-----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, GZ3FxRR8XhJQcVJcNtodjy+6CrO3CoyPTgTGSTpLmB7IuEAB6JwL94SD+9b3lKBu mjd3r6BBRF2+oxrlP9QXlw== 0000950134-96-006527.txt : 19961125 0000950134-96-006527.hdr.sgml : 19961125 ACCESSION NUMBER: 0000950134-96-006527 CONFORMED SUBMISSION TYPE: 424B4 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19961122 SROS: NASD 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: 1031 FILING VALUES: FORM TYPE: 424B4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-14677 FILM NUMBER: 96671372 BUSINESS ADDRESS: STREET 1: 5551 CORPORATE BLVD CITY: BATON ROUGE STATE: LA ZIP: 70808 BUSINESS PHONE: 5049261000 424B4 1 FINAL PROSPECTUS 1 Filed Pursuant to Rule 424(b)(4) Registration Statement No. 333-14677 PROSPECTUS 2,200,000 SHARES [LAMAR LOGO] CLASS A COMMON STOCK ------------------ All of the 2,200,000 shares of Class A Common Stock, $0.001 par value per share (the "Class A Common Stock"), offered hereby are being issued and sold by Lamar Advertising Company (the "Company"). The Class A Common Stock is quoted on the Nasdaq National Market System under the symbol "LAMR." On November 21, 1996, the last reported sale price for the Class A Common Stock as reported on the Nasdaq National Market was $24.25 per share. See "Price Range of Class A Common Stock." Concurrently with the offering of the shares of Class A Common Stock (this "Offering"), the Company is offering $255,000,000 aggregate principal amount of Senior Subordinated Notes due 2006 (the "Notes") by a separate prospectus (the "Note Offering," and together with this Offering, the "Offerings"). The Company's authorized capital stock includes the Class A Common Stock and shares of Class B Common Stock, $0.001 par value per share (the "Class B Common Stock"). The economic rights of the Class A Common Stock and the Class B Common Stock (collectively, the "Common Stock") are identical, except that each share of Class A Common Stock entitles the holder thereof to one vote in respect of matters submitted for the vote of holders of Common Stock, whereas each share of Class B Common Stock entitles the holder thereof to ten votes on such matters. Immediately after this Offering, the Reilly Family Limited Partnership, of which Kevin P. Reilly, Jr., the Company's Chief Executive Officer, is the managing general partner, will have the power to vote all of the outstanding shares of Class B Common Stock (representing approximately 88.9% of the aggregate voting power of the Common Stock, assuming no exercise of the Underwriters' over-allotment option). Each share of Class B Common Stock converts automatically into one share of Class A Common Stock upon sale or other transfer to a party other than Permitted Transferees (as defined herein). See "Description of Capital Stock." ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) ------------------------------------------------------------------------------------------------------- Per Share $23.00 $1.12 $21.88 - ------------------------------------------------------------------------------------------------------- Total(3) $50,600,000 $2,464,000 $48,136,000 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the Offering, payable by the Company, estimated at $500,000. (3) The Company has granted to the Underwriters a 30-day option to purchase an additional 330,000 shares of Class A Common Stock on the same terms as set forth above solely to cover over-allotments, if any. See "Underwriting." If all such shares are purchased, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $58,190,000, $2,833,600 and $55,356,400, respectively. See "Underwriting." ------------------ The shares of Class A Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if received and accepted by them and subject to certain conditions. It is expected that certificates for shares of Class A Common Stock will be available for delivery on or about November 27, 1996 at the offices of Smith Barney Inc., 333 W. 34th Street, New York, New York 10001. ------------------ SMITH BARNEY INC. ALEX. BROWN & SONS INCORPORATED PRUDENTIAL SECURITIES INCORPORATED November 22, 1996 2 [COMPANY MAP -- OUTDOOR MARKETS AND LOGO STATES] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 3 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere or incorporated by reference in this prospectus. Unless otherwise indicated, as used herein, the "Company" refers to Lamar Advertising Company together with its consolidated subsidiaries. Unless otherwise indicated, the information in this prospectus assumes that the Underwriters' over-allotment option is not exercised. THE COMPANY Lamar Advertising Company is one of the largest and most experienced owners and operators of outdoor advertising structures in the United States. It conducts a business that has operated under the Lamar name since 1902. As of September 30, 1996, the Company operated approximately 24,000 outdoor advertising displays in 13 southeastern, midwestern and mid-Atlantic states. After giving effect to the acquisition of FKM Advertising Co., Inc. ("FKM") and assuming consummation of the proposed acquisition of Outdoor East, L.P. ("Outdoor East") described below (collectively, the "Acquisitions"), the Company will operate approximately 29,000 outdoor advertising displays in 14 states. In each of the Company's existing 36 primary markets, the Company believes that it is the only full-service outdoor advertising company serving such markets. The Company also operates the largest logo sign business in the United States. Logo signs are erected pursuant to state-awarded franchises on public rights-of-way near highway exits and deliver brand name information on available gas, food, lodging and camping services. The Company currently operates logo sign franchises in 15 of the 21 states which have a privatized logo sign program. In addition, the Company has recently entered into an agreement to acquire the existing logo sign franchises for the states of Kentucky and Nevada, has been awarded the logo sign franchise for the state of Florida, and was selected to operate the tourism signing franchise for the province of Ontario, Canada. As of September 30, 1996, the Company maintained over 18,000 logo sign structures containing over 51,000 logo advertising displays under these franchises. The Company has recently expanded into the transit advertising business through the operation of displays on bus shelters, benches and buses in 8 of its 36 existing primary markets and several other markets in the state of South Carolina. For the fiscal year ended October 31, 1995, the Company reported net revenues and EBITDA (as defined herein) of $102.4 million and $41.0 million, respectively. Assuming all of the Transactions (as defined herein) were consummated, the Company's net revenues and EBITDA for the twelve months ended July 31, 1996, would have been $133.4 million and $54.1 million, respectively. The Company's strategy is to be the leading provider of outdoor advertising in each of the markets it serves, with an emphasis on markets with a media industry ranking based on population between 50 and 250. Important elements of this strategy are the Company's decentralized management structure and its focus on providing high quality local sales and service. In order to be more responsive to local market demands, the Company offers a full complement of outdoor advertising services coupled with local production facilities, management and account executives through its local offices. While maintaining its local focus, the Company seeks to expand its operations within existing and contiguous markets. The Company also pursues expansion opportunities, including acquisitions, in additional markets. In this regard and as described more fully below, the Company has acquired or has agreed to acquire several outdoor advertising companies and has executed a letter of intent to acquire another such company. In the logo sign business, the Company's strategy is to maintain its position as the largest operator of logo signs in the U.S. by expanding through the addition of state logo franchises as they are awarded and through possible acquisitions. The Company may also pursue expansion opportunities in transit and other out-of-home media which the Company believes will enable it to leverage its management skills and market position. Management believes that operating in small to medium-sized markets provides the Company with certain advantages, including a diverse and reliable mix of local advertisers, geographic diversification and an ability to package inventory effectively. Local advertising constituted over 81% of the Company's outdoor advertising net revenues in fiscal 1995, which management believes is higher than the industry average. The Company believes that the experience of its senior and local managers has contributed greatly to its success. Its regional managers have been with the Company, on average, for 25 years. The average tenure of the Company's 36 local managers is 11 years. In addition, each of the five regional managers and 32 of the 3 4 36 local managers began their careers with the Company as local sales executives. The Company emphasizes decentralized local management of operations with centralized support and financial and accounting controls. As a result of this local focus, the Company maintains an extensive local operating presence within its markets and employed a total of 110 local account executives at September 30, 1996. Local account executives are typically supported by additional local staff and have the ability to draw upon the resources of the central office and offices in other markets in the event that business opportunities or customers' needs support such allocation of resources. The outdoor advertising industry generated total revenues of approximately $1.8 billion in 1995, or approximately 1.1% of the total advertising expenditures in the United States, according to recent estimates by the Outdoor Advertising Association of America (the "OAAA"), the trade association for the outdoor advertising industry. This represents growth of approximately 8.2% over estimated total 1994 revenues and compares favorably to the growth of total U.S. advertising expenditures of approximately 7.7% during the same period. Outdoor advertising offers repetitive impact and a relatively low cost-per-thousand impressions compared to broadcast media, newspapers, magazines and direct mail marketing, making it attractive to both local businesses targeting a specific geographic area or set of demographic characteristics and national advertisers seeking mass market support. Over the past 25 years, outdoor advertising industry revenues have grown from $0.3 billion in 1971 to $1.83 billion in 1995, representing a compound annual growth rate of approximately 8%. According to the OAAA, in eleven of the last twenty years, outdoor advertising revenue growth exceeded total advertising revenue growth. The Company believes that this revenue growth is primarily the result of long term contracts that are generally renewable, a broadening client mix, the increased use of vinyl and computer printing and acquisition opportunities. Outdoor advertising services have recently expanded beyond billboards to include a wide variety of out-of-home advertising media, including advertising displays in shopping centers, malls, airports, stadiums, movie theaters and supermarkets, as well as on taxis, trains, buses and subways. The OAAA estimates that total out-of-home advertising revenues, including traditional billboard advertising, exceeded $3.0 billion in 1995. RECENT ACQUISITION ACTIVITY The Company has recently entered into agreements to acquire, or has acquired, the assets or capital stock of several complementary businesses. The Company believes that these acquisitions will allow the Company to capitalize on the operating efficiencies and cross-market sales opportunities associated with operating in or near markets currently served by the Company. PENDING ACQUISITIONS The Outdoor East Acquisition The Company has agreed to acquire substantially all of the assets of Outdoor East for a cash purchase price of approximately $60 million. Upon completion of the acquisition of Outdoor East, the Company will operate an additional 1,780 posters and 2,070 bulletins in seven markets in the states of Virginia, West Virginia, North Carolina, South Carolina, Georgia and Florida. The acquisition of Outdoor East would add advertising displays positioned along heavily travelled highways serving the eastern U.S. The largest market included in this acquisition is Columbia, SC, which is the state capital, home to the University of South Carolina and the 88th largest market in the U.S. The Outdoor East acquisition would give the Company a presence in additional small to medium-sized markets, including Harrisonburg, VA, Dublin, VA, Hopewell, VA, Bluefield, WV, Valdosta, GA and Lumberton, NC. Outdoor East had approximately $12.2 million in net revenues for the twelve months ended September 30, 1996. The consummation of the Outdoor East acquisition, which is expected to occur on or before December 15, 1996, is subject to customary closing conditions, including the expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). 4 5 Logo Signs The Company has agreed to acquire the logo sign franchises for the states of Kentucky and Nevada from Logo Signs of America, Inc. ("LSA") for $3.8 million in cash. Upon consummation of the acquisition, the Company will operate 1,984 logo sign displays in Kentucky and 292 logo sign displays in Nevada. The acquisition of LSA, which is expected to take place on December 2, 1996, is subject to customary closing conditions, including required regulatory approvals. Transit The Company has agreed to acquire 450 transit advertising displays located in Augusta, GA and Greenville, North Charleston, Spartanburg and Columbia, SC from Shelter Ad Systems, Inc. for $1.1 million in cash. This acquisition is expected to close on December 2, 1996. COMPLETED ACQUISITIONS The FKM Acquisition On November 1, 1996, the Company acquired all of the outstanding capital stock of FKM for a cash purchase price of $40 million. Upon completion of the FKM acquisition, the Company acquired a total of 122 bulletins and 537 posters in Youngstown, OH and 553 bulletins located across the state of Pennsylvania on interstate highways and other primary roads. FKM had approximately $7.5 million of net revenues for the twelve months ended September 30, 1996. The Company financed the FKM acquisition with borrowings of $40 million under the Company's current bank credit facility (the "Existing Credit Agreement"). The acquisition of FKM expands the Company's operations in Ohio and gives the Company an entry into Pennsylvania. As a result of the FKM acquisition, the Company will operate bulletin structures on non-metropolitan Pennsylvania interstate and state highways. Other Outdoor Advertising Acquisitions Since July 31, 1996, the Company has also acquired for cash certain assets of (i) Revere Outdoor Advertising in Corpus Christi, TX and Laredo, TX for $9.3 million, (ii) Southworth Advertising, Inc. in Panama City, FL, Fort Walton, FL and Albany, GA for $1.8 million, (iii) Colonial Outdoor Advertising, Inc. in Roanoke, VA for $1.1 million, and (iv) Walz Marketing, Inc. in Lakeland, FL for $0.8 million. As a result of these additional acquisitions, the Company has acquired approximately 1,686 outdoor advertising displays consisting of 195 bulletins and 519 posters in Corpus Christi, TX; 87 bulletins and 373 posters in Laredo, TX; 45 bulletins and 164 posters in Panama City, FL; six bulletins in Fort Walton, FL; 14 bulletins and 112 posters in Albany, GA; 50 bulletins in Roanoke, VA and 121 bulletins in Lakeland, FL. Net revenues relating to these acquired assets totalled approximately $3.5 million based on the most recently completed fiscal years of the acquired businesses. OTHER ACQUISITION The Company has entered into a letter of intent with Headrick Outdoor, Inc. ("Headrick"), pursuant to which the Company intends to acquire the assets of Headrick for a cash purchase price of approximately $75 million. Upon completion of the Headrick acquisition the Company will operate an additional 3,577 bulletins in ten southeastern and midwestern states. A definitive acquisition agreement has not yet been executed, and there can be no assurance that such an agreement will be executed or, if executed, that the acquisition will be consummated. The Headrick acquisition will be subject to customary closing conditions, including the expiration or early termination of the waiting period under the HSR Act. 5 6 FINANCING PLAN The Company intends to finance its acquisition activity from external sources. In this regard, the Company is negotiating the terms of a new bank credit facility (the "New Credit Agreement") which would increase its loan commitment to $225 million and would provide for additional borrowing of up to $75 million at the discretion of the lenders. In addition to this Offering, the Company is planning to issue in the Note Offering $255 million aggregate principal amount of Notes that would be subordinate to amounts borrowed under the New Credit Agreement. As part of this financing plan, the Company has commenced a tender offer (the "Tender Offer" which, together with the Offerings and the Acquisitions, are collectively referred to herein as the "Transactions") to purchase for cash all of its 11% Senior Secured Notes due May 15, 2003 (the "Existing Notes"), of which $100 million are currently outstanding, and is soliciting consents to amend the indenture (the "Existing Note Indenture") and pledge agreement relating to the Existing Notes. As of the date of this Prospectus, the holders representing over a majority in principal amount of the Existing Notes have validly tendered their Existing Notes and delivered their consents. The acquisition of FKM was funded from borrowings under the Existing Credit Agreement and the Outdoor East acquisition and the Tender Offer will be financed with a portion of the net proceeds of the Offerings. This Offering is not conditioned upon the consummation of any of the other Transactions. As used in this Prospectus, the term "market" refers to the geographic area represented by the Spring 1996 Arbitron Radio Metro Market ranking, as determined by The Arbitron Company, which ranks, according to population of persons 12 years or older, the largest 263 markets in the U.S. -- from New York, NY (1) to Casper, WY (263). The Company believes that the Metro Market ranking is a standard measure of market size used by the media industry. 6 7 OUTDOOR ADVERTISING The following table sets forth certain information regarding the Company's existing primary outdoor advertising markets and the assets proposed to be acquired in the acquisition of Outdoor East. EXISTING OUTDOOR ADVERTISING MARKETS(1)
