal and most state income taxes are the responsibility of the stockholder and therefore not reflected on the Division's financial statements. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. LEASE COMMITMENTS The Division leases office facilities and property under various operating leases. The Division's primary office premises are leased from a partnership in which Industries is the general partner. Annual minimum rental payments under leases that have an initial or remaining term in excess of one year or leases expected to be renewed at November 30, 1998 are as follows:
YEARS ENDING DECEMBER 31, RELATED - ------------------------- PARTY OTHER TOTAL --------- -------- -------- 1999 $ 224 $ 20,856 $ 21,080 2000 224 20,983 21,207 2001 224 21,094 21,318 2002 224 21,217 21,441 2003 56 21,397 21,453 Thereafter - 566,701 566,701 -------- --------- --------- $ 952 $ 672,248 $ 673,200 ======== ========= =========
Total lease expense was approximately $20,080 for the eleven months ended November 30, 1998. Lease expense to related parties was $216 for the eleven months ended November 30, 1998. 4. MANAGEMENT AGREEMENT In October 1984, the Division entered into an agreement with Metro Management Associates (the "Partnership"), a partnership in which several partners are employees of Industries, for the management and operation of approximately 540 outdoor advertising signs located in Indiana, Texas, Rhode Island, Missouri, Ohio, Florida, Illinois, Kentucky, Pennsylvania and Virginia. All revenue and operating expenses related to the management and operation of the Partnership's outdoor advertising signs are included in the Division's results of operations. The Division is required to pay a profit participation fee to the Partnership which approximates the operating profit of the management assets and is based upon a fixed monthly fee and a variable fee based upon revenue. For the eleven months ended November 30, 1998, the Division paid $2,164 to Metro Management in connection with the agreement. On August 31, 1998, the Partnership entered into an agreement to sell substantially all of the assets and certain specified liabilities of the Partnership to Chancellor Media Corporation of Los Angeles. The management agreement between the Division and the Partnership was terminated upon the consummation of the acquisition by Chancellor Media Corporation of Los Angeles on December 1, 1998. INDEPENDENT AUDITORS' REPORT The Board of Directors Whiteco Industries, Inc. Merrillville, Indiana We have audited the accompanying balance sheets of the Outdoor Advertising Division of Whiteco Industries, Inc. as of December 31, 1996 and 1997, and the related statements of income and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Outdoor Advertising Division of Whiteco Industries, Inc. as of December 31, 1996 and 1997, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /S/ BDO SEIDMAN, LLP BDO Seidman, LLP Chicago, Illinois September 17, 1998 OUTDOOR ADVERTISING DIVISION OF WHITECO INDUSTRIES, INC. BALANCE SHEETS ASSETS
DECEMBER 31, --------------------------- 1996 1997 ------------ ------------ Current assets Cash............................................. $ 155,781 $ 249,733 Accounts receivable (net of $631,000 and $1,111,000 allowance for uncollectible accounts for December 31, 1996 and 1997, respectively)................................. 9,112,798 10,718,470 Prepaid expenses and other receivables................................... 2,520,913 2,684,801 Prepaid sign costs............................... 4,880,789 5,064,178 ------------ ------------ Total current assets..................... 16,670,281 18,717,182 ------------ ------------ Property and equipment Land, buildings and improvements................. 5,389,827 6,279,957 Advertising signs................................ 134,120,274 150,697,192 Equipment........................................ 4,226,984 4,925,336 ------------ ------------ Total cost............................... 143,737,085 161,902,485 Accumulated depreciation......................... 84,300,457 91,601,392 ------------ ------------ Net property and equipment......................... 59,436,628 70,301,093 ------------ ------------ Other sign costs................................... 707,273 1,424,848 ------------ ------------ $ 76,814,182 $ 90,443,123 ============ ============
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities Accounts payable................................. $ 505,561 $ 900,145 Customers' advance payments and deposits......... 127,925 70,174 Accrued expenses................................. 1,577,194 2,210,355 ------------ ------------ Total current liabilities................ 2,210,680 3,180,674 ------------ ------------ Commitments Divisional equity.................................. 74,603,502 87,262,449 ------------ ------------ $ 76,814,182 $ 90,443,123 ============ ============
See accompanying notes to financial statements. OUTDOOR ADVERTISING DIVISION OF WHITECO INDUSTRIES, INC. STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ------------------------------------------ 1995 1996 1997 ------------ ------------ ------------ Revenues....................... $108,447,476 $117,268,324 $126,800,754 Less: Agency discounts......... 6,616,011 8,400,821 8,702,563 ------------ ------------ ------------ Net revenues................. 101,831,465 108,867,503 118,098,191 Cost of revenues............... 40,659,116 42,021,229 45,615,461 Selling and administrative expenses..................... 14,878,784 16,288,955 18,369,034 Corporate overhead expenses.... 5,176,832 5,644,490 6,073,671 Depreciation and amortization................. 8,675,204 10,501,844 11,525,410 Profit participation fee....... 2,101,620 2,248,329 2,321,884 ------------ ------------ ------------ Income from operations before other income and interest expense...................... 30,339,909 32,162,656 34,192,731 Other income, less other expenses..................... (1,060,355) (1,131,033) (1,833,411) Interest expense............... 38,556 17,927 3,794 ------------ ------------ ------------ Net income..................... $ 31,361,708 $ 33,275,762 $ 36,022,348 ============ ============ ============
See accompanying notes to financial statements. OUTDOOR ADVERTISING DIVISION OF WHITECO INDUSTRIES, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1995 1996 1997 ------------ ------------ ------------ Cash flows from operating activities Net income................................... $ 31,361,708 $ 33,275,762 $ 36,022,348 Adjustments to reconcile net income to net cash provided by operating activities Provision for depreciation and amortization........................... 8,675,204 10,501,844 11,525,410 Gain on disposals of assets.............. (795,498) (812,482) (1,488,665) Increase in accounts receivable.......... (694,344) (1,853,160) (1,605,672) Decrease (increase) in prepaid expenses and other receivables.................. (220,881) (1,202,910) (163,888) Increase in prepaid sign costs and other sign costs............................. (1,044,722) (815,916) (1,840,672) (Decrease) increase in accounts payable and accrued expenses................... (66,319) 869,627 1,027,745 Increase (decrease) in customers' advance payments and deposits.................. 185,750 (57,825) (57,751) ------------ ------------ ------------ Total adjustments.................... 6,039,190 6,629,178 7,396,507 ------------ ------------ ------------ Net cash provided by operating activities.... 37,400,898 39,904,940 43,418,855 ------------ ------------ ------------ Cash flows from investing activities Proceeds from sales of assets.............. 1,352,297 1,115,793 2,474,779 Expenditures for advertising signs......... (26,033,225) (14,713,166) (19,541,162) Expenditures for property and equipment.... (1,986,847) (2,180,644) (2,895,119) ------------ ------------ ------------ Net cash used in investing activities........ (26,667,775) (15,778,017) (19,961,502) ------------ ------------ ------------ Cash flows from financing activities Interdivisional transactions............... (11,489,912) (24,124,287) (23,363,401) ------------ ------------ ------------ Net cash used in financing activities........ (11,489,912) (24,124,287) (23,363,401) ------------ ------------ ------------ Net (decrease) increase in cash.............. (756,789) 2,636 93,952 Cash, at beginning of year................... 909,934 153,145 155,781 ------------ ------------ ------------ Cash, at end of year......................... $ 153,145 $ 155,781 $ 249,733 ============ ============ ============
See accompanying notes to financial statements. OUTDOOR ADVERTISING DIVISION OF WHITECO INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Whiteco Industries, Inc. ("Whiteco") has entered into an agreement to sell substantially all of the assets and certain liabilities of its Outdoor Advertising Division (the "Division"). The Division owns and operates outdoor advertising signs throughout the United States. During the periods covered by the financial statements, the Division was conducted as an integral part of Whiteco's overall operations and separate financial statements were not prepared. These financial statements have been prepared from Whiteco's historical accounting records. Corporate overhead expenses are actual expenses incurred by the Division. The Division operated independently from Whiteco Industries, Inc. However, the expenses incurred by the Division for corporate overhead may not necessarily be indicative of expenses that would have been incurred had the Division been operated as a separate entity. Contracts and Revenue Recognition Outdoor advertising signs are contracted to customers under individual advertising contracts that primarily run from one month to five years. Revenue is recognized ratably over the life of the contract. Costs associated with the outdoor advertising operations, including contract costs and land rental, are expensed over the related contract term. Prepaid Sign Costs and Other Sign Costs Prepaid sign costs and other sign costs are primarily land rental payments relating to future periods. Amortization on these assets was $1,020,942, $1,075,827 and $939,708 for the years ended December 31, 1995, 1996 and 1997. Property and Equipment Land, Buildings and Improvements and Equipment Land, buildings and improvements and equipment are carried at cost, including interest charges capitalized during construction. Depreciation on these assets is computed over various lives under the straight-line method and amounted to $767,872, $911,890 and $1,092,869 for the years ended December 31, 1995, 1996 and 1997. Advertising Signs Advertising sign structures are depreciated by the straight-line method over lives principally from eight to twelve years. Depreciation of advertising signs was $6,886,390, $8,514,127 and $9,492,833 for the years ended December 31, 1995, 1996 and 1997. Income Taxes The Division is part of Whiteco, which is an "S" corporation and, as such, federal and most state income taxes are the responsibility of the stockholder and therefore not reflected on the Division's financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. LEASES The Division leases office facilities and property under various operating leases. The Division's primary office premises are leased from a partnership in which Whiteco Industries, Inc. is the general partner. Annual minimum rental payments under leases that have an initial or remaining term in excess of one year at December 31, 1997 are as follows:
RELATED YEAR PARTY OTHER TOTAL ---- -------- -------- ---------- 1998....................................... $224,000 $270,000 $ 494,000 1999....................................... 224,000 131,000 355,000 2000....................................... 224,000 130,000 354,000 2001....................................... 224,000 131,000 355,000 2002....................................... 224,000 131,000 355,000 Thereafter................................. 56,000 962,000 1,018,000
Total lease expense was approximately $675,000, $646,000 and $665,000 for the years ended December 31, 1995, 1996 and 1997, respectively. Related party lease expense was $254,000, $230,000 and $117,000 for the years ended December 31, 1995, 1996 and 1997, respectively. 3. RETIREMENT SAVINGS PLAN The Division is a part of Whiteco Industries, Inc. ("Whiteco"), who maintains a qualified plan under Section 401(k) of the Internal Revenue Code. This plan is available for all employees who have completed one year or more of continuous service. The plan permits employees to contribute up to 15% of their annual compensation. The plan allows for discretionary Whiteco contributions. Currently, Whiteco matches 20% of the employees' contributions, to a maximum of 6% of earnings, and also makes a 1% quarterly matching contribution. Contributions were $154,160, $171,270 and $177,100 for the years ended December 31, 1995, 1996 and 1997, respectively. 4. MANAGEMENT AGREEMENT In October 1984, the Division entered into an agreement with Metro Management Associates (the "Partnership"), a partnership in which several partners are employees of Whiteco, for the management and operation of approximately 540 outdoor advertising signs located in Indiana, Texas, Rhode Island, Missouri, Ohio, Florida, Illinois, Kentucky, Pennsylvania and Virginia. All revenue and operating expenses related to the management and operation of the Partnership's outdoor advertising signs are included in the Division's results of operations. The Division is required to pay a profit participation fee to the Partnership which approximates the operating profit of the managed assets and is based upon a fixed monthly fee and a variable fee based upon revenue. On August 31, 1998, the Partnership entered into an agreement to sell substantially all of the assets and certain specified liabilities of the Partnership to Chancellor Media Corporation. The management agreement between the Division and the Partnership will be terminated upon consummation of the acquisition by Chancellor Media Corporation. 5. SUBSEQUENT EVENT On August 31, 1998, Whiteco Industries, Inc. entered into an agreement to sell substantially all of the assets and certain specified liabilities of the Division to Chancellor Media Corporation. REPORT OF INDEPENDENT ACCOUNTANTS June 9, 1999 To the Board of Directors of Chancellor Media Corporation In our opinion, the accompanying statements of operations, partners' capital and cash flows present fairly, in all material respects, the operations and cash flows of Martin Media, L.P. (the "Company") for the seven months ended July 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards that require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /S/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP MARTIN MEDIA L.P. STATEMENT OF OPERATIONS SEVEN MONTHS ENDED JULY 31, 1998 (DOLLARS IN THOUSANDS)
Revenue $ 33,791 Cost of revenue 4,136 --------- Gross profit 29,655 Managers' controlled operating expenses 14,364 --------- Income from managers' operations 15,291 Other operating expenses: Depreciation and amortization 11,223 Refinance and acquisition expenses 3,276 Other 3,174 --------- Operating loss (2,382) Other income (expenses): Interest income 20 Other income 473 Interest expense (8,527) --------- Net loss $ (10,416) =========
See accompanying notes to financial statements. MARTIN MEDIA L.P. STATEMENT OF PARTNERS' CAPITAL SEVEN MONTHS ENDED JULY 31, 1998 (DOLLARS IN THOUSANDS)
Balance at December 31, 1997 $ 18,143 Distributions and redemption of partnership units (23,613) Net loss (10,416) --------- Balance at July 31, 1998 $ (15,886) =========
See accompanying notes to financial statements. MARTIN MEDIA L.P. STATEMENT OF CASH FLOWS SEVEN MONTHS ENDED JULY 31, 1998 (DOLLARS IN THOUSANDS)
Cash flows from operating activities: $ (10,416) Net loss Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 11,223 Provision for doubtful accounts 407 Changes in operating assets and liabilities (exclusive of acquisitions): Accounts receivable (1,276) Other current assets (953) Other assets 20 Accounts payable and accrued expenses (6,026) ---------- Net cash used by operating activities (7,021) Cash flows from investing activities: Acquisitions, net of cash acquired (22,667) Capital expenditures (14,795) ---------- Net cash used in investing activities (37,462) Cash flows from financing activities: Deposit received from Chancellor Media Corporation 185,860 Payments on long-term debt (112,456) Redemption of partnership units (23,612) ---------- Net cash provided by financing activities 49,792 Net increase in cash and cash equivalents 5,309 Cash and cash equivalents at beginning of period 23 ---------- Cash and cash equivalents at end of period $ 5,332 ========== Supplemental disclosures of cash flow information: Interest paid $ 5,313 ==========