NUMBER OF DISPLAYS(4) --------------------- NET STATE/PRIMARY MARKET MARKET RANK(3) BULLETINS POSTERS REVENUES(5) - ------------------------------------------------------- -------------- --------- ------- ------------- (IN THOUSANDS) LOUISIANA Baton Rouge.......................................... 81 419 684 $ 7,280 Shreveport........................................... 126 268 730 3,389 Lafayette............................................ 97 154 353 2,035 Lake Charles......................................... 202 189 285 1,915 Monroe............................................... 226 123 508 1,534 Alexandria........................................... 198 49 224 757 Houma(2)............................................. -- 40 164 -- ----- ------ -------- Total.......................................... 1,242 2,948 16,910 TENNESSEE Nashville............................................ 44 326 1,174 7,488 Knoxville............................................ 69 694 896 7,171 Clarksville.......................................... -- 98 357 1,533 ----- ------ -------- Total.......................................... 1,118 2,427 16,192 FLORIDA Pensacola............................................ 125 250 662 3,113 Lakeland............................................. 104 554 372 2,875(6) Panama City.......................................... 225 268 470 2,262(6) Fort Myers........................................... 77 133 297 2,153 Tallahassee.......................................... 167 121 302 1,908 Fort Walton.......................................... 207 157 220 1,643(6) Daytona Beach........................................ 93 54 339 1,456 ----- ------ -------- Total.......................................... 1,537 2,662 15,410 ALABAMA Mobile............................................... 84 381 630 4,755 Montgomery........................................... 142 248 499 3,598 ----- ------ -------- Total.......................................... 629 1,129 8,353 TEXAS Brownsville.......................................... 63 204 873 2,577 Beaumont............................................. 127 204 308 2,165 Corpus Christi....................................... 128 195 519 1,707(6) Wichita Falls........................................ 235 89 165 902 Laredo............................................... 216 87 373 868(6) ----- ------ -------- Total.......................................... 779 2,238 8,219 MISSISSIPPI Jackson.............................................. 118 268 698 4,420 Gulfport............................................. 134 207 559 2,953 ----- ------ -------- Total.......................................... 475 1,257 7,373 GEORGIA Savannah............................................. 154 344 604 3,307 Augusta.............................................. 107 163 471 2,482 Albany............................................... 243 106 383 1,109(6) ----- ------ -------- Total.......................................... 613 1,458 6,898 VIRGINIA Richmond............................................. 56 309 616 4,288 Roanoke.............................................. 101 262 450 1,958(6) ----- ------ -------- Total.......................................... 571 1,066 6,246 PENNSYLVANIA Statewide Highways................................... N/A 553 0 4,713(6) KENTUCKY Lexington............................................ 105 117 507 3,127 WEST VIRGINIA Wheeling............................................. 213 261 551 2,626 COLORADO Colorado Springs..................................... 98 141 355 2,486 OHIO Dayton............................................... 52 3 529 1,960 Youngstown........................................... 90 122 537 243(6) ----- ------ -------- Total.......................................... 125 1,066 2,203 Subtotal....................................... 8,161 17,664 $ 100,756 ----- ------ --------
7 8 THE OUTDOOR EAST ACQUISITION (PENDING)
NUMBER OF DISPLAYS(4) NET --------------------- REVENUES(5) STATE/PRIMARY MARKET MARKET RANK(3) BULLETINS POSTERS -------------- - ------------------------------------------------------- -------------- --------- ------- (IN THOUSANDS) SOUTH CAROLINA Columbia............................................. 88 338 571 3,725(7) NORTH CAROLINA Statewide Highways................................... N/A 924 112 2,472(7) WEST VIRGINIA Bluefield............................................ -- 306 281 1,863(7) VIRGINIA Dublin............................................... -- 99 221 --(8) Harrisonburg......................................... 253 9 123 --(8) Hopewell............................................. -- 56 291 --(8) ----- ------ -------- Total.......................................... 164 635 1,632(7)(8) GEORGIA Valdosta............................................. -- 338 181 1,289(7) ----- ------ -------- Subtotal....................................... 2,070 1,780 $ 10,981 ----- ------ -------- TOTAL.................................................. 10,231 19,444 $ 111,737 ===== ====== ========
LOGO SIGN FRANCHISES The following table sets forth certain information regarding the Company's logo business operations. As of September 30, 1996, the Company operated 51,140 logo advertising displays.
# LOGO YEAR ADVERTISING AWARDED FRANCHISE DISPLAYS - ------- ------------------------ ----------- 1989 Nebraska................ 788 1989 Oklahoma................ 1,120 1990 Utah.................... 1,494 1991 Missouri(9)............. 8,254 1992 Ohio.................... 5,686 1993 Texas................... 2,177 1993 Mississippi............. 2,866 1995 Georgia................. 9,240 # LOGO YEAR ADVERTISING AWARDED FRANCHISE DISPLAYS - ------- ------------------------ ----------- 1995 Minnesota(10)........... 2,491 1995 South Carolina.......... 1,982 1996 Virginia................ 7,658 1996 Michigan................ 1,376 1996 Tennessee............... 4,216 1996 Kansas.................. 1,792 1996 New Jersey(11).......... --
- --------------- (1) Includes additional or outlying markets served by the office in the applicable market. (2) Houma was established as a separate primary market in fiscal 1995, and, therefore, net revenues are not included. (3) Indicates the Spring 1996 Arbitron Radio Metro Market ranking within which the office is located, as determined by The Arbitron Company. The Company believes that Metro Market ranking, which ranks, according to population of persons 12 years or older, the largest 263 markets in the U.S., is a standard measure of market size used by the media industry. Where no market ranking is shown, such market is not ranked by Arbitron. (4) The two standardized types of industry displays are bulletins and posters. See "Business -- Company Operations." The display count is as of October 31, 1995, pro forma for acquisitions completed within the last twelve months. (5) Except as otherwise noted, represents net revenues for fiscal year ended October 31, 1995 attributable to each outdoor advertising market. These revenues, together with logo sign and transit advertising revenues and production revenue, comprise outdoor advertising net revenues shown in the Company's consolidated statements of earnings (loss). (6) Reflects net revenues for the most recently completed applicable fiscal year with respect to acquisitions completed by the Company since July 31, 1996. See "The Transactions -- Recent Acquisition Activity -- Completed Acquisitions." (7) Represents net revenues for the most recently completed applicable fiscal year attributable to the outdoor advertising market proposed to be acquired by the Company. See "The Transactions -- Recent Acquisition Activity -- Pending Acquisitions." (8) Net revenues for specific markets proposed to be acquired in the state of Virginia are not available. (9) Franchise operated by a 66.7% owned partnership. (10) Franchise operated by a 95.0% owned partnership. (11) The Company was recently awarded the New Jersey franchise, and, accordingly, no logo signs had been erected as of September 30, 1996. The Company's address is 5551 Corporate Boulevard, Baton Rouge, Louisiana 70808. Its telephone number is (504) 926-1000. 8 9 THE OFFERING Class A Common Stock offered..... 2,200,000 shares Common Stock to be outstanding after the Offering............... 17,204,340 shares of Class A Common Stock(1) 13,791,389 shares of Class B Common Stock 30,995,729 total shares of Common Stock Use of proceeds.................. The net proceeds from this Offering, together with the net proceeds of the Note Offering, will be used to repay existing indebtedness and for general corporate purposes, including acquisitions. See "Use of Proceeds." Voting rights.................... The holders of the Class A Common Stock and the holders of the Class B Common Stock vote together as a single class (except as may be otherwise required by Delaware law) on all matters submitted to a vote of stockholders, with each share of Class A Common Stock entitled to one vote and each share of Class B Common Stock entitled to ten votes. Each share of Class B Common Stock converts automatically into one share of Class A Common Stock upon the sale or other transfer of such share of Class B Common Stock to a person or entity other than a Permitted Transferee (as defined under "Description of Capital Stock -- Common Stock"). Each class of Common Stock otherwise has identical rights. Nasdaq National Market Symbol......................... LAMR Dividend policy.................. The Company does not expect to pay dividends on the Common Stock in the foreseeable future. The Company's ability to pay dividends in the future to holders of the Common Stock will be subject to limitations and prohibitions contained in certain existing and future debt instruments of the Company and to the rights of the holders of its preferred stock. See "Dividend Policy." - --------------- (1) Excludes 1,161,835 shares of Class A Common Stock issuable under outstanding options granted pursuant to the Company's 1996 Equity Incentive Plan. 9 10 SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
PRO FORMA NINE MONTHS TWELVE PRO FORMA ENDED MONTHS YEAR ENDED OCTOBER 31, YEAR ENDED JULY 31, ENDED --------------------------------------------------- OCTOBER 31, ------------------- JULY 31, 1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(1) -------- ------- -------- -------- -------- ----------- -------- -------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues................. $ 62,262 $61,955 $ 66,524 $ 84,473 $102,408 $ 118,872 $ 76,726 $ 88,165 $133,365 Operating expenses: Direct advertising expenses.................. 22,143 22,783 23,830 28,959 34,386 39,783 26,564 30,969 44,947 General and administrative expenses.................. 17,703 18,225 19,504 24,239 27,057 31,679 20,636 22,842 34,320 Depreciation and amortization.............. 8,826 8,881 8,924 11,352 14,090 21,344 9,954 10,568 21,958 -------- -------- -------- -------- -------- --------- -------- -------- --------- Total operating expenses................ 48,672 49,889 52,258 64,550 75,533 92,806 57,154 64,379 101,225 -------- -------- -------- -------- -------- --------- -------- -------- --------- Operating income............. 13,590 12,066 14,266 19,923 26,875 26,066 19,572 23,786 32,140 -------- -------- -------- -------- -------- --------- -------- -------- --------- Interest expense............. 11,650 10,454 11,502 13,599 15,783 27,044 11,948 11,957 26,973 Earnings before income taxes and extraordinary item...... 936 2,625 1,677 5,227 8,308 (4,293) 6,069 10,897 2,747 Income tax expense (benefit)(2)................ 207 270 476 (2,072) (2,390) (6,976) (2,480) 4,420 808 Net earnings (loss)(3)(4).... 729 2,355 (653) 7,299 10,698 2,683 8,549 6,477 1,939 Net earnings (loss) applicable to common stock....................... 729 2,355 (653) 7,299 10,698 2,683 8,549 6,203 1,665 Earnings per common share before extraordinary item(5)..................... $ .02 $ .07 $ .03 $ .21 $ .32 $ .07 $ .26 $ .23 $ .05 ======== ======== ======== ======== ======== ========= ======== ======== ========= Net earnings (loss) per common share(5)............. $ .02 $ .07 $ (.02) $ .21 $ .32 $ .07 $ .26 $ .23 .05 ======== ======== ======== ======== ======== ========= ======== ======== ========= OTHER DATA: EBITDA(6).................... 22,416 20,947 23,190 31,275 40,965 47,410 29,526 34,354 54,098 EBITDA margin................ 36% 34% 35% 37% 40% 40% 39% 39% 41 % Ratio of EBITDA to interest expense..................... 1.9x 2.0x 2.0x 2.3x 2.6x 1.8x 2.5x 2.9x 2.0 x Ratio of net debt to EBITDA(7)................... 4.9x 5.0x 4.6x 4.7x 3.4x 3.7 -- -- 3.6 x Ratio of total debt to EBITDA...................... 4.9x 5.0x 5.0x 4.9x 3.6x 6.0 -- -- 5.2 x Ratio of earnings to fixed charges(8).................. 1.1x 1.2x 1.0x 1.3x 1.4x 0.9x 1.4x 1.7x 1.1 x Capital expenditures: Outdoor advertising......... 1,847 1,695 2,374 4,997 6,643 10,251 4,786 4,922 10,359 Logos....................... 629 3,056 2,009 2,761 1,567 1,567 1,390 7,989 8,096 Cash flows from operating activities(9)............... 10,328 12,930 12,411 15,214 25,065 -- 10,752 15,595 -- Cash flows from investing activities(9)............... (4,236) (7,273) (10,064) (53,569) (17,817) -- (11,049) (28,798) -- Cash flows from financing activities(9)............... (5,133) (6,734) 6,802 37,147 (9,378) -- (5,751) 9,287 -- Number of outdoor advertising displays(10)................ 18,829 17,835 17,659 22,369 22,547 27,609 22,512 23,089 28,151 Number of logo advertising displays(10)................ 5,027 11,371 13,820 18,266 24,219 24,219 22,431 48,362 48,362 Cumulative logo sign franchises(10).............. 4 5 7 7 11 11 8 15 15
AS OF JULY 31, 1996 ---------------------------- PRO FORMA FOR THE IPO AND THE ACTUAL TRANSACTIONS -------- ------------ BALANCE SHEET DATA: Cash and cash equivalents.............................................................. $ 1,965 $ 89,138 Working capital........................................................................ 1,479 90,877 Total assets........................................................................... 150,267 349,440 Total debt (including current maturities).............................................. 160,007 282,910 Total long-term obligations............................................................ 156,674 280,800 Stockholders' equity (deficit)......................................................... (25,289) 50,769