See accompanying notes to financial statements. MARTIN MEDIA L.P. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. NATURE OF BUSINESS Martin Media L.P. ("Martin" or the "Company"), a California limited partnership, was formed in December 1984 and operated under the name of Colorado River Markets until August 1991. The Company has operating divisions located in Pennsylvania, Ohio , Connecticut, Washington, D.C., Arizona and Nevada. The Company owns and leases billboards on a contractual basis nationwide for the purpose of providing outdoor advertising services. The Company extends credit in the form of accounts receivable on a short-term basis to businesses and advertisers doing business in the above noted areas. On July 31, 1998, Martin and related companies were acquired by Chancellor Media Corporation for a total purchase price of $615,117, which consisted of $612,848 in cash and included various direct acquisition costs and the assumption of notes payable of $2,270. The accompanying financial statements do not reflect any adjustments related to this transaction. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to be all highly liquid investments purchased with a maturity of three months or less. INVENTORIES Inventories are stated at the lower of cost or market using the first in, first out (FIFO) cost method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated over estimated useful lives primarily using the straight-line method. Repairs and maintenance are expensed as incurred. Depreciation expense for the seven months ended July 31, 1998 was $2,059. Expenditures which significantly increase asset values are capitalized. Estimated useful lives are as follows:
YEARS ------------ Building and improvements 15-31 Posters 7-25 Bulletins 7-25 Shop equipment 3-10 Office furniture and equipment 5-10 Auto and trucks 5-7
CONTRACTS AND REVENUE RECOGNITION Outdoor advertising signs are contracted to customers under individual advertising contracts that primarily run from one month to five years. Revenue is recognized ratably over the life of the contract. Costs associated with the outdoor advertising operations, including contract costs and land rental, are expensed over the related contract term. INCOME TAXES Under provision of the Internal Revenue Code and the respective state taxation codes, partnerships are not subject to income taxes; any income or loss realized is taxed to the individual partners. Certain states do impose a minimum tax or franchise fee. INTANGIBLE ASSETS Covenants not to compete are recorded at cost and are amortized using the straight-line method over the contractual period specified. Advertising rights, permits and licenses, acquisition fees, lease rights and goodwill are recorded at cost and are amortized using the straight-line method over five years. Loan fees are amortized over the life of the loan to which they are associated. PROFIT-SHARING PLAN The Company has adopted profit-sharing plans which are qualified under Section 401(k) of the Internal Revenue Code. All full-time employees with twelve months of service who are 18 years old or older are eligible to participate. Each employee may voluntarily contribute up to the lesser of 15% of their pay or $9. The Company has made no contributions to the plan. 3. SIGNIFICANT ACQUISITIONS On January 2, 1998, Martin acquired Las Vegas Outdoor Advertising, Inc., an outdoor advertising company with 90 billboards and outdoor displays in the Las Vegas market, for approximately $16,800 in cash plus various other direct acquisition costs. On July 9, 1998, Martin acquired POA, an outdoor advertising company with over 1,240 billboards and outdoor displays in the Pittsburgh market, for approximately $5,867 in cash plus various other direct acquisition costs. These acquisitions were accounted for under the purchase method of accounting and, accordingly, the accompanying statement of operations includes the results of the acquired companies' operations from the respective dates of acquisition. 4. COMMITMENTS The Company leases land, buildings, and equipment in connection with its outdoor advertising business under operating leases. The leasing of land relates to the posters and bulletins. The Company also leases property, equipment and buildings to house and support division administrative and field offices. Future annual minimum lease payments are as follows:
YEARS ENDING DECEMBER 31, TOTAL - ------------- --------- 1999 $ 6,397 2000 7,130 2001 7,404 2002 7,658 2003 7,914 Thereafter 353,578 --------- $ 390,081 =========
Lease expense for the seven months ended July 31, 1998 was approximately $5,328. ACQUISITION, PURCHASE AND PURCHASE OPTION On July 31, 1997, the Company entered into an agreement with Martin & MacFarlane, Inc. (related party), relative to an agreement Martin & MacFarlane, Inc. had with another company to purchase certain assets, to acquire certain assets including sign structures, equipment, and related intangibles located in the Las Vegas and Colorado River markets for a total purchase price of $14,350. This purchase agreement has two segments, the first of which provided for the purchase of assets during the year ending December 31, 1997 for $11,273. The second segment of the agreement provides an option to the Company to purchase additional assets for $3,077. Upon execution of the option agreement, the Company deposited $464 in good faith with Martin & MacFarlane, Inc. PREFERRED PARTNERSHIP UNITS On December 23, 1997, the Company entered into an agreement to sell preferred limited partnership units (PPUs), warrants and warrant units to a select group of purchasers. The Company issued 25,000 PPUs at $1 each, calling for the holders of the PPUs to receive an initial 14% preferred rate of return, which escalates on certain dates to a maximum of 20%. The Company can redeem PPUs for 102% of the PPUs capital account amount until September 23, 1998 and thereafter to redeem all outstanding PPUs on December 23, 2006. Warrants to purchase additional PPUs, based upon terms of the agreement, shall be issuable upon the 270th day following the purchase date and quarterly thereafter, if any PPUs shall then be outstanding. 5. RELATED PARTY TRANSACTIONS Substantially all administrative functions are performed by MW Sign Co., the general partner. The partnership pays management fees approximating 4% of gross revenue, refinancing fees of 4% of all debt refinanced and acquisition fees of 4% of the purchase price of acquired companies. Total fees paid to MW Sign Co. for the seven month period ended July 31, 1998 were approximately $1,340 and are included in other operating expenses. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Martin Media: We have audited the accompanying balance sheets of Martin Media, (a California limited partnership) as of December 31, 1997 and 1996 and the related statements of operations, partners' capital (deficit), and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Martin Media, as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /S/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Bakersfield, California February 13, 1998 MARTIN MEDIA BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ASSETS
1997 1996 ------------ ----------- Current Assets Cash and equivalents.........................................$ 23,254 $ 2,661,610 Trade accounts receivable, net of allowance for doubtful accounts of $142,515 and $100,000 as of December 31, 1997 and 1996, respectively............................... 5,658,379 4,726,301 Current maturities of long-term notes receivable, limited partners.................................................. 136,030 132,956 Other receivables............................................ 113,514 100,892 Inventories, raw materials................................... 520,725 209,323 Prepaid expenses............................................. 1,566,582 1,085,324 ---------- ---------- Total current assets................................. 8,018,484 8,916,406 ---------- ---------- Long-Term Notes Receivable, limited partners, less current maturities........................................... 281,279 317,309 Property and Equipment, net of accumulated depreciation........ 74,863,597 52,367,653 Intangible Assets, net of accumulated amortization............. 58,446,919 15,872,530 Deposit on purchase option..................................... 463,800 -- ------------ ----------- $142,074,079 $77,473,898 ============ ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current Liabilities Current maturities of long-term debt....................... $ 3,690,436 $ 5,339,365 Current maturities of capital lease obligations............ 214,380 135,586 Accounts payable........................................... 627,590 928,712 Accrued expenses........................................... 8,112,132 1,569,048 Unearned income............................................ 219,022 112,961 ------------ ----------- Total current liabilities.......................... 12,863,560 8,085,672 ------------ ----------- Long-Term Liabilities Long-term debt, less current maturities.................... 109,232,810 66,752,424 Capital lease obligations, less current maturities... 447,865 662,245 ------------ ----------- Total long-term liabilities........................ 109,680,675 67,414,669 ------------ ----------- Commitments (Note 10) Mandatorily Redeemable Preferred partnership units................................ 25,000,000 -- ------------ ---------- Partners' Capital (Deficit).................................. (5,470,156) 1,973,557 ------------ ---------- $142,074,079 $77,473,898 ============ ===========
The accompanying notes are an integral part of these statements. MARTIN MEDIA STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- ----------- Income................................................ $48,106,851 $42,359,472 $33,732,821 Cost of sales......................................... 6,091,333 5,745,308 4,459,240 ----------- ----------- ----------- Gross profit................................ 42,015,518 36,614,164 29,273,581 Managers' controlled operating expenses............... 21,201,914 20,929,536 16,861,406 ----------- ----------- ----------- Income from managers' operations............ 20,813,604 15,684,628 12,412,175 ----------- ----------- ----------- Other operating expenses: Depreciation and amortization....................... 9,282,574 5,364,835 3,339,377 Management fees..................................... 1,937,326 1,277,431 1,111,350 Refinance and acquisition........................... 9,644,819 3,822,894 -- ----------- ----------- ----------- 20,864,719 10,465,160 4,450,727 ----------- ----------- ----------- Operating income (loss)..................... (51,115) 5,219,468 7,961,448 ----------- ----------- ----------- Nonoperating income (expenses): Interest income..................................... 66,260 96,103 116,154 Interest expense.................................... (8,023,704) (6,022,001) (5,030,100) Miscellaneous income................................ 1,077,184 252,653 283,597 Miscellaneous expense............................... -- (11,437) (92,682) Loss on disposal of assets.......................... (512,338) (458,464) (378,358) ----------- ----------- ----------- (7,392,598) (6,143,146) (5,101,389) ----------- ----------- ----------- Net income (loss)........................... $(7,443,713) $ (923,678) $ 2,860,059 =========== =========== ===========
The accompanying notes are an integral part of these statements. MARTIN MEDIA (A CALIFORNIA LIMITED PARTNERSHIP) STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- ----------- Balance, beginning of year............................ $ 1,973,557 $ 3,184,665 $ 822,406 Issuance of partnership units....................... -- 5,300,000 -- Redemption of partnership units..................... -- (5,260,230) -- Distributions....................................... -- (327,200) (497,800) Net income (loss)................................... (7,443,713) (923,678) 2,860,059 ----------- ----------- ----------- Balance, end of year.................................. $(5,470,156) $ 1,973,557 $ 3,184,665 =========== =========== ===========
The accompanying notes are an integral part of these statements. MARTIN MEDIA STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------------ ------------ ----------- Cash flows from operating activities: Net income (loss)................................. $ (7,443,713) $ (923,678) $ 2,860,059 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................ 9,282,574 5,364,835 3,339,377 Loss on disposal of assets................... 512,338 458,464 378,358 Changes in operating assets and liabilities (exclusive of acquisitions): Increase in accounts receivable........... (932,078) (1,047,834) 223,315 Increase in other receivables............. (12,622) (72,759) 24,091 (Increase) decrease in inventories, raw materials............................... (311,402) 105,466 35,645 Increase in prepaid expenses.............. (481,258) (136,610) 53,372 Decrease in accounts payable.............. (301,122) (7,055) (195,463) Increase in accrued expenses.............. 6,543,084 793,490 24,624 Increase in unearned income............... 106,061 84,915 (14,020) ------------ ------------ ----------- Net cash provided by operating activities.............................. 6,961,862 4,619,234 6,729,358 ------------ ------------ ----------- Cash flows from investing activities: Principal payments on notes receivable............ 32,956 374,740 20,692 Issuance of notes receivable...................... -- (400,000) -- Proceeds from sale of property and equipment...... 49,460 63,801 79,236 Cash paid for acquisitions........................ (67,164,295) (17,200,000) (1,575,000) Capital expenditures.............................. (7,750,411) (7,114,708) (1,762,978) Proceeds from sale of investment.................. -- -- 970,482 Purchase option deposit........................... (463,800) -- -- ------------ ------------ ----------- Net cash used in investing activities..... (75,296,090) (24,276,167) (2,267,568) ------------ ------------ ----------- Cash flows from financing activities: Net (payments)borrowings on line-of-credit........ -- (1,395,052) 601,324 Proceeds from issuance of long-term debt.......... 41,014,131 75,915,869 1,006,400 Principal payments on long-term debt.............. (318,259) (57,059,619) (3,522,394) Distributions to partners......................... -- (327,200) (497,800) Redemption of partnership units................... -- (5,260,230) -- Issuance of mandatorily redeemable preferred partnership units.............................. 25,000,000 -- -- Issuance of partnership units..................... -- 5,000,000 -- ------------ ------------ ----------- Net cash provided by (used in) financing activities.............................. 65,695,872 16,873,768 (2,412,470) ------------ ------------ ----------- Net increase (decrease) in cash and cash equivalents....................................... (2,638,356) (2,783,165) 2,049,320 Cash and cash equivalents at beginning of year...... 2,661,610 5,444,775 3,395,455 ------------ ------------ ----------- Cash and cash equivalents at end of year............ $ 23,254 $ 2,661,610 $ 5,444,775 ============ ============ =========== Supplemental disclosures of cash flow information: Interest paid................................ $ 8,085,486 $ 6,357,207 $ 5,036,375 ============ ============ =========== Income taxes paid............................ $ -- $ 7,349 $ 800 ============ ============ ===========
MARTIN MEDIA STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Supplemental disclosures of noncash investing and financing activities: During the year ended December 31, 1997 long-term debt in the amount of $84,845,560 was refinanced. During the year ended December 31, 1996 long-term debt in the amount of $1,684,215 was incurred to purchase fixed assets and intangible assets. During the year ended December 31, 1996 notes receivables to shareholders in the amount of $300,000 were issued for partnership units. During the year ended December 31, 1995 long-term debt in the amount of $318,900 was incurred to purchase sign structures. The accompanying notes are an integral part of these statements. MARTIN MEDIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business Martin Media, a California limited partnership (the Company), was formed in December, 1984 and operated under the name of Colorado River Markets until August, 1991. The Company has operating divisions located in Pennsylvania, Ohio, Connecticut, Washington, D.C., Arizona and Nevada. The Company owns and leases billboards on a contractual basis nationwide for the purpose of providing outdoor advertising services. The Company extends credit in the form of accounts receivable on a short-term basis to businesses and advertisers doing business in the above noted areas. Significant accounting policies Basis of accounting The financial statements are prepared on an accrual basis, which recognizes income when earned and expenses when incurred. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash and cash equivalents The Company considers cash and cash equivalents to be all highly liquid investments purchased with a maturity of three months or less. Inventories, raw materials Inventories are stated at the lower of cost or market using the first in, first out (FIFO) cost method. Property and equipment Property and equipment are stated at cost and depreciated over estimated useful lives primarily using the straight-line method. Repairs and maintenance and small equipment purchases are expensed as incurred. Expenditures which significantly increase asset values or extend useful lives are capitalized. Estimated useful lives are as follows: YEARS ----- Buildings and improvements.................................. 15-31 Posters..................................................... 25 Bulletins................................................... 25 Shop equipment.............................................. 3-10 Office furniture and equipment.............................. 5-10 Auto and trucks............................................. 5-7 Income taxes Under provision of the Internal Revenue Code and the respective state Taxation Codes, partnerships are not subject to income taxes; any income or loss realized is taxed to the individual partners. Certain states do impose a minimum tax (franchise fee). Intangible assets Covenants not to compete are recorded at cost and are amortized using the straight-line method over the contractual period specified. Organization costs, advertising rights, permits and licenses, acquisition fees, lease rights and goodwill are recorded at cost and are amortized using the straight-line method over five years. Loan fees are amortized over the life of the loan to which they are associated. Profit sharing plan The Company adopted a profit sharing plan which is a qualified pension trust under Section 401(k) of the Internal Revenue Code. All full-time employees with twelve months of service who are 18 years old or older are eligible to participate. Each employee may voluntarily contribute up to the lesser of 15% of their pay or $9,500. The Company has made no contributions to the plan. Fair value of financial instruments The carrying amount of the long-term debt approximates fair value. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 2. LONG-TERM NOTES RECEIVABLE, LIMITED PARTNERS Notes receivable, limited partners at December 31, 1997 and 1996 consisted of the following:
1997 1996 -------- -------- Barry Heffner, Manager of Pittsburgh Division, prime plus 2%, collateralized by subscription of one unit of Martin Media, payable $717 per month including interest, due September 27, 2001........................................ $ 18,758 $ 25,036 Mary Ellen Coleman, Manager of Scranton Division, prime plus 2%, collateralized by subscription of one unit of Martin Media, payable $717 per month including interest, due September 27, 2001........................................ 18,975 25,229 Brent Baer, Manager of Washington D.C. Division, 8%, collateralized by 1/4 of one partnership unit, payable $838 per month including interest, due December 28, 2001...................................................... 69,894 75,000 Thomas Jones, Manager of Las Vegas Division, 8%, collateralized by 1/4 of one partnership unit, payable $838 per month including interest, due December 28, 2001...................................................... 69,894 75,000 David Lamberger, National Sales Manager, 8%, collateralized by 1/4 of one partnership unit, payable $838 per month including interest, due December 28, 2001................. 69,894 75,000 Lynn Terlaga, Manager of Hartford Division, 8%, collateralized by 1/4 of one partnership unit, payable $838 per month including interest, due December 28, 2001...................................................... $ 69,894 $ 75,000 David Weyrich, 10%, unsecured, payable $833 per month interest only, due November 27, 1997, paid in full subsequent to December 31, 1997........................... 100,000 100,000 -------- -------- 417,309 450,265 Less current maturities..................................... 136,030 132,956 -------- -------- $281,279 $317,309 ======== =========
Prime rate was 8.5% and 8.25% at December 31, 1997 and 1996, respectively. 3. ACQUISITIONS During 1997, the Company purchased substantially all the assets and assumed certain liabilities of three outdoor advertising companies; during 1996, the Company purchased substantially all of the assets and assumed certain liabilities of one outdoor advertising company and exchanged partnership interests and other consideration for substantially all of the assets, and assumed certain liabilities, for another outdoor advertising company (the "Exchange"). Funds used to make the acquisitions and facilitate the Exchange were provided through the Company's credit facility. The majority of the intangible assets acquired through the acquisitions and Exchange are being amortized over a five year period. See Note 10 for acquisitions included above which were acquired from a related party. Acquisitions during 1995 were not significant. The acquisitions were accounted for using the purchase method of accounting and the purchase price was allocated to the various tangible and intangible assets acquired. For the Exchange, the Company recorded the assets acquired and liabilities assumed based on the fair value of the partnership interests granted. Accordingly, the results of operations for the acquisitions, and the Exchange, have been included in the results of the Company from the respective effective dates. A summary of the cash consideration and allocation of the purchase price as of the acquisition dates are as follows:
1997 1996 ----------- ----------- Fair value of tangible assets acquired..................... $20,293,392 $ 8,420,000 Fair value of intangible assets acquired................... 46,870,903 11,870,455 Liabilities assumed........................................ -- (2,790,455) Book value of partnership interests granted................ -- (300,000) ----------- ----------- Cash paid.................................................. $67,164,295 $17,200,000 =========== ===========
Of the cash paid in 1996, approximately $5 million was utilized to redeem existing partnership units in connection with the Exchange. 4. PREPAID EXPENSES Prepaid expenses at December 31, 1997 and 1996 consisted of the following:
1997 1996 ---------- ---------- Leases...................................................... $1,279,243 $ 903,154 Insurance................................................... 41,541 32,545 Other....................................................... 196,064 124,726 Deposits.................................................... 49,734 24,899 ---------- ---------- $1,566,582 $1,085,324 ========== ==========
5. PROPERTY AND EQUIPMENT Major classes of property and equipment and accumulated depreciation at December 31, 1997 and 1996 are as follows:
1997 1996 ----------- ----------- Land....................................................... $10,578,202 $ 936,954 Buildings and improvements................................. 5,349,404 218,947 Posters.................................................... 26,855,790 25,114,090 Bulletins.................................................. 44,189,355 36,314,244 Shop equipment............................................. 722,278 519,319 Office furniture and equipment............................. 649,696 449,391 Autos and trucks........................................... 1,951,625 1,662,820 Construction in process.................................... 402,892 215,744 ----------- ----------- 90,699,242 65,431,509 Less accumulated depreciation.............................. 15,835,645 13,063,856 ----------- ----------- $74,863,597 $52,367,653 =========== ===========
See Note 7 for collateralization of property and equipment. Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was $2,943,826, $2,624,212 and $2,392,186. During the years ended December 31, 1997, 1996 and 1995, the Company took down a number of boards located in the Pittsburgh, Scranton, Hartford, Las Vegas and Cincinnati divisions. These disposals were initiated by management due to high operating costs and/or high site lease costs, which resulted in marginal operating results. Losses on board disposals amounted to $515,056, $440,746 and $418,957 in the years ended December 31, 1997, 1996 and 1995. 6. INTANGIBLE ASSETS Intangible assets and accumulated amortization at December 31, 1997 and 1996 are as follows:
1997 1996 ----------- ----------- Organization costs......................................... $ 1,238,376 $ 1,238,376 Covenants not to compete................................... 2,452,096 2,452,096 Advertising rights......................................... 2,925,800 1,291,338 Permits and licenses....................................... 10,705,122 2,547,274 Lease rights............................................... 14,307,733 11,970,722 Goodwill................................................... 33,979,535 220,453 Acquisition fees........................................... 3,718,759 1,053,423 Loan fees.................................................. 359,398 1,577,500 ----------- ----------- 69,686,819 22,351,182 Less accumulated amortization.............................. 11,239,900 6,478,652 ----------- ----------- $58,446,919 $15,872,530 =========== ===========
See Note 7 for collateralization of intangible assets. Amortization expense for the years ended December 31, 1997, 1996 and 1995 was $6,338,748, $2,740,623 and $947,191. 7. LONG-TERM DEBT Long-term debt at December 31, 1997 and 1996 consisted of the following:
1997 1996 ------------ ----------- Canadian Imperial Bank of Commerce, as administrative agent for lenders, under the Credit Agreement dated July 31, 1997, Term A loan, interest at LIBOR plus 2%, collateralized by accounts receivable, inventory, sign structures, and intangible assets, payable quarterly, due June 2004**......................................... $ 60,000,000 $ -- Canadian Imperial Bank of Commerce, as administrative agent for lenders, under the Credit Agreement dated July 31, 1997, Term B loan, interest at LIBOR plus 2.25%, collateralized by accounts receivable, inventory, sign structures, and intangible assets, payable quarterly, due December 2005**..................................... 35,000,000 -- Canadian Imperial Bank of Commerce, as administrative agent for lenders, under the Credit Agreement dated July 31, 1997, Revolving Line of Credit, interest ranging from prime plus 2% LIBOR plus 2.75%, collateralized by accounts receivable, inventory, sign structures, and intangible assets, payable quarterly, due June 2004**... 17,300,000 -- Jackson Poster Advertising, 8%, collateralized by sign structures, payable $912 per month including interest, due December 2000....................................... 29,124 37,381 Dominion Signs, 8%, collateralized by sign structures and personally guaranteed by E. Thomas Martin, payable $68,475 plus interest annually, due August 1999......... 136,950 205,425 Elaine Perlroth, 7%, collateralized by mortgage, payable $989 monthly including interest, due November 2008...... 90,381 95,715 Ronco Media, non-interest bearing, uncollateralized, payable $3,000 monthly, due April 2001.................. 120,000 156,000 Ronald Rieger, non-interest bearing, uncollateralized, payable $167 monthly, due July 2001..................... 6,667 8,667 Rose Marie Rieger, non-interest bearing, uncollateralized, payable $167 monthly, due April 2001.................... 6,667 8,667 Daniel H. Bradley, non-interest bearing, uncollateralized, payable $1,667 monthly, due April 2001.................. 66,667 86,667 Pamela Lynn Rieger, non-interest bearing, uncollateralized, payable $1,667 monthly, due April 2001.................................................... 66,667 86,667 Kory William Rieger, non-interest bearing, uncollateralized, payable $1,667 monthly, due April 2001.................................................... 66,667 86,667 Rembrandt Outdoor Services, non-interest bearing, uncollateralized, payable $608 monthly, due July 2001... 33,456 34,065 Canadian Imperial Bank of Commerce, as administrative agent for Lenders under the Credit Agreement dated July 15, 1996, Term A Loan, interest at LIBOR plus 2.5%, collateralized by accounts receivable, inventory, sign structures, and intangible assets, payable quarterly, due March 2003**........................................ -- 40,000,000 Canadian Imperial Bank of Commerce, as administrative agent for Lenders under the Credit Agreement dated July 15, 1996, Term B Loan, interest at LIBOR plus 3%, collateralized by accounts receivable, inventory, sign structures, and intangible assets, payable quarterly, due December 2004**..................................... -- 15,000,000 Canadian Imperial Bank of Commerce, as administrative agent for Lenders under the Credit Agreement dated July 15, 1996, Revolving Line of Credit, interest ranging from prime plus 1.25% to LIBOR plus 2.50%, collateralized by accounts receivable, inventory, sign structures, and intangible assets, payable annually, due March 2003**............................................ -- 16,285,868 ------------ ----------- 112,923,246 72,091,789 Less current maturities................................... 3,690,436 5,339,365 ------------ ----------- $109,232,810 $66,752,424 ============ ===========
Aggregate maturities of long-term debt at December 31, 1997 were as follows:
YEAR ENDING DECEMBER 31, - ------------ 1998........................................................ $ 3,690,436 1999........................................................ 7,691,592 2000........................................................ 13,124,365 2001........................................................ 14,545,258 2002........................................................ 15,007,561 Thereafter.................................................. 58,864,034 ------------ $112,923,246 ============
** Loan has varying interest rates based on Company performance and indexes found in Credit Agreement dated July 31, 1997. At December 31, 1997 effective interest rates ranged from 7.1875% to 8.5%. The Company has entered into interest rate caps primarily to protect against rising interest exposure of its floating rate long-term debt. The difference to be paid or received on the cap is included in interest expense as payments are made or received. At December 31, 1997, the Company had outstanding interest rate cap agreements with two commercial bank, having a total notional principal amount of $135,000,000. This agreement effectively changes the Company's interest exposure on up to $135,000,000 of floating rate debt to a fixed 6.5% with a floor of 5.5%. The interest rate cap agreements mature September 1998 ($35,000,000) and September 2000 ($100,000,000). During 1997, the Company sold an interest rate floor for a gain of $440,000. This gain is included in other income. The counterparties to the Company's derivative financial instrument contract are substantial and creditworthy commercial banks which are recognized market makers. Neither the risks of counterparty nonperformance nor the economic consequence of counterparty nonperformance associated with these contracts were considered by the Company to be material. Interest expense consists of interest on notes payable and the cost associated with the purchased of the interest rate cap instrument. Prime rate was 8.5% and 8.25% at December 31, 1997 and 1996, respectively. LIBOR rate was 5.9% and 6.5% at December 31, 1997 and 1996, respectively. 8. LONG-TERM CAPITAL LEASE OBLIGATIONS The Company leases certain sign structures with lease terms through July 2000. Obligations under capital leases have been recorded in the accompanying financial statements at the discounted present value of future minimum lease payments. The cost and accumulated amortization for such equipment as of December 31, 1997 was $1,029,200 and $58,321, respectively. Amortization included in depreciation expense for the year ended December 31, 1997 was $41,168. Interest paid on these leases was $130,118 for the year ended December 31, 1997. The future minimum lease payments under these capital leases and the net present value of the future minimum lease payments are as follows:
YEAR ENDING DECEMBER 31: - ------------ 1998........................................................ $316,628 1999........................................................ 399,627 2000........................................................ 113,280 -------- Total future minimum lease payments......................... 829,535 Less amount representing interest........................... 167,290 -------- Present value of future minimum lease payment............... 662,245 Less current portion........................................ 214,380 -------- Long-term portion........................................... $447,865 ========
9. RELATED PARTY TRANSACTIONS Transactions occurring between the Company and a related party, which are not presented elsewhere in these financial statements, are as follows: Martin and MacFarlane, Inc., a California Corporation (M&M, Inc.), which has stockholders who are also partners in the Company, performed substantially all administrative functions for the partnership during the year ended December 31, 1995 and January 1996. Beginning February 1, 1996, administrative functions were performed by MW Sign Co., the general partner. The partnership pays management fees approximating 3% of gross revenue, refinancing fees of 4% of all debt refinanced and acquisition fees of 4% of the purchased price of acquired companies. On January 1, 1997, management fees increased to 4% of gross revenue. Total fees paid to M&M, Inc. for the years ended December 31, 1997 and 1996 amounted to $-0- and $78,263, respectively. Total fees paid/accrued to MW Sign Co. for the years ended December 31, 1997 and 1996 amounted to $11,231,815 and $5,050,039. Total fees paid to M&M, Inc. and MW Sign Co. for the year ended December 31, 1995 amounted to $1,111,350. 10. COMMITMENTS Leases The Company leases land, buildings, and equipment in connection with its outdoor advertising business under operating leases. The leasing of land relates to the posters and bulletins. The Company also leases property, equipment and buildings to house and support division administrative and field offices. Future minimum lease payments under cancelable and noncancelable leases at December 31, 1997 are as follows:
YEAR ENDING POSTERS, DECEMBER 31, BULLETINS BUILDINGS TOTAL - ------------ ---------- ---------- ---------- 1998............................................. $1,199,353 $ 229,539 $1,428,892 1999............................................. 1,219,818 205,164 1,424,982 2000............................................. 1,244,566 193,264 1,437,830 2001............................................. 1,270,536 183,836 1,454,372 2002............................................. 1,295,506 173,628 1,469,134 Thereafter....................................... 1,670,042 289,380 1,959,422 ---------- ---------- ---------- $7,899,821 $1,274,811 $9,174,632 ========== ========== ==========
Certain of the Company's noncancelable lease payments are based on a percentage of revenue generated from the poster or bulletin rather than having a minimum rental. The percentage of rent ranges from 15% to 20% of revenue. An estimate of the future payments under these leases has been included in the above table under posters, bulletins. Historically, rental payments under these leases have approximated $1,180,000 annually. Lease expense for the years ended December 31, 1997, 1996 and 1995 was as follows:
1997 1996 1995 ---------- ---------- ---------- Land for posters and bulletins................... $8,042,746 $6,817,196 $5,226,956 Buildings........................................ 518,306 549,069 406,277 Equipment, other................................. 27,041 28,198 31,881 ---------- ---------- ---------- $8,588,093 $7,394,463 $5,665,114 ========== ========== ==========
Acquisition, purchase and purchase option On July 31, 1997, the Company entered into an agreement with Martin & MacFarlane, Inc. (related party), relative to an agreement Martin & MacFarlane, Inc. had with another company to purchase certain assets, to acquire certain assets including sign structures, equipment, and related intangibles located in the Las Vegas and Colorado River markets for a total purchase price of $14,350,400. This purchase agreement has two segments, the first of which provided for the purchase of assets during the year ending December 31, 1997 for $11,273,400. The second segment of the agreement provides an option to the Company to purchase additional assets for $3,077,000. Upon execution of the option agreement, the Company deposited $463,800 in good faith with Martin & MacFarlane, Inc. The option agreement can only be exercised upon Martin & MacFarlane, Inc. exercising its option to purchase those assets and other assets it has under option with the seller; the option agreement expires October 1, 1998. Preferred partnership units On December 23, 1997, the Company entered into an agreement to sell preferred limited partnership units (PPU's), warrants and warrant units to a select group of purchasers. The Company issued 25,000 PPU's at $1,000 each ($25,000,000), calling for the holders of the PPU's to receive an initial 14% preferred rate of return, which escalates on certain dates to a maximum of 20%. The Company can redeem PPU's for 102% of the PPU's capital account amount until September 23, 1998 and thereafter for 100% of the PPU's capital account amount. The Company is obligated under the agreement to redeem all outstanding PPU's on December 23, 2006. Warrants to purchase additional PPU's, based upon terms of the agreement, shall be issuable upon the 270th day following the purchase date (December 23, 1997) and quarterly thereafter, if any PPU's shall then be outstanding. Credit facilities On December 23, 1997, the Company entered into an agreement with Canadian Imperial Bank of Commerce in which their Term B loan maximum borrowing limit was increased to $40,000,000. As of December 31, 1997, the Company had $5,000,000 available under the term of the loan. On July 31, 1997, the Company entered into an agreement with Canadian Imperial Bank of Commerce, as administrative agent for Lenders under the credit agreement dated July 31, 1997. Under the terms of this agreement, Swing Loan is available in the amount of $5,000,000. As of December 31, 1997, the Company's outstanding obligation was $-0-. 11. SUBSEQUENT EVENTS Subsequent to December 31, 1997, the Company acquired substantially all of the assets and assumed certain liabilities of three outdoor advertising companies at an aggregate purchase price of $18,350,000. Funds used to make the purchase were provided through the Company's credit facility. REPORT OF INDEPENDENT ACCOUNTANTS June 9, 1999 To the Board of Directors of Chancellor Media Corporation In our opinion, the accompanying statements of operations, retained earnings and cash flows present fairly, in all material respects, the operations and cash flows of Martin & MacFarlane, Inc. (the "Company") for the seven months ended July 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards that require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /S/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP MARTIN & MACFARLANE, INC. STATEMENT OF OPERATIONS SEVEN MONTHS ENDED JULY 31, 1998 (DOLLARS IN THOUSANDS)
Revenue $ 17,946 Cost of revenue 1,370 ---------- Gross profit 16,576 Managers' controlled operating expenses 10,526 ---------- Income from managers' operations 6,050 Other operating expenses: Depreciation and amortization 3,471 Refinance and acquisition expenses 1,570 Other expenses 2,623 ---------- Operating loss (1,614) Other income (expense): Interest expense (2,244) Gain on disposal of assets 465 Other income 537 ---------- Loss before income taxes (2,856) Income tax expense 10 ---------- Net loss $ (2,866) ==========
See accompanying notes to financial statements. MARTIN & MACFARLANE, INC. STATEMENT OF RETAINED EARNINGS SEVEN MONTHS ENDED JULY 31, 1998 (DOLLARS IN THOUSANDS)
Balance at December 31, 1997 $ 7,949 Dividends (743) Net loss (2,866) --------- Balance at July 31, 1998 $ 4,340 =========
See accompanying notes to financial statements. MARTIN & MACFARLANE, INC. STATEMENT OF CASH FLOWS SEVEN MONTHS ENDED JULY 31, 1998 (DOLLARS IN THOUSANDS)
Cash flows from operating activities: Net Loss $ (2,866) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 3,471 Provision for doubtful accounts 593 Changes in operating assets and liabilities (exclusive of acquisitions): Accounts receivable (1,061) Other current assets 1,075 Other assets 31 Accounts payable and accrued expenses 502 Other liabilities 91 ----------- Net cash provided by operating activities 1,836 Cash flows from investing activities: Acquisitions, net of cash acquired (12,500) Capital expenditures (1,881) ----------- Net cash used in investing activities (14,381) Cash flows from financing activities: Dividends paid (743) Payments on long-term debt (35,680) Deposit received from Chancellor Media Corporation 50,000 ----------- Net cash provided by financing activities 13,577 Net increase in cash 1,032 Cash and cash equivalents at beginning of period 16 ----------- Cash and cash equivalents at end of period $ 1,048 =========== Supplemental disclosures of cash flow information: Interest paid $ 1,913 =========== Income taxes paid $ 4 ===========
See accompanying notes to financial statements. MARTIN & MACFARLANE, INC. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. NATURE OF BUSINESS Martin & MacFarlane, Inc. (the "Company") was incorporated on December 2, 1971 and owns, leases, and manages billboards on a contractual basis nationwide for the purpose of providing outdoor advertising services. The Company also owns and operates a small winery located in Paso Robles, California. The Company extends short-term credit in the form of accounts receivable to businesses and advertisers doing business in the above noted areas. On July 31, 1998, Martin & MacFarlane, Inc. and related companies were acquired by Chancellor Media Corporation for a total purchase price of $615,117, which consisted of $612,848 in cash and included various direct acquisition costs and the assumption of notes payable of $2,270. The accompanying financial statements do not reflect any adjustments related to this transaction. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to be all highly liquid investments purchased with a maturity of three months or less. INVENTORIES Inventories are stated at the lower of cost or market using the first in, first out (FIFO) cost method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated over estimated useful lives primarily using the straight-line method. Depreciation expense for the seven months ended July 31, 1998 was $927. Repairs and maintenance are expensed as incurred. Expenditures which significantly increase asset values are capitalized. Estimated useful lives are as follows:
YEARS ----------- Building and improvements 15-31 Posters 7-25 Bulletins 7-25 Shop equipment 3-10 Office furniture and equipment 5-10 Auto and trucks 5-7
CONTRACTS AND REVENUE RECOGNITION Outdoor advertising signs are contracted to customers under individual advertising contracts that primarily run from one month to five years. Revenue is recognized ratably over the life of the contract. Costs associated with the outdoor advertising operations, including contract costs and land rental, are expensed over the related contract term. INCOME TAXES Effective July 1, 1995, the Company's shareholders elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under such election, the shareholders of an "S" Corporation are taxed individually on their proportionate share of the Company's taxable income. Therefore, no provision or liability for federal income tax has been included in these financial statements. State income taxes are provided based on statutory rates. State income taxes currently payable and deferred relate primarily to temporary differences from the use of accelerated methods of depreciation and the direct write-off method of accounting for bad debts. INTANGIBLE ASSETS Covenants not to compete are recorded at cost and are amortized using the straight-line method over the contractual period specified. Advertising rights, permits and licenses, acquisition fees, lease rights and goodwill are recorded at cost and are amortized using the straight-line method over five years. Loan fees are amortized over the life of the loan to which they are associated. PROFIT-SHARING PLAN The Company has adopted profit-sharing plans which are qualified under Section 401(k) of the Internal Revenue Code. All full-time employees with twelve months of service who are 19 years old or older are eligible to participate. Each employee may voluntarily contribute up to the lesser of 15% of their pay or $10. The Company has made no contributions to the plan. 3. DEFERRED INCOME TAXES For state tax purposes, the applicable states do recognize "S" corporation status; however, they still impose a tax at the corporate level, generally at a rate significantly lower than the regular corporate rate. Deferred tax assets and liabilities relate to temporary differences associated with state income taxes. Income tax expense for the seven months ended July 31, 1998 consisted of $10 of current state income taxes. 4. SIGNIFICANT ACQUISITION On January 2, 1998, the Company acquired Newman Outdoor of Texas, Inc., an outdoor advertising company with over 1,200 billboards and outdoor displays in three markets, for approximately $12,500 in cash plus various other direct acquisition costs. The acquisition was accounted for under the purchase method of accounting and, accordingly, the accompanying statement of operations includes the results of the acquired operations from the date of acquisition. 5. COMMITMENTS The Company leases land in connection with its outdoor advertising posters and panels as well as for office and yard spaces. These are long-term operating leases which the Company and lessor have the option to terminate with thirty days notice. Certain leases are subject to renewal options. The Company also leases office and shop buildings which are located at various divisions. A portion of these are long-term leases. Future annual minimum lease payments at July 31, 1998 are as follows:
YEARS ENDING DECEMBER 31, - ------------- 1999 $ 6,147 2000 6,850 2001 7,114 2002 7,358 2003 7,603 Thereafter $ 339,712 ---------- $ 374,784 ==========
Certain of the Company's noncancelable lease payments are based on a percentage of revenue generated from the poster or bulletin rather than having a minimum rental. The percentage of rent ranges from 15% to 20% of revenue. Lease expense for the seven months July 31, 1998 was $2,782. ACQUISITION, PURCHASE AND PURCHASE OPTION On July 31, 1997, the Company entered into an agreement with another company to acquire certain assets, including sign structures, equipment, and related intangibles located in Nevada, Arizona, and California for a total purchase price of $60,000. This purchase agreement has two segments, the first of which provided for the purchase of assets totaling $20,500. Simultaneously, and as part of the master agreement, the Company entered into an agreement with Martin Media (related party) to sell them those assets located in their geographical area, primarily the Las Vegas and Colorado River markets, for $11,273. The Company's net acquisition price under the first segment of the agreement was $9,227. The second segment of the agreement provides an option for the Company to purchase additional assets for $39,500. As part of this transaction, the Company has also provided Martin Media with an option to purchase the assets located in the Las Vegas and Colorado River markets for $3,077. The Company's net acquisition price for assets to be received under the second segment of the agreement was $36,423. Upon execution of the option agreement, the Company deposited $6,000 in good faith with the seller. Similarly, Martin Media deposited $464 with the Company resulting in a net deposit of $5,536. The option agreement expired on October 1, 1998. The Company contracts with M.W. Sign Company, a company wholly-owned by related shareholders, to provide the Company with management services at 4% of gross revenue. Management fees of $1,841 were paid to M.W. Sign Company during the seven months ended July 31, 1998 and are included in other operating expenses. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors Martin & MacFarlane, Inc.: We have audited the accompanying balance sheets of Martin & MacFarlane, Inc., (a California corporation), as of December 31, 1997 and 1996, and the related statements of income, retained earnings and cash flows for each of the two years in the period ended December 31, 1997 and six months in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Martin & MacFarlane, Inc. as of December 31, 1997 and 1996 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1997 and six months in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /S/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Bakersfield, California February 13, 1998 MARTIN & MACFARLANE, INC. BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ASSETS
1997 1996 ----------- ----------- Current Assets Cash and equivalents............................................... 138,294 $ 10,519 Trade accounts receivable, less allowance for doubtful accounts of $96,051 and $100,000 at December 31, 1997 and 1997.. 2,973,646 1,836,944 Current maturity of note receivable.............................. 6,856 6,206 Other receivables................................................ 78,723 331,419 Inventories...................................................... 1,764,872 1,104,190 Prepaid expenses................................................. 928,416 565,971 Current deferred income taxes.................................... 1,441 1,500 ----------- ----------- 5,892,248 3,856,749 ----------- ----------- Note Receivable.................................................... 24,381 31,083 Property and Equipment, net of accumulated depreciation............ 23,527,457 20,187,460 Intangible Assets, net of accumulated amortization................. 11,053,092 3,007,566 Other Assets Deposits......................................................... 24,197 22,047 Deposit on Purchase Option....................................... 5,536,200 -- ----------- ----------- 5,560,397 22,047 ----------- ----------- $46,057,575 $27,104,905 =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities Bank overdraft.................................................. $ 166,083 $ 523,360 Current maturities of long-term debt............................ 690,718 7,460,727 Note payable, bank.............................................. -- 800,000 Accounts payable................................................ 543,648 465,372 Accrued expenses................................................ 391,069 444,798 Distributions payable........................................... 61,832 61,658 Unearned income................................................. 506,348 84,530 Income taxes payable............................................ 6,408 33,205 ----------- ----------- 2,366,106 9,873,650 ----------- ----------- Long-Term Debt, less current maturities........................... 36,041,494 6,835,699 ----------- ----------- Deferred Income Taxes............................................. 102,375 111,008 ----------- ----------- Commitments (Note 13) Stockholders' Equity Common stock, no par or stated value, authorized 150,000 shares, issued and outstanding 82,443 shares, stated at 1,113,070 1,113,070 Retained earnings.............................................. 6,434,530 9,171,478 ----------- ----------- 7,547,600 10,284,548 ----------- ----------- $46,057,575 $27,104,905 =========== ===========