10 11 - --------------- (1) For purposes of the pro forma adjusted financial information (i) the statement of earnings of the Company for its fiscal year ended October 31, 1995 has been combined with the statements of earnings of Outdoor East and FKM for their fiscal year ended December 31, 1995, (ii) the statement of earnings of the Company for the twelve month period ended July 31, 1996 has been combined with the statements of earnings of Outdoor East and FKM for the twelve months ended September 30, 1996 and (iii) effect has been given to the IPO and the Transactions. For a more complete description of the pro forma impact on the Company's results of operations see "Unaudited Pro Forma Condensed Consolidated Financial Statements." (2) The benefit of the Company's net operating loss carryforward was fully recognized as of October 31, 1995, resulting in the income tax expense shown for the nine months ended July 31, 1996, compared to the income tax benefit for the same period in the prior year. (3) Includes, in 1993, an extraordinary loss on debt extinguishment, net of an income tax benefit, of $1.9 million. (4) Pro forma financial information for the year ended October 31, 1995 and the twelve months ended July 31, 1996 does not give effect to extraordinary loss from the extinguishment of debt of $9,235 and $9,470, respectively. (5) After giving effect to the approximately 778.9 for 1 split of the Company's then-existing common stock and the redesignation of such stock as Common Stock. (6) "EBITDA" is defined as operating income before depreciation and amortization. EBITDA represents a measure which management believes is customarily used to evaluate the financial performance of companies in the media industry. However, EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to operating income or net earnings as an indicator of the Company's operating performance or to net cash provided by operating activities as a measure of its liquidity. (7) "Net debt" consists of debt less cash and cash equivalents. (8) The ratio of earnings to fixed charges was computed by dividing earnings by fixed charges. For this purpose, earnings consist of income from continuing operations, before income taxes and fixed charges of the Company and its subsidiaries plus the Company's share of the distributed income of less than 50% owned persons. Fixed charges consist of the Company's and its subsidiaries' interest expense (including interest costs capitalized) and the portion of rent expense representative of an interest factor. (9) Cash flows from operating, investing and financing activities are obtained from the Company's consolidated statements of cash flows prepared in accordance with generally accepted accounting principles. (10) As of the end of the period. 11 12 RISK FACTORS In addition to the other information contained and incorporated by reference in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Class A Common Stock offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below. Such forward looking statements include those assuming the completion of this Offering, the Note Offering, the Acquisitions, the Tender Offer and the New Credit Agreement, certain of which have yet to be completed and which may not be completed. The failure of the Company to complete any of these transactions will impact the Company's capital structure, as more fully described under "Capitalization," and could have certain other effects, many of which are more fully described herein. FLUCTUATIONS IN ECONOMIC AND ADVERTISING TRENDS The Company relies on sales of advertising space for its revenues, and its operating results are therefore affected by general economic conditions, as well as trends in the advertising industry. A reduction in advertising expenditures available for the Company's displays could result from a general decline in economic conditions, a decline in economic conditions in particular markets where the Company conducts business or a reallocation of advertising expenditures to other available media by significant users of the Company's displays. Although the Company believes that in recent years outdoor advertising expenditures have increased more rapidly than total U.S. advertising expenditures, there can be no assurance that this trend will continue or that in the future outdoor advertising expenditures will not grow more slowly than the advertising industry as a whole. REGULATION OF OUTDOOR ADVERTISING The outdoor advertising business is subject to regulation by federal, state and local governments. Federal law requires states, as a condition to federal highway assistance, to restrict billboards on federally-aided primary and interstate highways to commercial and industrial areas and imposes certain additional size, spacing and other limitations on billboards. Some states have adopted standards more restrictive than the federal requirements. Local governments generally control billboards as part of their zoning regulations, and some local governments prohibit construction of new billboards and reconstruction of substantially damaged billboards or allow new construction only to replace existing structures. In addition, some jurisdictions (including certain of those within the Company's markets) have adopted amortization ordinances under which owners and operators of outdoor advertising displays are required to remove existing structures at some future date, often without condemnation proceeds being available. Federal and corresponding state outdoor advertising statutes require payment of compensation for removal by governmental order in some circumstances. Ordinances requiring the removal of a billboard without compensation, whether through amortization or otherwise, have been challenged in various state and federal courts on both statutory and constitutional grounds, with conflicting results. Although the Company has been successful in the past in negotiating acceptable arrangements in circumstances in which its displays have been subject to removal or amortization, there can be no assurance that the Company will be successful in the future and what effect, if any, such regulations may have on the Company's operations. In addition, the Company is unable to predict what additional regulation may be imposed on outdoor advertising in the future. Legislation regulating the content of billboard advertisements has been introduced in Congress from time to time in the past, although no laws which, in the opinion of management, would materially and adversely affect the Company's business have been enacted to date. Changes in laws and regulations affecting outdoor advertising at any level of government may have a material adverse effect on the Company's results of operations. See "-- Declining Tobacco Advertising" for a discussion of recent federal executive action concerning tobacco advertising. RESTRICTIVE COVENANTS IN DEBT INSTRUMENTS The Existing Credit Agreement and the Existing Note Indenture contain, and the New Credit Agreement and the indenture relating to the Notes (the "Indenture") are each expected to contain covenants 12 13 which restrict, among other things, the ability of the Company to dispose of assets, incur or repay debt, create liens, and make certain investments and other restricted payments. In addition, the Existing Credit Agreement requires, and the New Credit Agreement is expected to require, the Company to maintain specified financial ratios and levels, including cash interest coverage, fixed charge coverage and total debt ratios. The ability of the Company to comply with the foregoing restrictive covenants will depend on its future performance, which is subject to prevailing economic, financial and business conditions and other factors beyond the Company's control. See "Description of Other Indebtedness." SUBSTANTIAL INDEBTEDNESS OF THE COMPANY The Company presently has substantial indebtedness ($160.0 million at July 31, 1996) and contemplates increasing its indebtedness in connection with the Acquisitions. In addition, the Company is planning to issue in the Note Offering $255 million aggregate principal amount of Notes and is currently negotiating the terms of the New Credit Agreement, which would increase the Company's loan commitment to $225 million and would provide for additional borrowing of up to $75 million at the discretion of the lenders. See "The Transactions." Additionally, at July 31, 1996, the Company had $3.6 million of Class A Preferred Stock, $638 par value per share (the "Class A Preferred Stock"), outstanding which is entitled to an aggregate annual cumulative preferential dividend of $364,903. At July 31, 1996, assuming consummation of the Transactions and the IPO and the application of the net proceeds therefrom, the Company's indebtedness would have been $282.9 million. A substantial part of the Company's cash flow from operations will be dedicated to debt service and will not be available for other purposes. Further, if the Company's net cash provided by operating activities were to decrease from present levels, the Company could experience difficulty in meeting its debt service obligations without additional financing. There can be no assurance that, in the event the Company were to require additional financing, such additional financing would be available or, if available, would be available on favorable terms. In addition, any such additional financing could be incurred only upon satisfaction of the debt incurrence provisions of the Existing Note Indenture and the Indenture and may require the consent of lenders under the Existing Credit Agreement or the New Credit Agreement, as the case may be, or holders of other debt of the Company. The level of the Company's indebtedness could have important consequences to stockholders, including a reduction in the Company's flexibility to respond to changing business and economic conditions. Certain of the Company's competitors currently operate on a less leveraged basis and may have greater operating and financial flexibility than the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Description of Indebtedness" and "Description of Capital Stock." ACQUISITION AND GROWTH STRATEGY RISKS The Company's growth has been enhanced materially by strategic acquisitions that have substantially increased the Company's inventory of advertising displays. One element of the Company's operating strategy is to make strategic acquisitions in markets in which it currently competes as well as in new markets. While the Company believes that the outdoor advertising industry is highly fragmented and that significant acquisition opportunities are available, there can be no assurance that suitable acquisition candidates can be found, and the Company is likely to face competition from other outdoor advertising companies for available acquisition opportunities. In addition, if the prices sought by sellers of outdoor advertising displays continue to rise, as management believes may happen, the Company may find fewer acceptable acquisition opportunities. There can be no assurance that the Company will have sufficient capital resources to complete acquisitions or be able to obtain any required consents of its bank lenders or that acquisitions can be completed on terms acceptable to the Company. In addition, the Company recently has entered into the transit advertising business and, while the Company believes that it will be able to utilize its expertise in outdoor advertising to operate this business, it has had limited experience in transit advertising and there is no assurance that it will be successful. Since July 31, 1996, the Company has completed the acquisition of, and has entered into agreements to acquire, eight complementary businesses. The process of integrating these businesses into the Company's operations may result in unforeseen operating difficulties and could require significant management attention 13 14 that would otherwise be available for the development of the Company's existing business. Moreover, there can be no assurance that the Company will realize anticipated benefits and cost savings or that the Outdoor East acquisition or any future acquisitions will be consummated. See "The Transactions -- Recent Acquisition Activity" for a description of the Company's recent acquisition activity and a discussion of certain pending transactions. DECLINING TOBACCO ADVERTISING Approximately 9% of the Company's outdoor advertising net revenues in fiscal 1995 came from the tobacco products industry, compared to 7% for fiscal 1994 and 1993, 12% for fiscal 1992 and 17% for fiscal 1991. The percentage for the nine months ended July 31, 1996, on a historical basis and on a pro forma basis giving effect to the Acquisitions, was approximately 10%. Manufacturers of tobacco products, principally cigarettes, were historically major users of outdoor advertising displays. Beginning in 1992, the leading tobacco companies substantially reduced their domestic advertising expenditures in response to societal and governmental pressures and other factors. There can be no assurance that the tobacco industry will not further reduce advertising expenditures in the future either voluntarily or as a result of governmental regulation or as to what affect any such reduction may have on the Company. See "Business -- Company Operations -- Categories of Business." Tobacco advertising is currently subject to regulation and legislation has been introduced from time to time in Congress that would further regulate advertising of tobacco products. In August 1996, President Clinton signed an executive order adopting rules proposed by the United States Food and Drug Administration which would prohibit the use of pictures and color in tobacco advertising and restrict the proximity of outdoor tobacco advertising to schools and playgrounds. Although certain advertising industry and tobacco industry organizations have filed lawsuits challenging these rules and certain members of Congress have indicated that they may sponsor legislation to prevent these rules from going into effect, there can be no assurance that such lawsuits will be successful or that such legislation, if proposed, will be adopted. Subject to the outcome of litigation or legislative action, these rules would become effective in August 1997. Further, there can be no assurance that national or local legislation or regulations restricting tobacco advertising will not be adopted in the future, or as to the effect any such legislation or the voluntarily curtailment of advertising by tobacco companies would have on the Company. See "Business -- Regulation." COMPETITION In addition to competition from other forms of media, including television, radio, newspapers and direct mail advertising, the Company faces competition in its markets from other outdoor advertising companies, some of which may be larger and better capitalized than the Company. The Company also competes with a wide variety of other out-of-home advertising media, the range and diversity of which have increased substantially over the past several years to include advertising displays in shopping centers, malls, airports, stadiums, movie theaters and supermarkets, and on taxis, trains and buses. The Company believes that its local orientation, including the maintenance of local offices, has enabled it to compete successfully in its markets to date. However, there can be no assurance that the Company will be able to continue to compete successfully against current and future sources of outdoor advertising competition and competition from other media or that the competitive pressures faced by the Company will not adversely affect its profitability or financial performance. In its logo sign business, the Company currently faces competition for state franchises from four other national logo sign providers as well as local companies. Competition from these sources is encountered both when a franchise is first privatized and upon renewal thereafter. See "Business -- Competition." POTENTIAL LOSSES FROM HURRICANES A significant portion of the Company's structures are located in the mid-Atlantic and Gulf Coast regions of the United States. These areas are highly susceptible to hurricanes during the late summer and early fall. In the past, severe storms have caused the Company to incur material losses resulting from structural damage, overtime compensation, loss of billboards that could not legally be replaced and reduced occupancy because billboards are out of service. The Company has determined that it is not economical to obtain insurance 14 15 against losses from hurricanes and other storms. The Company has developed contingency plans to deal with the threat of hurricanes, including plans for early removal of advertising faces to permit the structures to better withstand high winds and the replacement of such faces after storms have passed. As a result of these contingency plans, the Company has experienced lower levels of losses from recent storms and hurricanes. Structural damage attributable to Hurricane Andrew in 1992 was less than $500,000, and three hurricanes caused aggregate structural damage of less than $1,000,000 in 1995. There can be no assurance, however, that the Company's contingency plans will continue to be effective. RISKS IN OBTAINING AND RETAINING LOGO SIGN FRANCHISES Logo sign franchises represent a growing portion of the Company's revenues and operating income. The Company cannot predict the number of remaining states, if any, that will initiate logo sign programs or convert state-run logo sign programs to privately operated programs. Competition for new state logo sign franchises is intense and, even after a favorable award, franchises may be subject to challenge under state contract bidding requirements, resulting in delays and litigation costs. In addition, state logo sign franchises are generally, with renewal options, ten to twenty-year franchises subject to earlier termination by the state, in most cases upon payment of compensation. Typically, at the end of the term of the franchise, ownership of the structures is transferred to the state without compensation to the Company. None of the Company's logo sign franchises are due to terminate in the next two years; only two are subject to renewal during that period and, in one case, the state authority has verbally agreed to renew the franchise for five years. There can be no assurance that the Company will be successful in obtaining new logo sign franchises or renewing existing franchises. Furthermore, following the receipt by the Company of a new state logo sign franchise, the Company generally incurs significant start-up capital expenditures and there can be no assurance that the Company will continue to have access to capital to fund such expenditures. RELIANCE ON KEY EXECUTIVES The Company's success depends to a significant extent upon the continued services of its executive officers and other key management and sales personnel, in particular Kevin P. Reilly, Jr., the Company's Chief Executive Officer, the Company's five regional managers and the manager of its logo sign business. Although the Company believes it has incentive and compensation programs designed to retain key employees, the Company has no employment contracts with any of its employees, and none of its executive officers are bound by non-compete agreements. The Company does not maintain key man insurance on its executives. The unavailability of the continuing services of any of its executive officers and other key management and sales personnel could have an adverse effect on the Company's business. See "Management." STOCKHOLDERS' DEFICIT At July 31, 1996 and October 31, 1995, the Company had a stockholders' deficit of $25.3 million and $28.2 million, respectively. The deficit results primarily from net losses that were incurred during the fiscal years ended October 31, 1983 through 1990 caused primarily by high levels of depreciation and amortization of fixed assets and acquired intangibles, and from stock redemptions and dividends. Although the stockholders' deficit declined by approximately $9.2 million in fiscal 1995, primarily as a result of net earnings, there can be no assurance that this trend will continue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CONTROLLING STOCKHOLDER Upon consummation of this Offering, the Reilly Family Limited Partnership, of which Kevin P. Reilly, Jr., the Company's Chief Executive Officer, is the managing general partner, will beneficially own shares of the Company's Common Stock having approximately 88.9% of the total voting power of the Common Stock. As a result, Mr. Reilly, or his successor as managing general partner, will effectively be able to control the outcome of matters requiring a stockholder vote, including electing directors, adopting or amending certain provisions of the Company's certificate of incorporation and by-laws and approving or preventing certain mergers or other similar transactions, such as a sale of substantially all the Company's assets (including 15 16 transactions that could give holders of the Company's Class A Common Stock the opportunity to realize a premium over the then-prevailing market price for their shares). In addition, upon consummation of this Offering, the Company's officers, directors and their respective affiliates, other than the Reilly Family Limited Partnership, will beneficially own shares of the Company's Common Stock having approximately 2.3% of the total voting power of the Company's Common Stock. Therefore, purchasers of Class A Common Stock offered hereby will become minority stockholders of the Company and will be unable to control the management or business policies of the Company. Moreover, subject to contractual restrictions and general fiduciary obligations, the Company is not prohibited from engaging in transactions with its management and principal stockholders, or with entities in which such persons are interested. The Company's certificate of incorporation does not provide for cumulative voting in the election of directors and, as a result, the controlling stockholders can elect all the directors if they so choose. CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's certificate of incorporation and by-laws may have the effect of discouraging a third party from making an acquisition proposal for the Company and thereby inhibiting a change in control of the Company in circumstances that could give the holders of the Class A Common Stock the opportunity to realize a premium over the then prevailing market price of such stock. Such provisions may also adversely affect the market price of the Class A Common Stock. For example, the Company's certificate of incorporation authorizes the issuance of "blank check" preferred stock (the "Preferred Stock") with such designations, rights and preferences as may be determined from time to time by the Board of Directors. In the event of issuance, such Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. In addition, the issuance of Preferred Stock may adversely affect the voting and dividend rights, rights upon liquidation and other rights of the holders of Common Stock (including the purchasers of Class A Common Stock in this Offering). Although the Company has no present intention to issue any shares of such Preferred Stock, the Company retains the right to do so in the future. See "Description of Capital Stock -- Additional Preferred Stock." Furthermore, the Company is subject to Section 203 of the Delaware General Corporation Law. The existence of this provision, as well as the control of the Company by the Reilly Family Limited Partnership, would be expected to have an anti-takeover effect, including possibly discouraging takeover attempts that might result in a premium over the market price for the shares of Class A Common Stock. See "Description of Capital Stock" and "Principal and Selling Stockholders." LIMITED TRADING HISTORY AND VOLATILITY OF STOCK PRICE The Company completed the initial public offering of its Class A Common Stock in August 1996 (the "IPO") and, therefore, there is a limited trading history for the Class A Common Stock. In addition, from time to time, there may be significant volatility in the market price for the Class A Common Stock of the Company. Quarterly operating results of the Company, changes in earnings estimates by analysts, changes in general conditions in the Company's industry or the economy or the financial markets or other developments affecting the Company could cause the market price of the Class A Common Stock to fluctuate substantially. In addition, in recent years the stock market has experienced significant price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance. MANAGEMENT DISCRETION OVER USE OF NET PROCEEDS A portion of the net proceeds of the Offering will be available for general corporate purposes. Accordingly, management will have considerable discretion over the use of such proceeds and may use them without stockholder approval. See "Use of Proceeds." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market after this Offering could adversely affect the prevailing market price of such shares. In addition to the 2,200,000 shares of Class A Common 16 17 Stock offered hereby, as of the date of this Prospectus, there will be 28,795,729 shares of Common Stock outstanding, 23,330,814 of which are "restricted" shares (the "Restricted Shares") under the Securities Act of 1933, as amended (the "Securities Act"). Beginning 90 days after the date of this Prospectus, all of the Restricted Shares will become eligible for sale in the public market subject to restrictions pursuant to Rule 144 under the Securities Act. See "Principal Stockholders" and "Shares Eligible for Future Sale." ABSENCE OF DIVIDENDS The Company does not anticipate paying dividends on its Common Stock in the foreseeable future. In addition, as stated above, the Existing Credit Agreement, the Existing Indenture, the New Credit Agreement and the Indenture each place or will place limitations on the Company's ability to pay dividends and make other distributions on its Common Stock, and the Company's Class A Preferred Stock is entitled to preferential dividends before any dividends may be paid on the Common Stock. See "Dividend Policy," "Description of Capital Stock" and "Description of Indebtedness." THE TRANSACTIONS RECENT ACQUISITION ACTIVITY The Company has recently entered into agreements to acquire, or has acquired, the assets or capital stock of several complementary businesses. The Company believes that these acquisitions will allow the Company to capitalize on the operating efficiencies and cross-market sales opportunities associated with operating in or near markets currently served by the Company. PENDING ACQUISITIONS The Outdoor East Acquisition On October 9, 1996, the Company entered into a Contract to Sell and Purchase with Outdoor East pursuant to which the Company agreed to acquire substantially all of the assets of Outdoor East for a cash purchase price of approximately $60 million. Upon completion of the acquisition of Outdoor East, the Company will operate an additional 1,780 posters and 2,070 bulletins in seven markets in the states of Virginia, West Virginia, North Carolina, South Carolina, Georgia and Florida. The acquisition of Outdoor East would add advertising displays positioned along heavily travelled highways serving the eastern U.S. The largest market included in this acquisition is Columbia, SC, which is the state capital, home to the University of South Carolina and the 88th largest market in the U.S. The Outdoor East acquisition would give the Company a presence in additional small to medium-sized markets, including Harrisonburg, VA, Dublin, VA, Hopewell, VA, Bluefield, WV, Valdosta, GA and Lumberton, NC. Outdoor East had approximately $12.2 million in net revenues for the twelve months ended September 30, 1996. The consummation of the Outdoor East acquisition, which is expected to occur on or before December 15, 1996, is subject to customary closing conditions, including the expiration or early termination of the waiting period under the HSR Act. Logo Signs In November 1996, the Company entered into an agreement with LSA pursuant to which the Company agreed to acquire the logo sign franchises for the states of Kentucky and Nevada for $3.8 million in cash. Upon consummation of the acquisition, the Company will operate 1,984 logo sign displays in Kentucky and 292 logo sign displays in Nevada. The acquisition of LSA, which is expected to take place on December 2, 1996, is subject to customary closing conditions, including required regulatory approvals. 17 18 Transit The Company has entered into an agreement to acquire 450 transit advertising displays located in Augusta, GA and Greenville, North Charleston, Spartanburg and Columbia, SC from Shelter Ad Systems, Inc. for $1.1 million in cash. COMPLETED ACQUISITIONS The FKM Acquisition On November 1, 1996, the Company acquired all of the outstanding capital stock of FKM for a cash purchase price of $40 million. Upon completion of the FKM acquisition, the Company acquired a total of 659 displays in Youngstown, OH and 553 bulletins located across the state of Pennsylvania on interstate highways and other primary roads. FKM had approximately $7.5 million of net revenues for the twelve months ended September 30, 1996. The Company financed the FKM acquisition with borrowings of $40 million under the Existing Credit Agreement. The acquisition of FKM expands the Company's operations in Ohio and gives the Company an entry into Pennsylvania. As a result of the FKM acquisition, the Company will operate bulletin structures on non-metropolitan Pennsylvania interstate and state highways. Other Outdoor Advertising Acquisitions Since July 31, 1996, the Company has also acquired for cash certain assets of (i) Revere Outdoor Advertising in Corpus Christi, TX and Laredo, TX for $9.3 million, (ii) Southworth Advertising, Inc. in Panama City, FL, Fort Walton, FL and Albany, GA for $1.8 million, (iii) Colonial Outdoor Advertising, Inc. in Roanoke, VA for $1.1 million, and (iv) Walz Marketing, Inc. in Lakeland, FL for $0.8 million. As a result of these additional acquisitions, the Company has acquired approximately 1,686 outdoor advertising displays consisting of 195 bulletins and 519 posters in Corpus Christi, TX; 87 bulletins and 373 posters in Laredo, TX; 45 bulletins and 164 posters in Panama City, FL; six bulletins in Fort Walton, FL; 14 bulletins and 112 posters in Albany, GA; 50 bulletins in Roanoke, VA and 121 bulletins in Lakeland, FL. Net revenues relating to these acquired assets totalled approximately $3.5 million based upon the most recently completed fiscal years of each of the acquired businesses. OTHER ACQUISITION The Company has entered into a letter of intent with Headrick, pursuant to which the Company intends to acquire the assets of Headrick for a cash purchase price of approximately $75 million. Upon completion of the Headrick acquisition, the Company will operate an additional 3,577 bulletins in ten southeastern and midwestern states. A definitive acquisition agreement has not yet been executed, and there can be no assurance that such an agreement will be executed or, if executed, that the acquisition will be consummated. The Headrick acquisition will be subject to customary closing conditions, including the expiration or early termination of the waiting period under the HSR Act. THE TENDER OFFER On October 17, 1996, the Company commenced a tender offer for all of the Existing Notes and a solicitation of consents from the holders of the Existing Notes to (i) eliminate or modify certain covenants and other provisions contained in the Existing Note Indenture in order to improve the financial flexibility of the Company, (ii) amend the Pledge Agreement to release the collateral securing the Existing Notes, thereby making the Existing Notes unsecured obligations of the Company and (iii) release the Subsidiary Guarantors (as defined in the Existing Note Indenture) from their obligations as guarantors under the Existing Note Indenture. The consummation of the Tender Offer is conditioned on the valid tender of a majority of the outstanding Existing Notes and the Company having obtained the requisite financing for payment of the tendered Existing Notes. As of the date of this Prospectus, the holders representing over a majority in principal amount of the Existing Notes had validly tendered their Existing Notes and delivered their consents. 18 19 The Tender Offer will expire on November 25, 1996, unless further extended, at which time the Company expects to purchase all of the Existing Notes validly tendered with a portion of the net proceeds of the Offerings. THE NEW CREDIT AGREEMENT The Company is currently negotiating a New Credit Agreement which is expected to be executed after the closing of this Offering. The New Credit Agreement is expected to contain a $225 million commitment and provide for additional borrowing of up to $75 million at the discretion of the lenders. See "Description of Other Indebtedness -- New Credit Agreement" for a discussion of the terms of the agreement. There can be no assurance that the New Credit Agreement will be entered into. THE NOTE OFFERING Concurrently with this Offering, the Company is offering $255 million aggregate principal amount of Notes by a separate prospectus. The Notes will be issued pursuant to the Indenture and will be general unsecured obligations of the Company subordinate in right of payment to all existing and future senior indebtedness of the Company. 19 20 USE OF PROCEEDS The net proceeds to the Company from this Offering are estimated to be approximately $47.6 million (or approximately $54.9 million if the Underwriters' over-allotment option is exercised in full) after deducting estimated underwriting discounts and commissions and offering expenses. The net proceeds of this Offering, together with the net proceeds of the Note Offering, will be used as follows:
(DOLLARS IN THOUSANDS) ---------- Sources of Funds: Gross Proceeds of this Offering......................................... $ 50,600 Gross Proceeds of the Note Offering..................................... 255,000 -------- Total sources................................................... $305,600 ======== Uses of Funds: Repay Existing Credit Agreement......................................... $ 9,500(1) Repurchase Existing Notes............................................... 111,500(2) Purchase Price of the Acquisitions(3)................................... 100,500 Financing Fees and Expenses............................................. 10,527 Cash(4)................................................................. 73,573 -------- Total uses...................................................... $305,600 ========
- --------------- (1) Represents amounts outstanding at July 31, 1996 under the Existing Credit Agreement, as adjusted to give effect to the IPO, and does not reflect $40.0 million in borrowings to finance the FKM acquisition, all of which will be repaid with a portion of the net proceeds from the Offerings. The Existing Credit Agreement bears interest computed as a margin over either the lender's base rate or the London Interbank Offered Rate. See "Description of Other Indebtedness -- Existing Credit Agreement." (2) Does not reflect the payment of $5.5 million of interest paid on November 15, 1996. Assumes the tender of all of the Existing Notes. The Existing Notes mature on May 15, 2003 and were issued in May 1993 in an aggregate principal amount of $100 million, all of which are currently outstanding. The Existing Notes bear interest at the rate of 11% per annum. See "Description of Other Indebtedness -- Existing Notes." (3) The Company has borrowed $40.0 million under the Existing Credit Agreement to finance the FKM acquisition, all of which will be repaid with a portion of the net proceeds from the Offerings. (4) This amount, together with the $225 million commitment under the New Credit Agreement, will be available for general corporate purposes, including future acquisitions and working capital. This amount does not reflect the remaining $14.4 million of net proceeds from the IPO and ($0.8) million net adjustments related to the Acquisitions. DIVIDEND POLICY The Company does not anticipate paying dividends on its Common Stock in the foreseeable future. The Company intends to retain future earnings for reinvestment in the Company. In addition, the Existing Credit Agreement and the Existing Note Indenture contain, and the New Credit Agreement and the Indenture, if entered into, will contain, limitations on the Company's ability to pay dividends or make any other distributions on the Common Stock. The Company's Class A Preferred Stock is entitled to preferential dividends, in an annual aggregate amount of $364,903, before any dividends may be paid on the Common Stock. See "Description of Capital Stock" and "Description of Indebtedness." Any future determination as to the payment of dividends will be subject to such limitations, will be at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial condition, capital requirements and other factors deemed relevant by the Board of Directors. 20 21 PRICE RANGE OF CLASS A COMMON STOCK The Class A Common Stock is quoted on the Nasdaq National Market under the symbol "LAMR." The following table sets forth, for the periods indicated, the high and low closing sales prices for the Class A Common Stock as reported by the Nasdaq National Market. Prior to August 2, 1996, the day on which the Class A Common Stock was first publicly traded, there was no public market for the Class A Common Stock.