The accompanying notes are an integral part of these balance sheets. MARTIN & MACFARLANE, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SIX MONTH PERIOD ENDED DECEMBER 31, 1995
1997 1996 1995 ----------- ----------- ---------- Revenues............................................... $22,535,117 $16,994,368 $8,311,295 Cost of sales.......................................... 2,476,991 2,155,013 1,065,709 ----------- ----------- ---------- Gross profit................................. 20,058,126 14,839,355 7,245,586 Managers' controlled operating expenses................ 11,318,791 9,534,848 4,982,152 ----------- ----------- ---------- Income from managers' operations............. 8,739,335 5,304,507 2,263,434 ----------- ----------- ---------- Other operating expenses Depreciation and amortization expense................ 2,902,472 1,316,520 575,291 Management fees...................................... 2,210,351 472,931 -- Refinance and acquisitions........................... 884,083 85,175 -- ----------- ----------- ---------- 5,996,906 1,874,626 575,291 ----------- ----------- ---------- Operating income............................. 2,742,429 3,429,881 1,688,143 ----------- ----------- ---------- Other income (expense) Interest income...................................... 15,302 9,773 -- Interest expense..................................... (2,537,908) (1,115,772) (552,412) Other income......................................... 414,138 117,025 125,286 Loss on disposition of assets........................ (207,372) (136,875) (1,744) ----------- ----------- ---------- (2,315,840) (1,125,849) (428,870) ----------- ----------- ---------- Income before income taxes............................. 426,589 2,304,032 1,259,273 Income tax (expense) benefit........................... (23,458) (57,653) 2,972,317 ----------- ----------- ---------- Net income................................... $ 403,131 $ 2,246,379 $4,231,590 =========== =========== ==========
The accompanying notes are an integral part of these statements. MARTIN & MACFARLANE, INC. STATEMENT OF RETAINED EARNINGS YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SIX MONTH PERIOD ENDED DECEMBER 31, 1995
1997 1996 1995 ----------- ----------- ---------- Balance, beginning of period........................... $ 9,171,478 $ 8,526,046 $4,418,120 Net income........................................... 403,131 2,246,379 4,231,590 Dividends............................................ (3,140,079) (1,600,947) (123,664) ----------- ----------- ---------- Balance, end of period................................. $ 6,434,530 $ 9,171,478 $8,526,046 =========== =========== ==========
The accompanying notes are an integral part of these statements. MARTIN & MACFARLANE, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SIX MONTH PERIOD ENDED DECEMBER 31, 1995
1997 1996 1995 ------------ ----------- ----------- Cash flows from operating activities: Net income......................................... $ 403,131 $ 2,246,379 $ 4,231,590 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................... 2,902,472 1,316,520 575,291 Loss on disposition of assets................... 207,372 136,875 1,744 Changes in operating assets and liabilities (exclusive of acquisitions): Increase in accounts receivable................. (1,136,702) (410,142) 119,579 (Increase) decrease in other receivables........ 252,697 (312,755) 59,985 Increase in inventory........................... (660,682) (220,401) (115,754) Increase in prepaid expenses.................... (362,445) (135,739) 200,316 Decrease in deferred income tax asset........... 59 -- -- (Increase) decrease in other assets -- deposits............................ (2,150) (5,000) 3,124 Increase (decrease) in bank overdraft........... (357,277) 523,360 -- Increase (decrease) in accounts payable......... 78,276 (60,260) (126,935) Increase (decrease) in accrued expenses......... (53,555) 169,057 (8,073) Increase (decrease) in unearned income.......... 421,818 1,185 (73,536) Increase (decrease) in income taxes payable..... (26,797) 9,835 (868,116) Increase (decrease) in deferred income taxes.... (8,633) 7,826 (2,961,731) ------------ ----------- ----------- Net cash provided by operating activities............................... 1,657,584 3,266,740 1,037,484 ------------ ----------- ----------- Cash flows from investing activities: Increase in purchase option deposit................ (5,536,200) -- -- Proceeds from certificates of deposit.............. -- -- 200,000 Proceeds from sale of investments.................. -- 11,859 -- Proceeds from sale of property and equipment....... 107,400 217,320 14,082 Cash paid for acquisitions......................... (10,723,930) (5,849,000) (240,000) Capital expenditures............................... (2,646,168) (748,741) (201,925) Issuance of notes receivable....................... -- (38,901) (50,000) Principal payments on notes receivable............. 6,052 1,612 -- Principal payments on notes receivable, shareholder..................................... -- 50,000 -- ------------ ----------- ----------- Net cash used in investing activities...... (18,792,846) (6,355,851) (277,843) ------------ ----------- ----------- Cash flows from financing activities: Proceeds from notes payable........................ 21,459,216 5,500,000 809,400 Net (payments) borrowings on line of credit........ (950,000) 800,000 (50,000) Principal payments on notes payable................ (106,100) (1,975,159) (1,677,500) Distributions to shareholders...................... (3,140,079) (1,600,947) (123,664) ------------ ----------- ----------- Net cash provided by (used in) financing activities............................... 17,263,037 2,723,894 (1,041,764) ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents........................................ 127,775 (365,217) (282,123) Cash and cash equivalents at beginning of year....... 10,519 375,736 657,859 ------------ ----------- ----------- Cash and cash equivalents at end of year............. $ 138,294 $ 10,519 $ 375,736 ============ =========== =========== Supplemental disclosures of cash flow information: Interest paid...................................... $ 2,634,036 $ 1,093,501 $ 563,494 ============ =========== =========== Payment of income taxes............................ $ 50,255 $ 47,818 $ 857,530 ============ =========== ===========
Supplemental disclosures of non cash financing activities: During the year ended December 31, 1997 long term debt in the amount of $18,245,035 was refinanced. During the year ended December 31, 1996, long-term debt in the amount of $783,285 was incurred to purchase property and equipment and intangible assets. The accompanying notes are an integral part of these statements. MARTIN & MACFARLANE, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business Martin & MacFarlane, Inc. (the Company) was incorporated December 2, 1971. The Company owns, leases, and manages billboards on a contractual basis nationwide for the purpose of providing outdoor advertising services. The Company also owns and operates a small winery located in Paso Robles, California. The Company extends short-term credit in the form of accounts receivable to businesses and advertisers doing business in the above noted areas. Significant accounting policies BASIS OF ACCOUNTING The financial statements are prepared on an accrual basis, which recognizes income when earned and expenses when incurred. CHANGE IN ACCOUNTING PERIOD Pursuant to the adoption by the Company of S Corporation status for income tax purposes, the Company changed from a fiscal year end to a calendar year end for the period ending December 31, 1995, as required by the Internal Revenue Service, to coincide with shareholders' tax year end. Therefore, the reporting periods for the financial statements cover the years ended December 31, 1997 and 1996 and six month period ended December 31, 1995. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to be all highly liquid investments purchased with a maturity of three months or less. Throughout the year, the Company may have amounts in banks in excess of federally insured limits and as of December 31, 1997, the Company held funds in one financial institution in excess of federally insured limits in the amount of $115,360. INVENTORY Inventory is valued at the lower of cost or market. Valuation is determined using the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated over estimated useful lives on a straight-line or accelerated basis. Repairs and maintenance and small equipment purchases are expensed as incurred. Expenditures which significantly increase asset values or extend useful lives are capitalized. Estimated useful lives in years are as follows:
YEARS ----- Buildings and improvements.................................. 15-31 Posters..................................................... 7-25 Bulletins................................................... 7-25 Shop equipment.............................................. 3-10 Office furniture and equipment.............................. 5-10 Autos and trucks............................................ 3-7 Irrigation equipment........................................ 7-30 Vineyards................................................... 10-25
INTANGIBLE ASSETS Goodwill is amortized using the straight-line method over primarily five year periods. Covenants not to compete are amortized using the straight-line method over the contractual period specified, which ranges from five to ten years. Advertising rights, permits and licenses, and lease rights are amortized using the straight-line method over five years. INCOME TAXES Effective July 1, 1995, the Company's shareholders elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under such election, the shareholders of an "S" Corporation are taxed individually on their proportionate share of the Company's taxable income. Therefore, no provision or liability for federal income tax has been included in these financial statements. State income taxes are provided based on statutory rates. State income taxes currently payable and deferred relate primarily to temporary differences from the use of accelerated methods of depreciation and the direct write-off method of accounting for bad debts. PROFIT SHARING PLAN The Company adopted a profit sharing plan which is a qualified pension trust under Section 401(k) of the Internal Revenue Code. All full time employees with twelve months of service who are 19 year old or older are eligible to participate. Each employee may voluntarily contribute up to the lesser of 15% of their pay or $9,500. The Company has made no matching contributions to the plan. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of the long-term debt approximates fair value. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year presentation. 2. ACQUISITIONS During 1997, the Company purchased substantially all of the assets and assumed certain liabilities of three outdoor advertising companies; during 1996, the Company purchased substantially all of the assets and assumed certain liabilities of four outdoor advertising companies. Concurrently with one of the 1996 acquisitions, the Company exchanged the assets acquired and liabilities assumed for similar assets and liabilities of another outdoor advertising company to enable the Company to expand its existing market share in that locality. The exchange was recorded at the fair market value of the assets acquired. Funds used to make the acquisitions were provided through the Company's credit facility. The majority of the intangible assets acquired are being amortized over a five year period. See Note 13 for acquisitions included above, which also includes a related party. The acquisitions were accounted for using the purchase method of accounting and the purchase price was allocated to the various tangible and intangible assets acquired. Accordingly, the results of operations for the various acquisitions have been included in the results of the Company from the respective effective dates. A summary of the cash consideration and allocation of the purchase price as of the acquisition dates are as follows:
1997 1996 ----------- ---------- Fair value of tangible assets acquired.................. $ 2,756,703 $3,302,000 Fair value of intangible assets acquired................ 9,199,897 2,597,000 Liabilities assumed..................................... (1,232,670) (50,000) ----------- --------- Cash paid............................................... $10,723,930 $5,849,000 =========== ===========
3. NOTE RECEIVABLE
1997 1996 ------- ------- Ferguson Henderson Investments, 10%, secured by real property, payable $806 monthly, due November 10, 2001..... $31,237 $37,289 Less current maturity....................................... 6,856 6,206 ------- ------- $24,381 $31,083 ======= =======
4. INVENTORIES Inventories are as follows at December 31, 1997 and 1996:
1997 1996 ---------- ---------- Raw material................................................ $ 244,328 $ 139,309 Winery: Materials and grape production costs...................... 198,033 138,266 In process................................................ 746,996 494,817 Finished goods............................................ 529,953 299,240 Tasting room, miscellaneous and resale.................... 45,562 32,558 ---------- ---------- $1,764,872 $1,104,190 ========== ==========
5. PREPAID EXPENSES Prepaid expenses consist of the following at December 31, 1997 and 1996:
1997 1996 -------- -------- Leases...................................................... $798,887 $505,539 Insurance................................................... 15,256 13,258 Miscellaneous............................................... 114,273 47,174 -------- -------- $928,416 $565,971 ======== ========
6. PROPERTY AND EQUIPMENT Major classes of property and equipment and accumulated depreciation are as follows at December 31, 1997 and 1996:
1997 1996 ----------- ----------- Outdoor Advertising Buildings and improvements............................... $ 870,719 $ 593,537 Posters.................................................. 8,072,315 7,510,907 Bulletins................................................ 18,486,149 15,656,034 Shop equipment........................................... 458,691 329,493 Office furniture and equipment........................... 224,069 211,215 Autos and trucks......................................... 1,414,986 1,268,485 Land..................................................... 838,807 571,107 Construction in process, boards.......................... 363,913 178,736 ----------- ----------- 30,729,649 26,319,514 Less accumulated depreciation............................ 9,497,838 8,334,374 ----------- ----------- 21,231,811 17,985,140 ----------- ----------- Winery Buildings and improvements............................... $ 864,672 $ 844,850 Irrigation and wells..................................... 45,752 45,752 Vineyards................................................ 316,981 278,219 Landscaping.............................................. 26,194 26,194 Auto..................................................... 23,800 19,500 Vineyard equipment....................................... 129,356 125,502 Winery equipment......................................... 859,375 707,482 Office furniture and equipment........................... 50,349 40,749 Land..................................................... 376,133 376,133 ----------- ----------- 2,692,612 2,464,381 Less accumulated depreciation............................ 992,798 873,402 ----------- ----------- 1,699,814 1,590,979 ----------- ----------- Corporate Buildings and improvements............................... $ 699,474 $ 689,293 Office furniture and equipment........................... 18,647 18,647 Land..................................................... 41,448 42,783 ----------- ----------- 759,569 750,723 Less accumulated depreciation............................ 163,737 139,382 ----------- ----------- 595,832 611,341 ----------- ----------- $23,527,457 $20,187,460 =========== ===========
Depreciation expense for the years ended December 31, 1997 and 1996 and the six months ended December 31, 1995 was $1,468,013, $1,086,108, and $522,293, respectively. 7. INTANGIBLE ASSETS Intangible assets and accumulated amortization are as follows at December 31, 1997 and 1996:
1997 1996 ----------- ---------- Loans fees.................................................. $ 278,750 $ -- Goodwill.................................................... 5,339,883 438,965 Covenants not to compete.................................... 353,079 203,079 Advertising rights.......................................... 1,553,639 708,100 Permits and licenses........................................ 2,365,719 377,567 Lease rights................................................ 3,193,624 1,877,001 ----------- ---------- 13,084,694 3,604,712 Less accumulated amortization............................... 2,031,602 597,146 ----------- ---------- $11,053,092 $3,007,566 =========== ==========
Amortization expense for the years ended December 31, 1997 and 1996 and the six months ended December 31, 1995 was $1,434,459, $230,412, and $52,998, respectively. 8. LONG-TERM DEBT Long-term debt consists of the following at December 31, 1997 and 1996:
1997 1996 ----------- ----------- Canadian Imperial Bank of Commerce, as administrative agent for lenders under the Credit Agreement dated July 31, 1997, Term A loan, interest at LIBOR plus 2.75%, collateralized by accounts receivable, inventory, sign structures, and intangible assets, payable quarterly, due June 2004**......................................... $30,000,000 $ -- Canadian Imperial Bank of Commerce, as administrative agent for lenders under the Credit Agreement dated July 31, 1997, Revolving Line of Credit, interest ranging from prime plus 2% or LIBOR plus 2.75%, collateralized by accounts receivable, inventory, sign structures, and intangible assets, payable quarterly, due June 2004**... 3,400,000 -- Canadian Imperial Bank of Commerce, as administrative agent for lenders under the Credit Agreement dated July 31, 1997, Swing Loan, interest ranging from prime plus 2% or LIBOR plus 2.75%, collateralized by accounts receivable, inventory, sign structures, and intangible assets, payable at termination date, due June 2004**.... 1,455,565 -- Palmer Outdoor Advertising, Inc., 10.5%, collateralized by sign structures, equipment, and inventory, payable $10,266 monthly including interest, due January 2002.... 406,349 -- Anthony E. and Laverne L. Brum, 7%, collateralized by deed of trust, payable $1,742 monthly including interest, due August 2004............................................. 111,067 -- American Commercial Bank, 8%, collateralized by vehicle, payable $394 monthly including interest, due March 2001.................................................... 13,443 -- American Commercial Bank, 8%, collateralized by vehicle, payable $474 monthly including interest, due March 2001.................................................... 16,176 -- William H. and Jannette L. Kunz, 12.25%, uncollateralized, payable $6,631 monthly including interest, due May 2010.................................................... 505,043 -- LarMark, Inc., non-interest bearing, unsecured, due January 1998............................................ 425,000 -- Virgil and Ruth Rose, 7%, collateralized by deed of trust, payable $931 monthly including interest, due February 2026.................................................... 137,315 138,822 Paragon Outdoor Advertising, non-interest bearing, uncollateralized, payable $608 monthly, due July 2001... 26,157 33,456 Gaechter Outdoor Advertising, non-interest bearing, uncollateralized, payable in decreasing annual installments ranging from $28,000 to $21,600, due August 2001.................................................... 96,000 124,000 Ken Lyons and Michael Burkett, non-interest bearing, uncollateralized, payable $710 monthly, due May 2001.... 29,097 37,613 Pesenti Winery, noninterest bearing, collateralized by sign structure, payable $1,500 per year, due December 2003.................................................... 9,000 10,500 Advanced Outdoor, noninterest bearing, collateralized by sign structures, payable $9,500 per month, due December 1998.................................................... 102,000 214,000 Antelope Valley Bank, 8.5%, collateralized by vehicle, payable $466 monthly including interest, payable August 2001.................................................... -- 21,471 Don Enger and Clayton Enger, 8.5%, collateralized by deed of trust, payable $256 monthly including interest, due July 2001............................................... -- 11,648 Massachusetts Mutual Life Insurance Co., 11.05%, unsecured, payable $500,000 per year beginning November 11, 1994, interest payable quarterly, due November 1999.................................................... -- 1,500,000 Massachusetts Mutual Life Insurance Co., 10.9%, unsecured, payable $687,500 per year, interest payable quarterly, due August 1999......................................... -- 2,062,500 Massachusetts Mutual Life Insurance Company, 11.55%, unsecured, payable $500,000 per year beginning June 1, 1996, interest payable quarterly, due June 2002......... -- 3,000,000 Bank of Santa Maria, interest at prime plus 2.5%, collateralized by deed of trust, payable $1,188 per month including interest, due May 2002.................. -- 119,695 Bank of Santa Maria, 9.5%, collateralized by vehicle, payable $1,168 per month including interest, due August 1997.................................................... -- 4,244 Alta and Fred Higginbotham, 8%, collateralized by deed of trust, payable $150 per month, due January 2000......... -- 6,771 Estates Trust, Inc., 9%, collateralized by deed of trust and personally guaranteed by E. Thomas Martin, payable $862 per month including interest, due October 2009..... -- 78,578 Barbara Lehmann, 10%, collateralized by deed of trust, interest payable monthly, due March 1998................ -- 20,000 Christine and Alice Henderson, 9%, collateralized by deed of trust, payable $805 per month including interest, due April 2011.............................................. -- 96,034 Central Coast Federal Land Bank, 7.5%, collateralized by winery deed of trust, products and crops inventory and accounts receivable, payable $7,126 per month including interest, due November 2015............................. -- 797,081 Central Coast Production Credit Association, 9.75%, collateralized by winery accounts receivable and inventory, interest payable quarterly, due January 1999.................................................... -- 150,000 Canadian Imperial Bank of Commerce, interest at LIBOR plus 2.5%, collateralized by the Amarillo Division's accounts receivable, inventory, sign structures and intangible assets and personally guaranteed by E. Thomas Martin and David Weyrich, interest payable monthly, due May 1997**.................................................. -- 5,500,000 Central Coast Production Credit Association, interest at prime plus 1.5%, collateralized by winery equipment, payable $5,590 monthly including interest, due August 2000.................................................... -- 198,165 Homer Hensley and Rick Hensley, 8.5%, collateralized by deed of trust, payable $1,231 monthly including interest, due January 2001.............................. -- 50,813 Paragon Outdoor Advertising, 8%, collateralized by sign structures, payable $2,636 monthly including interest, due July 2001........................................... -- 121,035 ----------- ----------- 36,732,212 14,296,426 Less current maturities................................... 690,718 7,460,727 ----------- ----------- $36,041,494 $ 6,835,699 =========== ===========
Aggregate maturities of long-term debt at December 31, 1997 are as follows:
YEARS ENDING DECEMBER 31, ------------ 1998........................................................ $ 690,718 1999........................................................ 5,676,502 2000........................................................ 6,189,260 2001........................................................ 6,937,451 2002........................................................ 10,084,059 Thereafter.................................................. 7,154,222 ----------- $36,732,212 ===========
** Loan has varying interest rates based on Company performance and indexes found in the Credit Agreement dated July 31, 1997. At December 31, 1997 the effective interest rates ranged from 7.1875% to 8.5%. The Company has entered into an interest rate cap primarily to protect against rising interest exposure of its floating rate long-term debt. The difference to be paid or received on the cap is included in interest expense as payments are made or received. At December 31, 1997, the Company had outstanding interest rate cap agreements with two commercial banks having a total notional principal amount of $50,000,000. This agreement effectively changes the Company's interest exposure on $50,000,000 of floating rate debt to a fixed 6.5% with a floor of 5.5%. The interest rate cap agreement matures September 18, 2000. During 1997, the Company sold an interest rate floor for a gain of $220,000. This gain is included in other income. The counterparties to the Company's derivative financial instrument contract are substantial and creditworthy commercial banks which are recognized market makers. Neither the risks of counterparty nonperformance nor the economic consequence of counterparty nonperformance associated with these contracts were considered by the Company to be material. Interest expense consists of interest on notes payable, management fees and the cost associated with the purchase of the interest rate cap instrument. Prime rate was 8.5% and 8.25% at December 31, 1997 and 1996, respectively. LIBOR rate was 5.938% and 5.625% at December 31, 1997 and 1996, respectively. 9. NOTE PAYABLE, BANK Note payable, bank is as follows at December 31, 1997 and 1996:
1997 1996 -------- -------- Heritage Oaks Bank, interest at prime plus .5%, uncollateralized, interest payable monthly, due May 1997...................................................... $ -- $800,000 ======== ========
Prime rate was 8.25% at December 31, 1996. 10. DISTRIBUTIONS In January, May, August, and October 1997 and January, May, August, and October 1996 and in July and October 1995, the Company declared a $.75 per share cash distribution for 82,443 shares outstanding. At December 31, 1997 and 1996, $61,832 and $61,658 were payable January 1, 1998 and 1997, respectively. Subsequent to conversion of the Company to an S-corporation, effective July 1, 1995, the Company began making distributions equal to approximately 49% of estimated taxable income to its shareholders to cover their tax liabilities. Distributions during the year ended December 31, 1997, amounted to $3,140,079, including a $2,000,000 special distribution occurring as a result of an acquisition. Distributions during the year ended December 31, 1996, related to 1995 and 1996 taxable income, amounted to $1,353,618. 11. DEFERRED INCOME TAXES For state tax purposes, the applicable states do recognize "S" Corporation status; however, they still impose a tax at the corporate level, generally at a rate significantly lower than the regular corporate rate. Deferred tax assets and liabilities relate to temporary differences associated with state income taxes. Income tax expense (benefit) for the years ended December 31, 1997 and 1996 and six months ended December 31, 1995 consisted of the following:
1997 1996 1995 ------- ------- ----------- Current.............................................. $23,458 $49,827 $ 24,170 Deferred............................................. -- 7,826 (2,996,487) ------- ------- ----------- Income tax expense (benefit)......................... $23,458 $57,653 $(2,972,317) ======= ======= ===========
Components of deferred income tax balances at December 31, 1997 and 1996 consisted of:
1997 1996 -------- ------- Current deferred tax assets.......................... $ 1,441 $ 1,500 ======== ======== Long-term deferred tax liabilities................... $102,375 $111,008 ======== ========
Deferred income taxes arise primarily from temporary differences due to use of accelerated depreciation methods for income tax purposes and the straight-line method and the use of the allowance method of accounts receivable for financial reporting purposes. 12. RELATED PARTY TRANSACTIONS Through February 1, 1996 the Company provided management services to Martin Media, a company having common shareholders/partners, at a rate approximating 3% of Martin Media's gross revenue. Management fees of $78,263 were received by the Company from Martin Media during the year ended December 31, 1996. Subsequent to December 31, 1995, and effective February 1, 1996, the Company divested itself of all management and administrative employees and contracted with M.W. Sign Company, a company wholly owned by E. Thomas Martin and David Weyrich, to provide the Company with management services at 3% of gross revenue. As of January 1, 1997, management fees increased to 4% of gross revenue. Management fees of $895,281 and $472,931 were paid to M.W. Sign Company during the years ended December 31, 1997 and 1996, respectively. 13. COMMITMENTS Leases: The Company leases land in connection with its outdoor advertising posters and panels as well as for office and yard space. The Company also leases office and shop buildings which are located in different geographic areas within the various divisions. A portion of these are long-term leases. Lease expense for the years ended December 31, 1997 and 1996 and six months ended December 31, 1995 was $4,748,420, $2,333,218 and $1,064,875, respectively. Future minimum lease payments under noncancellable leases at December 31, 1997 are as follows:
POSTERS, YEARS ENDING DECEMBER 31, BUILDINGS BULLETINS TOTAL - ------------------------- --------- ---------- --------- 1998.............................................. $ 19,533 $ 162,400 $ 181,933 1999.............................................. 19,944 162,400 182,344 2000.............................................. 19,944 162,400 182,344 2001.............................................. 21,285 162,400 183,685 2002.............................................. 21,732 162,400 184,132 Thereafter........................................ 48,897 454,400 503,297 -------- ---------- --------- $151,335 $1,266,400 $1,417,735 ======== ========== ==========
On August 1, 1995, the Company entered into a lease with Outdoor Systems Company of Kansas City. Under the terms of the lease Outdoor Systems leased 87 outdoor advertising structures from the Company for $12,500 per month. The agreement terminated December 31, 1997. Acquisition, purchase and sales options On July 31, 1997, the Company entered into an agreement with another company to acquire certain assets, including sign structures, equipment, and related intangibles located in Nevada, Arizona, and California for a total purchase price of $60,000,000. This purchase agreement has two segments, the first of which provided for the purchase of assets totaling $20,500,000. Simultaneously, and as part of the master agreement, the Company entered into an agreement with Martin Media (related party) to sell them those assets located in their geographical service area, primarily the Las Vegas and Colorado River markets, for $11,273,400. The Company's net acquisition price under the first segment of the agreement was $9,226,600. The second segment of the agreement provides an option for the Company to purchase additional assets for $39,500,000. As part of this transaction, the Company has also provided Martin Media with an option to purchase the assets located in the Las Vegas and Colorado River markets for $3,077,000. The Company's net acquisition price for assets to be received under the second segment of the agreement will be $36,423,000. Upon execution of the option agreement, the Company deposited $6,000,000 in good faith with the seller. Similarly, Martin Media deposited $463,800 with the Company resulting in a net deposit of $5,536,200. The option agreement expires October 1, 1998. Should the Company not exercise the option, the seller holds an option agreement whereby it can repurchase the assets originally sold to the Company and assets owned by the Company in and around the Bakersfield area. As part of the option agreement, the Company will manage those assets covered by the option agreement. The payment for the use of these assets through the option period will approximate $285,000 per month. Revenue earned through the managed assets is subject to the 4% management fee paid to M.W. Sign, Inc. Credit facility On July 31, 1997, the Company entered into an agreement with Canadian Imperial Bank of Commerce, as administrative agent for Lenders under the credit agreement dated July 31, 1997. Under the terms of this agreement, the Term B Loan is available to fund future acquisitions in the amount of $20,000,000. As of December 31, 1997, the Company's outstanding obligation was $-0-. 14. SUBSEQUENT EVENTS Subsequent to December 31, 1997, the Company acquired substantially all of the assets and assumed certain liabilities of one outdoor advertising company at an aggregate purchase price of $12,500,000. Funds used to make the purchase were provided through the Company's existing credit facility. INDEPENDENT AUDITORS' REPORT To the Board of Directors Martin & MacFarlane, Inc. Paso Robles, California We have audited the accompanying balance sheet of Martin & MacFarlane, Inc. as of June 30, 1995 and the related statements of income, retained earnings and cash flows for the year then ended. These financial statements are the responsibility of Martin & MacFarlane, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Martin & MacFarlane, Inc. as of June 30, 1995 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. BARBICH LONGCRIER HOOPER & KING ACCOUNTANCY CORPORATION By: /s/ GEOFFREY B. KING, CPA Geoffrey B. King, CPA Bakersfield, California August 25, 1995 MARTIN & MACFARLANE, INC. BALANCE SHEET JUNE 30, 1995 ASSETS