HIGH LOW ------ ------ Fiscal year ended October 31, 1996: Fourth Quarter (beginning August 2, 1996)........................ $42.50 $20.13 Fiscal year ended October 31, 1997: First Quarter (through November 21, 1996)........................ $27.50 $24.13
On November 21, 1996, the last reported sale price per share for the Class A Common Stock on the Nasdaq National Market was $24.25. 21 22 CAPITALIZATION The following table sets forth (i) the capitalization of the Company as of July 31, 1996 and (ii) such pro forma capitalization adjusted for the IPO and the Transactions.
AS OF JULY 31, 1996 ------------------------ PRO FORMA AS ADJUSTED FOR THE IPO AND THE ACTUAL TRANSACTIONS -------- ------------ (DOLLARS IN THOUSANDS) Cash and cash equivalents............................................. $ 1,965 $ 89,138 ======== ======== Current maturities of long-term debt.................................. 5,326 4,103 Long-term debt, less current maturities 11% Senior Secured Notes............................................ 100,000 -- 9 5/8% Senior Subordinated Notes.................................... -- 255,000 Notes payable to bank group......................................... 34,250 -- Revolving credit facility........................................... 15,500 -- Other long-term debt................................................ 4,931 5,807 Ten-year subordinated notes......................................... -- 18,000 -------- -------- Total long-term debt, less current maturities............... 154,681 278,807 Stockholders' equity (deficit) Class A Preferred Stock, $638 par value, 10,000 shares authorized, 5,719.49 issued and outstanding.................................. 3,649 3,649 Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and outstanding.................................... -- -- Class A Common Stock, $0.001 par value, 50,000,000 shares authorized, 10,180,483 actual shares issued and outstanding, 17,204,340 issued and outstanding, pro forma, as adjusted........ 10(1) 17 Class B Common Stock, $0.001 par value, 25,000,000 shares authorized, 14,301,537 actual shares issued and outstanding, 13,791,389 issued and outstanding, pro forma, as adjusted........ 14(1) 14 Additional paid-in capital.......................................... -- 85,476 Accumulated deficit................................................. (28,962) (38,387) -------- -------- Total stockholders' equity (deficit)........................ (25,289) 50,769 -------- -------- Total capitalization........................................ $134,718 $333,679 ======== ========
- --------------- (1) Gives effect to the approximate 778.9 for 1 stock split and recapitalization effected after July 31, 1996. 22 23 SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA The selected consolidated statement of operations and balance sheet data presented below are derived from the consolidated financial statements of the Company. The financial statements of the Company for the three years ended October 31, 1995 and as of October 31, 1994 and 1995 were audited by KPMG Peat Marwick LLP, independent auditors, as indicated in their report included elsewhere in this Prospectus. The consolidated statement of operations and balance sheet data as of and for the nine months ended July 31, 1995 and 1996 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring adjustments, which management considers necessary for a fair presentation of the financial position and the results of operations for these periods. The results of operations for any such period are not necessarily indicative of the results of operations for a full year. The data presented below should be read in conjunction with the audited consolidated financial statements, related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations and other financial information included herein.
PRO FORMA PRO FORMA NINE MONTHS ENDED TWELVE YEAR ENDED OCTOBER 31, YEAR ENDED JULY 31, MONTHS ENDED --------------------------------------------------- OCTOBER 31, ------------------- JULY 31, 1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(1) -------- ------- -------- -------- -------- ----------- -------- -------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Net advertising revenues............... $ 60,834 $60,760 $ 65,365 $ 83,627 $101,871 $ 118,335 $ 76,295 $ 87,647 $132,741 Management fees.......... 827 623 595 334 31 31 23 45 53 Rental income............ 601 572 564 512 506 506 408 473 571 -------- ------- -------- -------- -------- --------- -------- -------- -------- Total net revenues.......... 62,262 61,955 66,524 84,473 102,408 118,872 76,726 88,165 133,365 -------- ------- -------- -------- -------- --------- -------- -------- -------- Operating expenses: Direct advertising expenses............... 22,143 22,783 23,830 28,959 34,386 39,783 26,564 30,969 44,947 General and administrative expenses............... 17,703 18,225 19,504 24,239 27,057 31,679 20,636 22,842 34,320 Depreciation and amortization........... 8,826 8,881 8,924 11,352 14,090 21,344 9,954 10,568 21,958 -------- ------- -------- -------- -------- --------- -------- -------- -------- Total operating expenses.......... 48,672 49,889 52,258 64,550 75,533 92,806 57,154 64,379 101,225 -------- ------- -------- -------- -------- --------- -------- -------- -------- Operating income.......... 13,590 12,066 14,266 19,923 26,875 26,066 19,572 23,786 32,140 -------- ------- -------- -------- -------- --------- -------- -------- -------- Non-operating expense (income): Interest income.......... (213) (96) (218) (194) (199) (211) (133) (140) (230) Interest expense......... 11,650 10,454 11,502 13,599 15,783 27,004 11,948 11,957 26,973 Loss (gain) on disposition of assets................. 216 (1,309) 729 675 2,328 2,560 1,004 818 2,146 Other expense............ 1,001 392 576 616 655 1,006 684 254 504 -------- ------- -------- -------- -------- --------- -------- -------- -------- Total non-operating expense........... 12,654 9,441 12,589 14,696 18,567 30,359 13,503 12,889 29,393 -------- ------- -------- -------- -------- --------- -------- -------- -------- Earnings (loss) before income taxes and extraordinary item....... 936 2,625 1,677 5,227 8,308 (4,293) 6,069 10,897 2,747 Income tax expense (benefit)(2)............. 207 270 476 (2,072) (2,390) (6,976) (2,480) 4,420 808 -------- ------- -------- -------- -------- --------- -------- -------- -------- Extraordinary loss on debt extinguishment, net of income tax benefit of $98...................... -- -- (1,854) -- -- -- -- -- -- -------- ------- -------- -------- -------- --------- -------- -------- -------- Net earnings (loss)(3).... 729 2,355 (653) 7,299 10,698 2,683 8,549 6,477 1,939 Preferred stock dividends................ -- -- -- -- -- -- -- 274 274 -------- ------- -------- -------- -------- --------- -------- -------- -------- Net earnings (loss) applicable to common stock.................... 729 2,355 (653) 7,299 10,698 2,683 8,549 6,203 1,665 ======== ======= ======== ======== ======== ========= ======== ======== ======== Earnings per common share before extraordinary item(4).................. $ .02 $ .07 $ .03 $ .21 $ .32 $ .07 $ .26 $ .23 $ .05 ======== ======= ======== ======== ======== ========= ======== ======== ======== Net earnings (loss) per common share(4).......... $ .02 $ .07 $ (.02) $ .21 $ .32 $ .07 $ .26 $ .23 $ .05 ======== ======= ======== ======== ======== ========= ======== ======== ======== OTHER DATA: EBITDA(5)................. 22,416 20,947 23,190 31,275 40,965 47,410 29,526 34,354 54,098 EBITDA margin............. 36% 34% 35% 37% 40% 40% 39% 39% 41% Ratio of EBITDA to interest expense......... 1.9x 2.0x 2.0x 2.3x 2.6x 1.8x 2.5x 2.9x 2.0x Ratio of net debt to EBITDA(6)................ 4.9x 5.0x 4.6x 4.7x 3.4x 3.7 -- -- 3.6x Ratio of total debt to EBITDA................... 4.9x 5.0x 5.0x 4.9x 3.6x 6.0 -- -- 5.2x Ratio of earnings to fixed charges(7)............... 1.1x 1.2x 1.0x 1.3x 1.4x 0.9x 1.4x 1.7x 1.1x Capital expenditures: Outdoor advertising...... 1,847 1,695 2,374 4,997 6,643 10,251 4,786 4,922 10,359 Logos.................... 629 3,056 2,009 2,761 1,567 1,567 1,390 7,989 8,096 Cash flows from operating activities(8)............ 10,328 12,930 12,411 15,214 25,065 -- 10,752 15,595 -- Cash flows from investing activities(8)............ (4,236) (7,273) (10,064) (53,569) (17,817) -- (11,049) (28,798) -- Cash flows from financing activities(8)............ (5,133) (6,734) 6,802 37,147 (9,378) -- (5,751) 9,287 -- Number of outdoor advertising displays(9).............. 18,829 17,835 17,659 22,369 22,547 27,609 22,512 23,089 28,151 Number of logo advertising displays(9).............. 5,027 11,371 13,820 18,266 24,219 24,219 22,431 48,362 48,362 Cumulative logo sign franchises(9)............ 4 5 7 7 11 11 8 15 15 BALANCE SHEET DATA(9): Cash and cash equivalents.............. 1,152 75 9,224 8,016 5,886 -- 1,968 1,965 89,138 Working capital........... (2,876) (7,557) 7,274 1,691 1,737 -- 178 1,479 90,877 Total assets.............. 81,737 78,649 92,041 130,008 133,885 -- 130,119 150,267 349,440 Total debt (including current maturities)...... 110,350 104,222 115,380 153,929 146,051 -- 148,552 160,007 282,910 Total long-term obligations.............. 111,267 103,567 122,774 147,957 143,944 -- 142,433 156,674 280,800 Stockholders' equity (deficit)................ (43,787) (41,870) (43,249) (37,352) (28,154) -- (29,178) (25,289) 50,769
23 24 - --------------- (1) For purposes of the pro forma adjusted financial information (i) the statement of earnings of the Company for its fiscal year ended October 31, 1995 has been combined with the statements of earnings of Outdoor East and FKM for their fiscal year ended December 31, 1995, (ii) the statement of earnings of the Company for the twelve month period ended July 31, 1996 has been combined with the statements of earnings of Outdoor East and FKM for the twelve months ended September 30, 1996 and (iii) effect has been given to the IPO and the Transactions. None of the other Transactions is a condition to this Offering. For a more complete description of the pro forma impact on the Company's results of operations if certain of the Transactions are not consummated see " Unaudited Pro Forma Condensed Consolidated Financial Statements." (2) The benefit of the Company's net operating loss carryforward was fully recognized as of October 31, 1995, resulting in the income tax expense shown for the nine months ended July 31, 1996, compared to the income tax benefit for the same period in the prior year. (3) Pro forma financial information for the year ended October 31, 1995 and the twelve months ended July 31, 1996 does not give effect to extraordinary loss from extinguishment of debt net of tax of $9,235 and $9,470, respectively. (4) After giving effect to the approximately 778.9 for 1 split of the Company's then-existing common stock and the recapitalization effected after July 31, 1996. (5) "EBITDA" is defined as operating income before depreciation and amortization. It represents a measure which management believes is customarily used to evaluate the financial performance of companies in the media industry. However, EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to operating income or net earnings as an indicator of the Company's operating performance or to net cash provided by operating activities as a measure of its liquidity. (6) "Net debt" consists of debt less cash and cash equivalents. (7) The ratio of earnings to fixed charges was computed by dividing earnings by fixed charges. For this purpose, earnings consist of income from continuing operations, before income taxes and fixed charges of the Company and its subsidiaries plus the Company's share of the distributed income of less than 50% owned persons. Fixed charges consist of the Company's and its subsidiaries' interest expense (including interest costs capitalized) and the portion of rent expense representative of an interest factor. (8) Cash flows from operating, investing and financing activities are obtained from the Company's consolidated statements of cash flows prepared in accordance with generally accepted accounting principles. (9) As of the end of the period. 24 25 LAMAR ADVERTISING COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following sets forth unaudited pro forma condensed consolidated financial information for the Company. The unaudited pro forma condensed consolidated statements of earnings for the year ended October 31, 1995, the nine month period ended July 31, 1996 and for the twelve month period ended July 31, 1996 give effect to (i) the consummation of the IPO and the application of the net proceeds therefrom, (ii) the Acquisitions, (iii) the Offerings and the application of the estimated net proceeds therefrom, and (iv) the Tender Offer, as if each had occurred on the first date of each such period. The unaudited pro forma condensed consolidated balance sheet as of July 31, 1996 has been prepared as if the IPO, the Acquisitions, the Offerings and the Tender Offer had occurred on July 31, 1996. For purposes of the pro forma financial information (i) the statement of earnings of the Company for its fiscal year ended October 31, 1995 has been combined with the statements of earnings of Outdoor East and FKM for their fiscal year ended December 31, 1995, (ii) the statement of earnings of the Company for the nine months ended July 31, 1996 has been combined with the statements of earnings of Outdoor East and FKM for the nine months ended September 30, 1996, (iii) the statement of earnings of the Company for the twelve month period ended July 31, 1996 has been combined with the statements of earnings of Outdoor East and FKM for the twelve months ended September 30, 1996 and (iv) the balance sheet of the Company as of July 31, 1996 has been combined with the balance sheets of Outdoor East and FKM as of September 30, 1996. The unaudited pro forma condensed consolidated financial statements give effect to the Acquisitions under the purchase method of accounting. The unaudited pro forma condensed consolidated financial statements have been prepared by the Company's management. The unaudited pro forma data are not designed to represent and do not represent what the Company's results of operations or financial position would have been had the aforementioned transactions been completed on or as of the dates assumed, and are not intended to project the Company'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 the Company and certain acquired businesses included elsewhere or incorporated by reference herein. 25 26 LAMAR ADVERTISING COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (LOSS) YEAR ENDED OCTOBER 31, 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INITIAL EQUITY OFFERING OUTDOOR LAMAR ADJUSTMENTS FKM EAST ---------- -------------- ------- ------- Revenues Outdoor advertising, net......................................... $ 101,871 $ 4,956 $11,508 Rental income.................................................... 