1995 ----------- Current Assets Cash and equivalents (Note 7)............................. $ 351,705 Restricted cash (Note 6).................................. 306,154 Certificates of deposit................................... 200,000 Investments............................................... 8,400 Trade accounts receivable, less allowance for doubtful accounts of $100,000................................... 1,546,381 Other receivables......................................... 78,649 Inventories (Note 2)...................................... 768,035 Prepaid expenses (Note 3)................................. 630,548 Current deferred income taxes (Note 10)................... 145,554 ----------- 4,035,426 ----------- Property and Equipment, net of accumulated depreciation (Notes 4, 7 and 8)........................................ 16,872,469 ----------- Intangible Assets, net of accumulated amortization (Note5).. 764,898 ----------- Other Assets................................................ 20,171 ----------- $21,692,964 ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities Current maturities of long-term debt (Note 7)............. $ 1,848,465 Note payable, bank (Note 8)............................... 200,000 Accounts payable.......................................... 652,567 Accrued expenses.......................................... 319,021 Dividends payable (Note 9)................................ 26,451 Unearned income........................................... 156,881 Income taxes payable (Note 10)............................ 891,486 ----------- 4,094,871 ----------- Long-Term Debt, less current maturities (Note 7)............ 8,857,936 ----------- Long-Term Deferred Income Taxes (Note 10)................... 3,208,967 ----------- Commitments (Note 13) Stockholders' Equity Common stock, no par or stated value, authorized 150,000 shares, issued and outstanding 82,443 shares (Note 9).. 1,113,070 Retained earnings......................................... 4,418,120 ----------- 5,531,190 ----------- $21,692,964 ===========
The accompanying notes are an integral part of this balance sheet. MARTIN & MACFARLANE, INC. STATEMENT OF INCOME YEAR ENDED JUNE 30, 1995
1995 ----------- Income...................................................... $16,168,763 Cost of sales............................................... 2,045,552 ----------- Gross profit...................................... 14,123,211 Managers' controlled operating expenses..................... 10,070,408 ----------- Income from managers' operations.................. 4,052,803 ----------- Other operating expenses Depreciation and amortization expense..................... 1,100,305 ----------- Operating income.................................. 2,952,498 ----------- Other income (expense) Interest expense.......................................... (1,313,456) Other income.............................................. 152,804 Gain on disposition of assets............................. 2,405,522 Employee separation expense............................... (269,803) ----------- Income before income taxes.................................. 3,927,565 Income tax expense (Note 10)........................... 1,519,542 ----------- Net income........................................ $ 2,408,023 ===========
The accompanying notes are an integral part of this statement. MARTIN & MACFARLANE, INC. STATEMENT OF RETAINED EARNINGS YEAR ENDED JUNE 30, 1995
1995 ---------- Balance, beginning of year.................................. $2,195,593 Net income................................................ 2,408,023 Dividends (Note 9)........................................ (185,496) ---------- Balance, end of year........................................ $4,418,120 ==========
The accompanying notes are an integral part of this statement. MARTIN & MACFARLANE, INC. STATEMENT OF CASH FLOWS YEAR ENDED JUNE 30, 1995
1995 ----------- Cash flows from operating activities: Net income................................................ $ 2,408,023 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 1,100,305 Gain on disposition of assets.......................... (2,405,522) Increase in deferred income taxes...................... 469,749 Changes in operating assets and liabilities: Increase in accounts receivable........................ (57,463) Increase in other receivables.......................... (66,187) Decrease in inventory.................................. 11,117 Decrease in prepaid expenses........................... 34,520 Increase in other assets............................... (9,065) Increase in accounts payable........................... 5,887 Decrease in accrued liabilities........................ (176,570) Increase in unearned income............................ 30,106 Increase in income taxes payable....................... 820,732 ----------- Net cash provided by operating activities......... 2,165,632 ----------- Cash flows from investing activities: Proceeds from sale of investments......................... 5,000 Increase in certificates of deposit....................... (200,000) Proceeds from sale of fixed assets........................ 2,656,384 Capital expenditures...................................... (736,258) Construction of capital improvements...................... (281,102) Principal payments on loans and notes receivable.......... 32,000 Purchase of intangible assets............................. (310,001) ----------- Net cash provided by investing activities......... 1,166,023 ----------- Cash flows from financing activities: Proceeds from notes payable............................... 1,007,317 Principal payments on notes payable....................... (3,946,286) Dividends paid............................................ (185,496) ----------- Net cash used in financing activities............. (3,124,465) ----------- Net increase in cash and cash equivalents................... 207,190 Cash and cash equivalents at beginning of year.............. 450,669 ----------- Cash and cash equivalents at end of year.................... $ 657,859 =========== Unrestricted cash........................................... $ 351,705 Restricted cash............................................. 306,154 ----------- $ 657,859 =========== Supplemental disclosures of cash flow information: Interest paid............................................. $ 1,339,278 =========== Payment of income taxes................................... $ 229,061 ===========
Schedule of noncash investing: The Company entered into an exchange agreement with National Outdoor Media (3M) during the year ended June 30, 1995. In accordance with the terms of the exchange agreement, the Company traded boards in Kansas City, Missouri to 3M in exchange for posters and bulletins in Bakersfield, California and Kansas at a value of $1,033,850 and $2,614,150 cash. The accompanying notes are an integral part of this statement. MARTIN & MACFARLANE, INC. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business Martin & MacFarlane, Inc. (the Company) was incorporated December 2, 1971. The Company owns, leases, and manages billboards on a contractual basis nationwide for the purpose of providing outdoor advertising services. The Company also owns and operates a small winery located in Paso Robles, California. The Company extends credit in the form of accounts receivable to businesses and advertisers doing business in the above noted areas. Significant accounting policies BASIS OF ACCOUNTING The financial statements are prepared on an accrual basis, which recognizes income when earned and expenses when incurred. CASH AND CASH EQUIVALENTS The Company considers cash and cash equivalents to be all highly liquid debt instruments purchased with a maturity of three months or less. As of June 30, 1995, the Company held funds of $646,293 in one financial institution. ALLOWANCE FOR DOUBTFUL ACCOUNTS Bad debts are recognized under the allowance method of accounting which is based on an average of actual write-offs in past years. INVESTMENTS Investments in marketable equity securities are carried at the lower of cost or market. Decline in market values below cost, which are temporary in nature, are not recognized as losses until the decline in value is deemed permanent or until the security is sold. INVENTORY Inventory is valued at the lower of cost or market. Valuation is determined using the first-in, first- out method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated over estimated useful lives on a straight-line or accelerated basis. Repairs and maintenance and small equipment purchases are expensed as incurred. Expenditures which significantly increase asset values or extend useful lives are capitalized. Estimated useful lives in years are as follows:
YEARS ----- Buildings and improvements.................................. 15-31 Posters..................................................... 7-25 Bulletins................................................... 7-25 Shop equipment.............................................. 3-10 Office furniture and equipment.............................. 5-10 Autos and trucks............................................ 3-7 Irrigation equipment........................................ 7-30 Vineyards................................................... 10-25
INTANGIBLE ASSETS Goodwill is recorded at cost and is amortized using the straight-line method over a forty year period. Covenants not to compete are recorded at cost and are amortized using the straight-line method over the contractual period specified, which ranges from five to ten years. INCOME TAXES Effective July 1, 1993, as required by professional standards, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred income taxes are provided on timing differences between financial statement and taxable incomes. Timing differences arise primarily from the use of the accelerated methods of depreciation, the direct write-off method of accounting for bad debts, and the carryforward of net operating losses for income tax purposes. Determination of current or long-term status of the asset or liability is based upon when the particular timing difference reverses. 2. INVENTORIES Inventories are as follows at June 30, 1995:
1995 -------- Raw material................................................ $ 84,383 Winery: Materials and grape production costs...................... 141,255 In process................................................ 162,669 Finished goods............................................ 359,060 Tasting room, miscellaneous and resale.................... 20,668 -------- $768,035 ========
3. PREPAID EXPENSES Prepaid expenses consist of the following at June 30, 1995:
1995 -------- Leases...................................................... $519,079 Insurance................................................... 36,600 Miscellaneous............................................... 74,869 -------- $630,548 ========
4. PROPERTY AND EQUIPMENT Major classes of property and equipment and accumulated depreciation are as follows at June 30, 1995:
1995 ----------- Outdoor Advertising Buildings and improvements................................ $ 500,731 Posters................................................... 5,987,468 Bulletins................................................. 13,850,302 Shop equipment............................................ 278,749 Office furniture and equipment............................ 191,692 Autos and trucks.......................................... 1,063,156 Land...................................................... 414,472 Construction in process, boards........................... 69,038 ----------- 22,355,608 Less accumulated depreciation............................. 7,105,290 ----------- 15,250,318 ----------- Winery Buildings and improvements................................ 664,515 Irrigation and wells...................................... 45,752 Vineyards................................................. 278,219 Landscaping............................................... 26,194 Auto...................................................... 19,500 Vineyard equipment........................................ 119,142 Winery equipment.......................................... 320,720 Office furniture and equipment............................ 37,604 Land...................................................... 206,133 ----------- 1,717,779 Less accumulated depreciation............................. 755,093 ----------- 962,686 ----------- Corporate Buildings and improvements................................ $ 654,970 Office furniture and equipment............................ 267,308 Land...................................................... 42,783 ----------- 965,061 Less accumulated depreciation............................. 305,596 ----------- 659,465 ----------- $16,872,469 ===========
Depreciation expense for the year ended June 30, 1995 was $1,021,709. 5. INTANGIBLES Intangible assets and accumulated amortization are as follows at June 30, 1995:
1995 ---------- Goodwill.................................................... $ 438,965 Covenants not to compete.................................... 69,000 Advertising rights.......................................... 136,100 Permits and licenses........................................ 168,567 Lease rights................................................ 335,001 ---------- 1,147,633 Less accumulated amortization............................... 382,735 ---------- $ 764,898 ==========
Amortization expense for the year ended June 30, 1995 was $78,596. 6. RESTRICTED CASH Restricted cash at June 30, 1995 consisted of the following:
1995 -------- Cash, interest bearing account, holdback account, held for the mutual benefit of the Company and National Advertising Company, by Chicago Title & Trust Company, until released by joint order of the parties. Cash is to be released within twelve months of the June 30, 1995 balance sheet date. Cash subsequently received July 7, 1995...................................................... $306,154 ========
7. LONG-TERM DEBT Long-term debt consists of the following at June 30, 1995:
1995 ----------- Federal Land Bank, 5.75% and 6.73%, at 1995 and 1994, collateralized by first trust deed, payable $3,510 per month including interest, due May 1, 2011................. $ 410,068 Massachusetts Mutual Life Insurance Co., 11.05%, unsecured, payable $500,000 per year beginning November 11, 1994, interest payable quarterly, due November 15, 1999......... 2,500,000 Massachusetts Mutual Life Insurance Co., 10.9%, unsecured, payable $687,500 per year beginning August 15, 1992, interest payable quarterly, due August 15, 1999........... 3,437,500 Massachusetts Mutual Life Insurance Company, 11.55%, unsecured, payable $500,000 per year beginning June 1, 1995, interest payable quarterly, due June 1, 2002........ 3,500,000 Boatmen's First National Bank, interest at prime plus 1.5%, collateralized by first deed of trust, payable $1,420 per month including interest, due July 8, 2002................ 91,056 Citizens Bank of Paso Robles, interest at prime plus 2.5%, collateralized by first trust deed, payable $1,188 per month including interest, due May 13, 2002................ 124,134 Sierra Outdoor, 8%, collateralized by bulletins, payable $940 per month including interest, due April 15, 1996..... 9,065 Citizens Bank of Paso Robles, interest at 9.5%, collateralized by vehicle, payable $555 per month including interest, due August 15, 1997................... 12,962 Citizens Bank of Paso Robles, interest at 9.5%, collateralized by vehicle, payable $613 per month including interest, due August 15, 1997................... 14,206 Alta and Fred Higginbotham, 8%, collateralized by deed of trust, payable $150 per month, due January 1, 2000........ 8,544 Estates Trust, Inc., 9%, collateralized by deed of trust, payable $862 per month including interest, due October 1, 2009...................................................... 82,916 Barbara Lehmann, 10%, collateralized by deed of trust, interest payable monthly, due March 30, 1998.............. 20,000 Christine and Alice Henderson, 9%, collateralized by deed of trust, payable $805 per month including interest, due April 8, 2011............................................. 97,450 Pesenti Winery, non-interest bearing, collateralized by sign structure, payable $1,500 per year, due December 15, 2003...................................................... 13,500 Advanced Outdoor, non-interest bearing, collateralized by sign structures, payable $8,500 per month, due December 10, 1998.................................................. 357,000 Advanced Outdoor, non-interest bearing, collateralized by sign structures, payable $1,000 per month, due October 1, 1997...................................................... 28,000 ----------- 10,706,401 Less current maturities..................................... 1,848,465 ----------- $ 8,857,936 ===========
Prime rate was 9% at June 30, 1995. Aggregate maturities of long-term debt at June 30, 1995 are as follows:
YEARS ENDING JUNE 30, ------------ 1996........................................................ $ 1,848,465 1997........................................................ 1,853,095 1998........................................................ 1,850,465 1999........................................................ 1,775,319 2000........................................................ 1,728,146 Thereafter.................................................. 1,650,911 ----------- $10,706,401 ===========
8. NOTE PAYABLE, BANK Note payable, bank is as follows at June 30, 1995:
1995 -------- Citizens Bank of Paso Robles, interest at 8.5%, collateralized by certificate of deposit, annually renewable on April 3, interest payable monthly, due April 3, 1996................................................... $200,000 ========
Prime rate was 9% at June 30, 1995. 9. DIVIDENDS PAYABLE In July 1994, October 1994 and January 1995, the Company declared a $.50 per share cash dividend, for 82,443 shares outstanding. In May 1995 the Company declared a $.75 per share dividend, for 82,443 shares outstanding. At June 30, 1995 $26,451 was payable July 1, 1995. 10. DEFERRED INCOME TAXES Income tax expense for the year ended June 30, 1995 is computed under SFAS 109 and consisted of the following:
FEDERAL STATE TOTAL ---------- -------- ---------- Current........................................... $ 808,602 $241,191 $1,049,793 Deferred.......................................... 657,023 100,162 757,185 Tax benefit of net operating loss carryforward.... (251,439) (35,997) (287,436) ---------- -------- ---------- Income tax expenses............................... $1,214,186 $305,356 $1,519,542 ========== ======== ==========
Components of deferred income tax balances at June 30, 1995 consisted of:
FEDERAL STATE TOTAL ----------- -------- --------- Current deferred tax assets....................... $ 136,254 $ 9,300 $ 145,554 ========== ======== ========== Long-term deferred tax liabilities................ $2,539,860 $669,107 $3,208,967 ========== ======== ==========
Deferred income tax liabilities arise primarily from timing differences due to use of accelerated depreciation methods for income tax purposes and the straight-line method for financial reporting purposes. Deferred income tax assets arise primarily from the application of federal and state net operating loss carryovers. At June 30, 1995, the Company had alternative minimum tax credits in the amount of $16,837, available to offset future taxes. Tax credits are included in deferred tax assets. 11. RELATED PARTY TRANSACTIONS The following transaction occurring between the Company and a related party, which is not presented elsewhere in these financial statements, is as follows: Martin Media, which has partners who are also stockholders in the Company, contracts the Company to perform management duties. Martin Media pays a management fee to the Company which is approximately 3% of Martin Media's gross revenue. Management fees of $986,356 were received from the partnership during the fiscal year ending June 30, 1995. 12. PROFIT SHARING PLAN Discretionary contributions under a defined contribution profit sharing plan, which are determined by the Company's Board of Directors, have been accrued to a trust for the benefit of qualified employees in the amount of $50,000 for the year ended June 30, 1995. All costs are funded currently. 13. COMMITMENTS The Company leases land in connection with its outdoor advertising posters and panels as well as for office and yard spaces. These are long-term operating leases which the Company and lessor have the option to terminate with thirty days notice. Lease expense for the year ended June 30, 1995 was $2,218,480. The Company leases office and shop buildings which are located at various divisions. A portion of these are long-term leases. Future minimum lease payments under noncancellable leases at June 30, 1995 are as follows:
Years ending June 30, 1996...................................................... $ 47,747 1997...................................................... 22,665 1998...................................................... 18,711 1999...................................................... 19,944 2000...................................................... 19,944 Thereafter................................................ 121,830 -------- $250,841 ========
EX-99.2 7 EXHIBIT 99.2 LAMAR ADVERTISING COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following sets forth unaudited pro forma condensed consolidated financial information for Lamar Advertising Company ("Lamar"). The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1998 gives effect to the acquisition of Outdoor Communications, Inc. (as filed in Lamar's Form 8-K/A filed June 8, 1999) and the proposed acquisition by Lamar (the "Stock Purchase") of all of the outstanding capital stock of Chancellor Media Outdoor Corporation ("Chancellor Outdoor") as if the transactions had occurred on January 1, 1998. The unaudited pro forma condensed consolidated statement of operations for the three months ended March 31, 1999 gives effect to the proposed Stock Purchase as if the transaction had occurred on January 1, 1998. The unaudited pro forma condensed consolidated balance sheet as of March 31, 1999 gives effect to the Stock Purchase as if the transaction had occurred on March 31, 1999. For purposes of the pro forma financial information: (i) the pro forma statement of operations of Lamar for the year ended December 31, 1998 (as adjusted for the Outdoor Communications, Inc. acquisition) has been combined with the statement of operations of Chancellor Outdoor for the period July 22, 1998 (inception) to December 31, 1998, the statement of operations of Martin Media L.P. ("Martin Media") for the seven months ended July 31, 1998, the statement of operations of Martin & MacFarlane, Inc. ("Martin & MacFarlane") for the seven months ended July 31, 1998 and the statement of income of the outdoor advertising division of Whiteco Industries, Inc. ("Whiteco") for the eleven months ended November 30, 1998; (ii) the statement of operations of Lamar for the three month period ended March 31, 1999 has been combined with the statement of operations of Chancellor Outdoor for the same period, and (iii) the balance sheet of Lamar as of March 31, 1999 has been combined with the balance sheet of Chancellor Outdoor as of March 31, 1999. The unaudited pro forma condensed consolidated financial statements give effect to the acquisitions under the purchase method of accounting. The pro forma adjustments are described in the accompanying notes and are based on preliminary estimates and certain assumptions that management of Lamar believes reasonable under the circumstances. The unaudited pro forma condensed consolidated financial statements have been prepared by Lamar's management. The unaudited pro forma data is not designed to represent and does not represent what Lamar's results of operations or financial position would have been had the Stock Purchase and the acquisition of Outdoor Communications, Inc. been completed on or as of the dates assumed, and is not intended to project Lamar's results of operations for any future period or as of any future date. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the audited and unaudited consolidated financial statements and notes of Lamar, Chancellor Outdoor, Martin Media, Martin & MacFarlane, Whiteco and Outdoor Communications, Inc. LAMAR ADVERTISING COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (dollars in thousands, except per share data)
PRO FORMA LAMAR CHANCELLOR MARTIN MARTIN & ADJUSTED OUTDOOR MEDIA MACFARLANE WHITECO FOR THE OCI JULY 22, 1998 TO JAN 1, 1998 TO JAN 1, 1998 TO JAN 1, 1998 TO ACQUISITION DECEMBER 31, 1998 JULY 31, 1998 JULY 31, 1998 NOV 30, 1998 --------------- ----------------- -------------- -------------- -------------- Revenues, net $ 332,754 $ 47,605 $ 29,655 $ 16,576 $ 119,630 --------------- ----------------- -------------- -------------- -------------- Direct advertising expenses 108,781 23,505 14,364 10,526 43,665 General and administrative expenses 69,662 1,981 6,450 4,193 26,296 Depreciation and amortization 112,805 25,990 11,223 3,471 10,342 --------------- ----------------- -------------- -------------- -------------- 291,248 51,476 32,037 18,190 80,303 --------------- ----------------- -------------- -------------- -------------- Operating income (loss) 41,506 (3,871) (2,382) (1,614) 39,327 --------------- ----------------- -------------- -------------- -------------- Other expense (income): Interest income (762) - - (20) - - (134) Interest expense 80,581 105 8,527 2,244 35 Loss (gain) on disposition of assets (729) - - - - (465) (1,418) Other expenses 314 (156) (473) (537) - - --------------- ----------------- -------------- -------------- -------------- 79,404 (51) 8,034 1,242 (1,517) --------------- ----------------- -------------- -------------- -------------- Income (loss) before income taxes (37,898) (3,820) (10,416) (2,856) 40,844 Income tax expense (benefit) (6,368) 345 - - 10 - - --------------- ----------------- -------------- -------------- -------------- Net income (loss) (31,530) $ (4,165) $ (10,416) $ (2,866) $ 40,844 ================= ============== ============== ============== Preferred stock dividends 365 --------------- Net loss applicable to common stock $ (31,895) =============== Net loss per common share $ (0.62) =============== Weighted average number of shares outstanding 51,361,522 ===============
COMBINED CHANCELLOR OUTDOOR ACQUISITION PRO FORMA 12/31/98 ADJUSTMENTS COMBINED --------------- --------------- --------------- Revenues, net $ 213,466 $ (3,810) (6) $ 542,410 --------------- --------------- --------------- Direct advertising expenses 92,060 (1,993) (6) 198,848 General and administrative expenses 38,920 (2,734) (1) 105,848 Depreciation and amortization 51,026 97,754 (2) 261,585 --------------- --------------- --------------- 182,006 93,027 566,281 --------------- --------------- --------------- Operating income (loss) 31,460 (96,837) (23,871) --------------- --------------- --------------- Other expense (income): Interest income (154) 154 (3) (762) Interest expense 10,911 40,046 (4) 131,538 Loss (gain) on disposition of assets (1,883) - - (2,612) Other expenses (1,166) - - (852) --------------- --------------- --------------- 7,708 40,200 127,312 --------------- --------------- --------------- Loss before income taxes 23,752 (137,037) (151,183) Income tax benefit 355 (44,536) (5) (50,549) --------------- --------------- --------------- Net income (loss) $ 23,397 $ (92,501) (100,634) =============== =============== Preferred stock dividends 365 --------------- Net loss applicable to common stock $ (100,999) =============== Net loss per common share $ (1.30) =============== Weighted average number of shares outstanding 26,227,273 77,588,795 =============== ===============
LAMAR ADVERTISING COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 (dollars in thousands, except per share data)
CHANCELLOR ACQUISITION PRO FORMA LAMAR OUTDOOR ADJUSTMENTS COMBINED -------------- -------------- -------------- -------------- Revenues, net $ 85,766 $ 53,601 $ (847) (6) $ 138,520 -------------- -------------- -------------- -------------- Direct advertising expenses 29,764 28,451 (480) (6) 57,735 General and administrative expenses 20,099 2,825 - - 22,924 Depreciation and amortization 31,561 31,396 5,799 (2) 68,756 -------------- -------------- -------------- -------------- 81,424 62,672 5,319 149,415 -------------- -------------- -------------- -------------- Operating income (loss) 4,342 (9,071) (6,166) (10,895) -------------- -------------- -------------- -------------- Other expense (income): Interest income (686) - - - - (686) Interest expense 18,145 64 12,501 (4) 30,710 Loss on disposition of assets (336) - - - - (336) Other expenses - - 86 - - 86 -------------- -------------- -------------- -------------- 17,123 150 12,501 29,774 -------------- -------------- -------------- -------------- Loss before income taxes (12,781) (9,221) (18,667) (40,669) Income tax benefit (2,842) (3,076) (7,800) (5) (13,718) -------------- -------------- -------------- -------------- Loss before cumulative effect of a change in accounting principle $ (9,939) $ (6,145) $ (10,867) $ (26,951) ============== ============== ============== ============== Loss before cumulative effect of a change in accounting principle per common share $ (0.16) $ (0.31) ============== ============== Weighted average number of shares outstanding 61,143,351 26,227,273 87,370,624 ============== ============== ==============
LAMAR ADVERTISING COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET MARCH 31, 1999 (dollars in thousands)
CHANCELLOR PRO FORMA PRO FORMA LAMAR OUTDOOR ADJUSTMENTS COMBINED --------------- --------------- --------------- --------------- Cash $ 8,171 $ 3,620 $ - - $ 11,791 Net receivables 41,042 29,015 - - 70,057 Other current assets 17,573 18,945 (2,243) (7) 34,275 --------------- --------------- --------------- --------------- Total current assets 66,786 51,580 (2,243) 116,123 --------------- --------------- --------------- --------------- Property, plant and equipment, net 521,495 1,213,218 (571,627) (8) 1,163,086 --------------- --------------- --------------- --------------- Intangibles 752,809 499,852 610,013 (9) 1,862,674 Other assets 17,447 1,168 - - 18,615 --------------- --------------- --------------- --------------- Total assets $ 1,358,537 $ 1,765,818 $ 36,143 $ 3,160,498 =============== =============== =============== =============== Current maturities of long-term debt $ 4,165 $ 671 $ - - $ 4,836 Other current liabilities 36,404 22,169 22,000 (10) 80,573 --------------- --------------- --------------- --------------- 40,569 22,840 22,000 85,409 --------------- --------------- --------------- --------------- Long-term debt 829,288 1,854 700,000 (11) 1,531,142 Deferred income - Long term 1,313 - - - - 1,313 Other liabilities 4,464 - - - - 4,464 Deferred tax liability 23,998 95,554 12,721 (12) 132,273 --------------- --------------- --------------- --------------- Total Liabilities 899,632 120,248 734,721 1,754,601 --------------- --------------- --------------- --------------- Stockholders' equity 458,905 1,645,570 (698,578) (13) 1,405,897 --------------- --------------- --------------- --------------- Total liabilities and stockholders' equity $ 1,358,537 $ 1,765,818 $ 36,143 $ 3,160,498 =============== =============== =============== ===============
LAMAR ADVERTISING COMPANY NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (dollars in thousands) For purposes of determining the pro forma effect of the Chancellor Outdoor acquisition on Lamar's Condensed Consolidated Statements of Operations for the year ended December 31, 1998 and the three months' ended March 31, 1999, the following adjustments have been made:
12/31/98 03/31/99 --------------- --------------- (1) To eliminate expenses in Chancellor Outdoor's combined financial statement related to management fees that would not have existed had the Stock Purchase taken place at the beginning of the year General and administrative expenses (2,734) - - =============== =============== (2) To record incremental amortization and depreciation due to the application of purchase accounting. Depreciation and amortization are calculated using accelerated and straight line methods over the estimated useful lives of the assets generally from 5-15 years. 97,754 5,799 =============== =============== (3) To eliminate historical interest income that would not have existed had the Stock Purchase taken place on January 1, 1998 154 - - =============== =============== (4) To eliminate historical interest expense in Chancellor Outdoor's combined financial statements and record interest expense related to the debt acquired and incurred in the Stock Purchase. (A difference of .125% in the rate of interest would have changed income by $875 and $216 for the year ended December 31, 1998 and three months ended March 31, 1999, respectively.) Historical interest expense (10,911) (64) Interest expense on debt acquired and incurred in the Stock Purchase. 50,957 12,565 --------------- --------------- 40,046 12,501 =============== =============== (5) To record the tax effect on pro forma statements for the Stock Purchase. (44,536) (7,800) =============== =============== (6) To record the effect on net revenues and direct expenses of the divestiture required of Chancellor Outdoor by the Department of Justice in May 1999. Net revenues (3,810) (847) =============== =============== Direct advertising expenses (1,993) (480) =============== ===============
The terms of the Stock Purchase Agreement include the issuance of 26,227,273 Class A Common Stock at an average stock price of $36.11 per share and $700 million in cash for a total purchase price of $1,646,992. The acquisition will be accounted for under the purchase method of accounting. The following is a summary of the preliminary allocation of the purchase price of the acquisition:
Current assets 49,337 Property, plant and equipment 641,591 Goodwill 312,371 Customer lists 132,913 Structure locations 628,649 Other intangibles 35,932 Other assets 1,168 Current liabilities (44,840) Long-term liabilities (110,129) -------------------------- 1,646,992
For purposes of determining the pro forma effect of the Stock Purchase on Lamar's unaudited Condensed Consolidated Balance Sheet as of March 31, 1999, the following adjustments have been made:
Pro Forma Adjustments --------------- (7) Other current assets To eliminate historical deferred tax assets not acquired in the Stock Purchase. (2,243) =============== (8) Property, Plant and Equipment, net: To record the decrease in property, plant and equipment from the allocation of the Purchase Price for the Stock Purchase (571,627) =============== (9) Intangibles: To record the increase in intangibles resulting from the allocation of the Purchase Price of the Stock Purchase. 610,013 =============== (10) Other current liabilities: To record the increase in the accrual of severance and other liabilities assumed in the Stock Purchase. 22,000 =============== (11) Long-term debt: To record the increase in debt related to financing the Stock Purchase. Borrowings under the Credit Facility 700,000 =============== (12) Deferred Tax Liability: To record the increase in the deferred tax liability created as a result of the application of purchase accounting. 12,721 =============== (13) Stockholders' Equity To eliminate Chancellor Outdoor's historical stockholders' equity as a result of the Stock Purchase. (1,645,570) To record the issuance of Class A Common Stock as a result of the Stock Purchase. 946,992 --------------- (698,578) ===============
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