506 -- Management fees from related and affiliated parties.............. 31 -- Other income..................................................... -- 45 -- Interest income.................................................. -- 12 -- ---------- --------- ------- ------- 102,408 5,013 11,508 ---------- --------- ------- ------- Direct expenses Direct advertising expenses...................................... 34,386 1,513 3,884 General and administrative expenses.............................. 27,057 1,119 3,548 Depreciation and amortization.................................... 14,090 1,823 2,675 ---------- --------- ------- ------- 75,533 4,455 10,107 ---------- --------- ------- ------- Operating income................................................... 26,875 558 1,401 ---------- --------- ------- ------- Other expense (income) Interest income.................................................. (199) 0 Interest expense................................................. 15,783 (2,337)(1)(6) 1,039 2,060 Loss on disposition of assets.................................... 2,328 232 -- Other expenses................................................... 655 7 344 ---------- --------- ------- ------- 18,567 (2,337) 1,278 2,404 ---------- --------- ------- ------- Earnings (loss) before income taxes................................ 8,308 2,337 (720) (1,003) Income tax expense (benefit)..................................... (2,390) 935 (11) (192) ---------- --------- ------- ------- Net earnings (loss)................................................ $ 10,698 $ 1,402 $ (528) $(1,003) ========== ========= ======= ======= Net earnings per common share...................................... $ 0.32 ========== Weighted average number of shares outstanding...................... 33,772,107 4,294,041 ========== ========= TENDER OFFER AND ADJUSTMENTS NOTE PRO FORMA ACQUISITION FOR THIS OFFERING COMBINED AS ADJUSTMENTS OFFERING ADJUSTMENTS ADJUSTED ----------- ----------- ----------- ----------- Revenues Outdoor advertising, net......................................... $ 118,335 Rental income.................................................... 506 Management fees from related and affiliated parties.............. 31 Other income..................................................... (45)(8) 0 Interest income.................................................. (12)(7) 0 ------- --------- ------- ---------- (57) 118,872 ------- --------- ------- ---------- Direct expenses Direct advertising expenses...................................... 39,783 General and administrative expenses.............................. (45)(8) 31,679 Depreciation and amortization.................................... 2,565 (2) 191 (5) 21,344 ------- --------- ------- ---------- 2,520 191 92,806 ------- --------- ------- ---------- Operating income................................................... (2,577) (191) 26,066 ------- --------- ------- ---------- Other expense (income) Interest income.................................................. (12)(7) (211) Interest expense................................................. (3,085)(3) 13,544 (4) 27,004 Loss on disposition of assets.................................... 2,560 Other expenses................................................... 1,006 ------- --------- ------- ---------- (3,097) 13,544 30,359 ------- --------- ------- ---------- Earnings (loss) before income taxes................................ 520 (13,735) (4,293) Income tax expense (benefit)..................................... 165 (11) (5,494)(11) (6,976) ------- --------- ------- ---------- Net earnings (loss)................................................ $ 355 $ $(8,241) $ 2,683 ======= ========= ======= ========== Net earnings per common share...................................... $ 0.07 ========= ========== Weighted average number of shares outstanding...................... 2,200,000 40,266,148 ========= ==========
26 27 LAMAR ADVERTISING COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (LOSS) NINE MONTHS ENDED JULY 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INITIAL EQUITY OFFERING OUTDOOR LAMAR ADJUSTMENTS FKM EAST ---------- -------------- ------ ------- Revenues Outdoor advertising, net.......................................... $ 87,647 $ $5,924 $ 9,130 Rental income..................................................... 473 Management fees from related and affiliated parties............... 45 100 Other income...................................................... 80 -- Interest income................................................... 20 -- ---------- ---------- ------ ------- 88,165 6,024 9,230 ---------- ---------- ------ ------- Direct expenses Direct advertising expenses....................................... 30,969 1,744 3,004 General and administrative expenses............................... 22,842 1,352 2,699 Depreciation and amortization..................................... 10,568 1,975 2,192 ---------- ---------- ------ ------- 64,379 5,071 7,895 ---------- ---------- ------ ------- Operating income.................................................... 23,786 953 1,335 ---------- ---------- ------ ------- Other expense (income) Interest income................................................... (140) Interest expense.................................................. 11,957 (1,871)(1)(6) 1,589 2,160 Loss on disposition of assets..................................... 818 Other expenses.................................................... 254 6 790 ---------- ---------- ------ ------- 12,889 (1,871) 1,595 2,950 ---------- ---------- ------ ------- Earnings (loss) before income taxes................................. 10,897 1,871 (642) (1,615) Income tax expense (benefit)...................................... 4,420 748 (11) (120) -- ---------- ---------- ------ ------- Net earnings (loss)................................................. $ 6,477 $ 1,123 $ (522) $(1,615) ========== ====== ======= Preferred stock dividends........................................... 274 ---------- Net earnings (loss) applicable to common stock...................... 6,203 ========== Net earnings per common share....................................... $ 0.23 ========== Weighted average number of shares outstanding....................... 27,068,544 4,294,041 ========== ========== TENDER OFFER AND ADJUSTMENTS NOTE PRO FORMA ACQUISITION FOR THIS OFFERING COMBINED AS ADJUSTMENTS OFFERING ADJUSTMENTS ADJUSTED ----------- ----------- ----------- ----------- Revenues Outdoor advertising, net.......................................... $ $ $ $ 102,701 Rental income..................................................... 473 Management fees from related and affiliated parties............... (100)(9) 45 Other income...................................................... (80)(8) -- Interest income................................................... (20)(7) -- ------- ---------- ------- ---------- (200) 103,219 ------- ---------- ------- ---------- Direct expenses Direct advertising expenses....................................... 35,717 General and administrative expenses............................... (80)(8) 26,813 Depreciation and amortization..................................... 1,129 (2) 77 (5) 15,941 ------- ---------- ------- ---------- 1,049 77 78,471 ------- ---------- ------- ---------- Operating income.................................................... (1,249) (77) 24,748 ------- ---------- ------- ---------- Other expense (income) Interest income................................................... (20)(7) (160) Interest expense.................................................. (3,738)(3) 10,158 (4) 20,255 Loss on disposition of assets..................................... 818 Other expenses.................................................... (716)(10) 334 ------- ---------- ------- ---------- (4,474) 10,158 21,247 ------- ---------- ------- ---------- Earnings (loss) before income taxes................................. 3,225 (10,235) 3,501 Income tax expense (benefit)...................................... 847 (11) (4,094)(11) 1,801 ------- ---------- ------- ---------- Net earnings (loss)................................................. $ 2,378 $ $(6,141) $ 1,700 ======= ======= Preferred stock dividends........................................... 274 ---------- Net earnings (loss) applicable to common stock...................... 1,426 ========== ========== Net earnings per common share....................................... $ 0.04 ========== ========== Weighted average number of shares outstanding....................... 2,200,000 33,562,585 ========== ==========
27 28 LAMAR ADVERTISING COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (LOSS) TWELVE MONTHS ENDED JULY 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INITIAL EQUITY OFFERING OUTDOOR LAMAR ADJUSTMENTS FKM EAST ----------- -------------- ------ ------- Revenues Outdoor advertising, net.......................................... 113,223 7,376 12,142 Rental income..................................................... 571 -- -- Management fees from related and affiliated parties............... 53 -- 100 Other income...................................................... -- 85 -- Interest income................................................... -- 24 -- ---------- --------- ----- ------ 113,847 7,485 12,242 ---------- --------- ----- ------ Direct expenses Direct advertising expenses....................................... 38,791 2,214 3,942 General and administrative expenses............................... 29,263 1,632 3,510 Depreciation and amortization..................................... 14,704 2,453 2,941 ---------- --------- ----- ------ 82,758 6,299 10,393 ---------- --------- ----- ------ Operating income.................................................... 31,089 1,186 1,849 ---------- --------- ----- ------ Other expense (income) Interest income................................................... (206) Interest expense.................................................. 15,792 (2,377)(1)(6) 1,965 2,672 Loss on disposition of assets..................................... 2,142 4 0 Other expenses.................................................... 225 10 985 ---------- --------- ----- ------ 17,953 (2,377) 1,979 3,657 ---------- --------- ----- ------ Earnings (loss) before income taxes................................. 13,136 2,377 (793) (1,808) Income tax expense (benefit)...................................... 4,510 951 (11) (157) ---------- --------- ----- ------ Net earnings (loss)................................................. 8,626 1,426 (636) (1,808) ========= ===== ====== Preferred stock dividends........................................... 274 ---------- Net earnings (loss) applicable to common stock............................................................. 8,352 ========== Net earnings per common share....................................... $0.29 ========== Weighted average number of shares outstanding....................................................... 28,778,075 4,294,041 ========== ========= TENDER OFFER ADJUSTMENTS AND NOTE PRO FORMA ACQUISITION FOR THIS OFFERING COMBINED ADJUSTMENTS OFFERING ADJUSTMENTS AS ADJUSTED ----------- ----------- ------------ ----------- Revenues Outdoor advertising, net.......................................... 132,741 Rental income..................................................... 571 Management fees from related and affiliated parties............... (100)(9) 53 Other income...................................................... (85)(8) 0 Interest income................................................... (24)(7) 0 ------ --------- ------- ---------- (209) 133,365 ------ --------- ------- ---------- Direct expenses Direct advertising expenses....................................... 44,947 General and administrative expenses............................... (85)(8) 34,320 Depreciation and amortization..................................... 1,669 (2) 191 (5) 21,958 ------ --------- ------- ---------- 1,584 191 101,225 ------ --------- ------- ---------- Operating income.................................................... (1,793) (191) 32,140 ------ --------- ------- ---------- Other expense (income) Interest income................................................... (24)(7) (230) Interest expense.................................................. (4,623)(3) 13,544 (4) 26,973 Loss on disposition of assets..................................... 2,146 Other expenses.................................................... (716)(10) 504 ------ --------- ------- ---------- (5,363) 13,544 29,393 ------ --------- ------- ---------- Earnings (loss) before income taxes................................. 3,570 (13,735) 2,747 Income tax expense (benefit)...................................... 998 (11) (5,494)(11) 808 ------ --------- ------- ---------- Net earnings (loss)................................................. 2,572 (8,241) 1,939 ====== ======= Preferred stock dividends........................................... 274 --------- ---------- Net earnings (loss) applicable to common stock............................................................. 1,665 ========= ========== Net earnings per common share....................................... $ 0.05 ========= ========== Weighted average number of shares outstanding....................................................... 2,200,000 35,272,116 ========= ==========
28 29 LAMAR ADVERTISING COMPANY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JULY 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INITIAL EQUITY OFFERING OUTDOOR LAMAR ADJUSTMENTS FKM EAST -------- -------------- ------- ------- Current assets Cash and cash equivalents.......................................... $ 1,965 $ 14,396 (13) $ 80 $1,026 Net receivables.................................................... 15,491 668 1,951 Other current assets............................................... 2,905 620 853 -------- -------- ------- ------- Total current assets......................................... 20,361 14,396 1,368 3,830 -------- -------- ------- ------- Property, plant & equipment Property, plant and equipment, net.............................................................. 105,185 7,209 15,566 -------- -------- ------- ------- Other assets Intangibles........................................................ 16,891 (299)(17) 8,676 4,219 Other assets....................................................... 7,830 1,689 775 -------- -------- ------- ------- Total assets................................................. $150,267 $ 14,097 $18,942 $24,390 ======== ======== ======= ======= Current liabilities Current maturities of long-term debt............................... 5,326 (1,500)(19) 1,490 867 Other current liabilities.......................................... 13,556 386 1,157 -------- -------- ------- ------- 18,882 (1,500) 1,876 2,024 -------- -------- ------- ------- Long-term liabilities Long-term debt..................................................... 154,681 (22,250)(21) 15,748 22,943 Deferred income.................................................... 779 -- -- Other liabilities.................................................. 1,214 -- -- -------- -------- ------- ------- Total liabilities............................................ 175,556 (23,750) 17,624 24,967 -------- -------- ------- ------- Stockholders' equity (deficit)....................................... (25,289) 37,847 (22) 1,318 (577) -------- -------- ------- ------- Total liabilities and stockholders' deficit.................. $150,267 $ 14,097 $18,942 $24,390 ======== ======== ======= ======= TENDER OFFER AND ADJUSTMENTS NOTE PRO FORMA ACQUISITION FOR THIS OFFERING COMBINED AS ADJUSTMENTS OFFERING ADJUSTMENTS ADJUSTED ----------- ----------- ----------- ----------- Current assets Cash and cash equivalents.......................................... $(102,402)(13) $47,636 (13) $ 126,437(13) $ 89,138 Net receivables.................................................... (2,025)(14) 16,085 Other current assets............................................... (853)(15) 3,525 --------- ------- -------- -------- Total current assets......................................... (105,280) 47,636 126,437 108,748 --------- ------- -------- -------- Property, plant & equipment Property, plant and equipment, net.............................................................. 25,275 (16) 153,235 --------- ------- -------- -------- Other assets Intangibles........................................................ 40,656 (17) 3,355 (17) 73,498 Other assets....................................................... (2,618)(18) 6,283 (18) 13,959 --------- ------- -------- -------- Total assets................................................. $ (41,967) $47,636 $ 136,075 $ 349,440 ========= ======= ======== ======== Current liabilities Current maturities of long-term debt............................... (2,080)(19) 4,103 Other current liabilities.......................................... (1,331)(20) 13,768 --------- ------- -------- -------- (3,411) 17,871 --------- ------- -------- -------- Long-term liabilities Long-term debt..................................................... (37,815)(21) 145,500 (21) 278,807 Deferred income.................................................... 779 Other liabilities.................................................. 1,214 --------- ------- -------- -------- Total liabilities............................................ (41,226) 145,500 298,671 --------- ------- -------- -------- Stockholders' equity (deficit)....................................... (741)(22) 47,636(22) (9,425)(22) 50,769 --------- ------- -------- -------- Total liabilities and stockholders' deficit.................. $ (41,967) $47,636 $ 136,075 $ 349,440 ========= ======= ======== ========
29 30 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) For purposes of determining the pro forma effect of the IPO and the Transactions on the Company's unaudited Condensed Consolidated Statements of Earnings for the year ended October 31, 1995, the nine months ended July 31, 1996, and the twelve months ended July 31, 1996, the following adjustments have been made:
NINE MONTHS ENDED TWELVE MONTHS YEAR ENDED JULY 31, ENDED OCTOBER 31, 1995 1996 JULY 31, 1996 ---------------- ----------- ------------- (1) Represents the elimination of interest expense on bank loans under the Existing Credit Agreement as a result of the application of the net proceeds from the IPO.......................................... $ (3,864) $(3,031) $(3,904) (2) Represents 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...................................... 2,565 1,129 1,669 (3) Represents the net effect on interest expense resulting from (i) additional borrowings assumed in the acquisitions and (ii) the elimination of interest expense on debt not assumed in the acquisitions.................. (3,085) (3,738) (4,623) (4) To eliminate historical interest expense on the Existing Notes and to record interest expense on the Notes at a rate of 9.625%. (A difference of .125% in the rate of interest would have changed income by $319, $239 and $319 for the year ended October 31, 1995, the nine months ended July 31, 1996 and the twelve months ended July 31, 1996, respectively.) Interest expense on the Note Offering... 24,544 18,408 24,544 Interest expense on the Existing Notes............... (11,000) (8,250) (11,000) 13,544 10,158 13,544 ------- ------- ------- (5) The increase in amortizing debt issuance costs associated with the Note Offering over the Existing Notes amortization...................... Amortization under Note Offering....... 756 567 756 Amortization on Existing Notes...... (565) (490) (565) 191 77 191 ------- ------- ------- (6) Interest expense on the $20 million ten year subordinated notes issued to existing shareholders at the time of the IPO.......... 1,527 1,160 1,527 (7) To reclassify interest income in order to conform to the Company's presentation........ (12) (20) (24)
30 31 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) To reclassify other income in order to conform to the Company's presentation........ (45) (80) (85) (9) To eliminate management fee income on Outdoor East historical financial statements, which would not have been earned had the Acquisitions been consummated on November 1, 1994......................................... -- (100) (100) (10) To eliminate costs associated with the sale and reorganization of Outdoor East which would not have been incurred had the Acquisitions been consummated on November 1, 1994......................................... -- (716) (716) (11) To record the tax effect on pro forma statements for: IPO....................................... 935 748 951 Acquisitions.............................. 165 847 998 Tender Offer and Note Offering............ (5,494) (4,094) (5,494) (12) The accompanying pro forma results of operation do not give effect to the extraordinary loss on the extinguishment of debt of $9,235, $9,425 and $9,470 for the year ended October 31, 1995, for the nine months ended July 31, 1996 and for the twelve months ended July 31, 1996; respectively, however, such amounts have been reflected as an adjustment to pro forma retained earnings.
For purposes of determining the pro forma effect of the IPO and the Transactions on the Company's unaudited Condensed Consolidated Balance Sheet as of July 31, 1996, the following adjustments have been made:
TENDER OFFER ADJUSTMENTS AND IPO ACQUISITION FOR THIS NOTE OFFERING ADJUSTMENTS ADJUSTMENTS OFFERING ADJUSTMENTS ----------- ----------- ----------- ------------- (13) Cash: Net proceeds of the IPO and the Transactions................................ $ 63,146 $47,636 $ 247,437 Use of proceeds of the IPO and the Transactions................................ (48,750) (121,000) Represents purchase of FKM.................... $ (40,000) Payoff of receivable from shareholder -- FKM.......................... 74 Represents purchase of Outdoor East........... (60,500) To record payoff of note assumed -- Outdoor East........................................ (950) To remove cash not purchased from Outdoor East........................................ (1,026) -------- --------- -------- --------- $ 14,396 $(102,402) $47,636 $ 126,437 ======== ========= ======== =========
(14) Net receivables: Payoff of receivable from shareholder -- FKM.......................... $ (74) To remove net receivables not purchased from Outdoor East................................ (1,951) --------- $ (2,025) =========
31 32 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TENDER OFFER ADJUSTMENTS AND IPO ACQUISITION FOR THIS NOTE OFFERING ADJUSTMENTS ADJUSTMENTS OFFERING ADJUSTMENTS -------- --------- -------- --------- (15) Other current assets: To remove net receivables not purchased from Outdoor East................................ $ (853) ========= (16) Property, plant and equipment: To record the net increase in property, plant and equipment from the allocation of the purchase price of the FKM acquisition....... $ 5,421 To record the net increase in structures from the allocation of the purchase price of the Outdoor East acquisition.................... 19,854 --------- $ 25,275 ========= (17) Intangibles: To reclassify additional offering fees........ $ (299) To record net intangible assets from purchase of FKM...................................... $ 17,730 To record net intangible assets from purchase of Outdoor East assets...................... 22,926 To record capitalized fees of the Notes Offering.................................... $ 7,563 To remove issuance costs of Existing Notes.... (4,208) -------- --------- --------- $ (299) $ 40,656 $ 3,355 ======== ========= ========= (18) Other assets: To eliminate other assets not purchased from Outdoor East................................ $ (775) To record reduction of deferred tax asset after giving effect to FKM acquisition...... (1,843) To record tax effect of loss on early extinguishment of debt...................... $ 6,283 --------- --------- $ (2,618) $ 6,283 ========= ========= (19) Current maturities of long-term debt: To record payoff of borrowings under the Existing Credit Agreement................... $ (3,500) To record ten year subordinated note payable, current portion............................. 2,000 To remove liabilities not assumed in FKM acquisition................................. $ (1,467) To record net current maturities of long-term debt related to Outdoor East acquisition.... (613) -------- --------- $ (1,500) $ (2,080) ======== =========
32 33 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TENDER OFFER ADJUSTMENTS AND IPO ACQUISITION FOR THIS NOTE OFFERING ADJUSTMENTS ADJUSTMENTS OFFERING ADJUSTMENTS -------- --------- -------- --------- (20) Other current liabilities: To remove liabilities not assumed from Outdoor East................................ $ (1,157) To remove liabilities not assumed from FKM.... (174) --------- $ (1,331) =========
(21) Long-term debt: To record payoff of loans under the Existing Credit Agreement............................ $ (40,250) $ (9,500) To record ten year subordinated note payable, long-term portion........................... 18,000 To remove net liabilities not assumed from FKM......................................... $ (15,733) To remove net liabilities not assumed from Outdoor East................................ (22,082) To record effect of Tender Offer.............. (100,000) To record effect of the issuance of the Notes....................................... 255,000 -------- --------- --------- $ (22,250) $ (37,815) $ 145,500 ======== ========= ========= (22) Stockholders' deficit: Net proceeds of the IPO and this Offering of 2,200 shares at a price of $23.00 per share....................................... $ 62,847 $ 47,636 Consideration related to previous stock redemptions................................. (25,000) To reverse historical equity in connection with the Acquisitions....................... (741) To record effect on equity due to loss on early extinguishment of debt................ $ (9,425) -------- --------- -------- --------- $ 37,847 $ (741) $ 47,636 $ (9,425) ======== ========= ======== =========
33 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the consolidated financial condition and results of operations of the Company for the three fiscal years ended October 31, 1995, and for the nine months ended July 31, 1996 compared to the same period for the prior year. This discussion should be read in conjunction with the consolidated financial statements of the Company and the related notes, and the pro forma condensed consolidated statements of the Company and the related notes, included in and incorporated by reference to this Prospectus. References herein to specific years refer to the Company's fiscal year ending on October 31 of such years. OVERVIEW The Company's net revenues, which represent gross revenues less commissions paid to advertising agencies that contract for the use of advertising displays on behalf of advertisers, are derived primarily from the sale of advertising on outdoor advertising displays owned and operated by the Company. In recent years, the Company's logo sign business has expanded rapidly and may in the future have an increasing impact on the Company's revenues and operating income. The Company has grown significantly during the last three years, primarily as the result of (i) internal growth in its existing outdoor advertising business resulting from construction of additional outdoor advertising displays, general improvements in occupancy and operating efficiency and increases in advertising rates, (ii) acquisitions of outdoor advertising businesses and structures, the most significant of which was the Company's acquisition of the 50.6% interest that it did not already own in Lamar Holding Corporation ("LHC") in 1994, and (iii) the rapid expansion of the Company's logo sign business. The Company's net advertising revenues increased by $36.4 million, representing a compound annual growth rate of 24.8%, from $65.4 million for the fiscal year ended October 31, 1993 to $101.9 million for the fiscal year ended October 31, 1995. During the same period, EBITDA increased $17.8 million, representing a compound annual growth rate of 32.9%, from $23.2 million for the fiscal year ended October 31, 1993 to $41.0 million for the fiscal year ended October 31, 1995. The Company plans to continue a strategy of expanding through both internal growth and acquisitions. As a result of acquisitions, principally the LHC acquisition, the operating performance of certain markets and of the Company as a whole are not necessarily comparable on a year-to-year basis. All recent acquisitions have been accounted for using the purchase method of accounting and, consequently, operating results from acquired operations are included from the respective dates of those acquisitions. The Company has recently acquired FKM for an aggregate cash purchase price of $40 million, acquired logo sign franchises in Kansas and Tennessee for an aggregate cash purchase price of $1.4 million and has acquired certain outdoor advertising properties for an aggregate cash cost of approximately $13 million. In addition, the Company has executed agreements to purchase Outdoor East for an aggregate cash purchase price of approximately $60 million, the logo sign franchises for Kentucky and Nevada for $3.8 million in cash certain transit advertising displays for approximately $1.1 million in cash, and has executed a letter of intent to acquire the assets of an additional outdoor advertising company at a cash purchase price of approximately $75 million. The Company intends to finance its acquisition activities from external sources, including the proceeds of this Offering, the proceeds of the Note Offering and borrowings under the New Credit Agreement. See "The Transactions." The Company relies on sales of advertising space for its revenues, and its operating results are therefore affected by general economic conditions, as well as trends in the advertising industry. The Company believes that in recent years outdoor advertising expenditures have increased more rapidly than total U.S. advertising expenditures, but there can be no assurance that this trend will continue or that in the future outdoor advertising will not grow more slowly than the advertising industry as a whole. Manufacturers of tobacco products, primarily cigarettes, were historically major users of outdoor advertising displays. Due to societal and governmental pressures and other factors, in the early 1990's, leading tobacco manufacturers substantially reduced their domestic advertising expenditures. The Company's tobacco 34 35 revenues, as a percentage of total net revenues, declined from 17% in fiscal 1991 to 12% in fiscal 1992, 7% in fiscal 1993 and 1994 and 9% in fiscal 1995. During this period, the Company has replaced the reduced tobacco advertising by diversifying its customer base and increasing sales to local advertisers. Growth of the Company's business requires significant capital expenditures to finance internal growth, acquisitions and the up-front costs associated with new logo sign franchises. The Company expended $7.6 million on capital expenditures in fiscal 1993, $13.4 million in fiscal 1994 and $14.0 million in fiscal 1995. Of these amounts, $2.0 million, $2.8 million and $1.6 million, respectively, were attributable to the logo sign business. See "-- Liquidity and Capital Resources." In the fiscal years ended October 31, 1994 and 1995, the Company recognized an income tax benefit from a net operating loss carryforward. The benefit of the Company's net operating loss carryforward was fully recognized as of October 31, 1995, resulting in the recognition of income tax expense for the nine months ended July 31, 1996. The following table presents certain items in the Consolidated Statements of Earnings (Loss) as a percentage of net revenues for the years ended October 31, 1993, 1994 and 1995 and for the nine months ended July 31, 1995 and 1996:
NINE MONTHS YEAR ENDED OCTOBER 31, ENDED JULY 31, ------------------------- --------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Net revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses Direct advertising expenses.............. 35.8 34.3 33.6 34.6 35.1 General & administrative expenses........ 29.3 28.7 26.4 26.9 25.9 Operating cash flow........................ 34.9 37.0 40.0 38.5 39.0 Depreciation and amortization.............. 13.4 13.4 13.8 13.0 12.0 Operating income........................... 21.4 23.6 26.2 25.5 27.0 Interest expense........................... 17.3 16.1 15.4 15.6 13.6 Other expense.............................. 18.9 17.4 18.1 17.6 14.6 Net earnings (loss)........................ (1.0) 8.6 10.4 11.1 7.3
EFFECTS OF THE ACQUISITIONS The Acquisitions will result in the addition of 2,745 bulletins and 2,317 posters, or a total of 5,062 outdoor advertising displays, to the Company's inventory, which represents a 21% increase in its outdoor advertising displays. The Company has also acquired an additional 1,686 outdoor advertising displays since July 31, 1996. The FKM acquisition expands the Company's operations in Ohio through the addition of the Youngstown market and gives the Company a presence in Pennsylvania through the operation of FKM's inventory of bulletins located on interstate highways and other primary roads in that state. The Outdoor East acquisition will add a billboard operation with structures positioned along heavily travelled highways serving the Eastern U.S. It will also add the Columbia, SC market, which is ranked as the 88th largest market in the U.S., as well as several smaller markets and displays located along North Carolina interstate highways and primary roads. On a pro forma basis for the twelve months ending July 31, 1996, the Acquisitions add $19.5 million in net outdoor advertising revenues to the Company's $113.2 net outdoor advertising revenues for the period, which constitutes an increase of 17%. The Company expects to be able to achieve certain operating efficiencies through the addition of outdoor advertising businesses operating in or near markets currently served by the Company. RECENT RESULTS Based upon preliminary information, the Company estimates that its net revenue and EBITDA for the fiscal year ended October 31, 1996 will be in the approximate range of $119.0 million and $48.5 million, respectively. The Company's net revenue and EBITDA for the fiscal year ended October 31, 1995 were 35 36 $102.4 million and $41.0 million, respectively. This subsection contains forward looking statements and estimates which could prove inaccurate. The Company's fiscal year has just ended and its results have not yet been determined, nor has the year-end audit taken place. Consequently, the estimates contained in this subsection are subject to change depending on the finalization of actual results, potential year-end adjustments and completion of the audit. In addition, the Company's results could be affected by the factors identified in "Risk Factors." NINE MONTHS ENDED JULY 31, 1996 COMPARED TO NINE MONTHS ENDED JULY 31, 1995 Net revenues increased $11.4 million or 14.9% to $88.2 million for the nine months ended July 31, 1996 compared to $76.8 million for the same period in 1995. This increase was primarily a result of the $6.8 million increase in outdoor advertising net revenues, principally attributable to increases in number of displays of approximately 600 and advertising rates at an average of 6%, with occupancy rates remaining relatively steady, and a $4.3 million increase in logo sign revenue due to the continued development of that program. Net outdoor advertising revenue for the period was $77.5 million and logo sign revenue was $9.0 million. Operating expenses, exclusive of depreciation and amortization, increased $6.6 million or 14.0% for the nine months ended July 31, 1996 as compared to the same period in 1995. This increase was the result of an increase in health insurance rates, increases in personnel costs, sign site rent, graphics expense, other costs related to the increase in revenue and additional operating expenses related to outdoor asset acquisitions and the continued development of the logo sign business. Depreciation and amortization expense increased $0.6 million or 6.2% from $10.0 million for the nine months ended July 31, 1995 to $10.6 million for nine months ended July 31, 1996. Due to the above factors, operating income increased $4.2 million or 21.5% to $23.8 million for the nine months ended July 31, 1996 from $19.6 million for the same period in 1995. Interest expense remained relatively constant for both periods. Income tax expense for the nine months ended July 31, 1996 increased $6.9 million over the same period in 1995. For the past several years the Company has had a substantial net operating loss carryforward. The benefit of the Company's net operating loss carryforward was fully recognized as of October 31, 1995. As a result of the foregoing factors, net earnings for the nine months ended July 31, 1996 decreased $2.1 million as compared to the same period in 1995. YEAR ENDED OCTOBER 31, 1995 COMPARED TO YEAR ENDED OCTOBER 31, 1994 Net revenues increased $17.9 million or 21.2% to $102.4 million for the twelve months ended October 31, 1995 from $84.5 million for the same period in 1994. This increase was predominantly attributable to higher outdoor advertising net revenues, which rose $17.9 million or 23.0% during this period. The increase in outdoor advertising net revenues was principally attributable to increases in number of displays and advertising rates, with occupancy rates remaining relatively steady. Operations acquired subsequent to fiscal 1993 generated $9.1 million of this increase in outdoor advertising net revenues. This increase in net revenues was partially offset by a decrease in management fees resulting from the LHC acquisition. Continued development of the logo sign business resulted in logo advertising revenue increasing $0.3 million or 5.5% for the twelve months ended October 31, 1995 as compared to the prior fiscal year. Operating expenses, exclusive of depreciation and amortization, increased $8.2 million or 15.5% to $61.4 million for the twelve months ended October 31, 1995 from $53.2 million for the same period in 1994. The LHC operations acquired in May 1994 generated $5.5 million of this increase in operating expenses; the remaining $2.7 million of the increase was generated by previously existing operations. This $2.7 million increase was primarily the result of acquisitions which caused an expansion of the Company's work force, which required higher aggregate commissions, workers' compensation costs and employee benefit expenses. 36 37 Depreciation and amortization expense increased $2.7 million or 24% from $11.4 million for the year ended October 31, 1994 to $14.1 million for the year ended October 31, 1995. This increase in depreciation and amortization was generated by the assets purchased during fiscal years 1994 and 1995. Because the Company's operating expenses declined as a percentage of net revenues to 73.8% for fiscal 1995 from 76.4% for fiscal 1994, operating income increased $7.0 million or 34.9% from $19.9 million for the twelve months ended October 31, 1994 to $26.9 million for the twelve months ended October 31, 1995. Interest expense increased $2.2 million or 16.1% to $15.8 million for the twelve months ended October 31, 1995 from $13.6 million for the same period in 1994. Approximately $1.8 million of the increase in interest expense reflected an additional $35.0 million in debt incurred in May 1994 to finance the LHC acquisition. The remaining $0.4 million increase in interest expense was due to increased working capital borrowings throughout fiscal 1995. The Company had a significant net operating loss carryforward and, therefore, income tax expense for this period reflected the alternative minimum tax, state income tax and the recognition in the current year of the deferred tax benefit generated by the net operating loss carryforward. As a result of the foregoing factors, net earnings increased $3.4 million or 46.6% to $10.7 million for the twelve months ended October 31, 1995 from $7.3 million for the same period in 1994. YEAR ENDED OCTOBER 31, 1994 COMPARED TO YEAR ENDED OCTOBER 31, 1993 Net revenues increased $18.0 million or 27.0% to $84.5 million for the twelve months ended October 31, 1994 from $66.5 million for the same period in 1993. Higher outdoor advertising net revenues contributed $16.6 million of this increase, resulting from increases in number of displays, occupancy rates and advertising rates. Logo advertising revenues increased $1.4 million or 34% from $4.3 million for the twelve months ended October 31, 1993 to $5.7 million for the twelve months ended October 31, 1994. The increase in revenues from logo advertising was generated by the build-out of logos in Texas and Mississippi and the continued expansion of the existing systems. Operating expenses, exclusive of depreciation and amortization, increased $9.9 million or 22.8% to $53.2 million for the twelve months ended October 31, 1994 from $43.3 million for the same period in 1993. This increase was approximately evenly split between existing operations and those acquired after fiscal 1993. Depreciation and amortization expense increased $2.4 million or 27.2% to $11.4 million for the twelve months ended October 31, 1994 from $8.9 million for the twelve months ended October 31, 1993. $1.8 million of such increase was attributable to operations acquired after fiscal 1993, with $1.2 million representing depreciation of newly acquired boards and $0.6 million representing amortization related to intangibles capitalized as part of such acquisitions. Because revenue growth outpaced increases in expenses, operating income increased $5.7 million or 39.7% to $19.9 million for the twelve months ended October 31, 1994 from $14.3 million for the same period in 1993. Interest expense increased $2.1 million or 18.2% to $13.6 million for the twelve months ended October 31, 1994 from $11.5 million for the twelve months ended October 31, 1993. Approximately $1.4 million of such increase reflects an additional $35.0 million of debt incurred in connection with the May 1994 LHC acquisition. The remaining $0.7 million of the increase in interest expense was due to the issuance in May 1993 of $100 million in aggregate principal amount of Existing Notes with a fixed interest rate of 11.0%. Prior to the issuance of the Existing Notes, the Company's debt consisted primarily of variable rate bank financing with a lower net interest cost. As a result of the foregoing factors, net earnings increased $8.0 million to $7.3 million for the twelve months ended October 31, 1994 from a net loss of $0.7 million for the same period in 1993. 37 38 LIQUIDITY AND CAPITAL RESOURCES The Company has historically satisfied its working capital requirements with cash from operations and revolving credit borrowings. Its acquisitions have been financed primarily with borrowed funds. On August 7, 1996, the Company sold pursuant to the IPO 4,000,000 shares of its Class A Common Stock and selling stockholders sold 735,000 shares at a price of $16.00 per share. The net proceeds to the Company from the sale of the 4,000,000 shares were approximately $58.8 million after deducting expenses and underwriting discounts. The Company used a portion of the net proceeds from the IPO to repay existing indebtedness in the aggregate principal amount of approximately $43.8 million, consisting of (i) bank term loans of $37.8 million and (ii) $6.0 million of outstanding loans under a revolving credit facility. The Company used approximately $5.0 million of the net proceeds from the IPO to pay a portion of the contingent consideration payable to stockholders whose shares of common stock were repurchased by the Company in October 1995 and March 1996. The Company issued to such stockholders $20.0 million aggregate principal amount of ten-year subordinated notes as the balance of the contingent consideration. In addition, on August 15, 1996, the Underwriters' over-allotment option to purchase an additional 294,041 shares from the Company was exercised, yielding net proceeds to the Company of approximately $4.4 million. The remaining net proceeds from the IPO are available for general corporate purposes, including possible acquisitions and repayment of indebtedness. In August 1996, the Company used net proceeds from the IPO to purchase certain outdoor advertising properties for an aggregate cash price of $12.2 million. The Company's net cash provided by operating activities increased to $15.2 million in fiscal 1994 from $12.4 million in fiscal 1993 due primarily to the increase in net earnings. Net cash used in investing activities increased from $10.1 million in fiscal 1993 to $53.6 million in fiscal 1994, due primarily to the LHC acquisition. Net cash used in financing activities increased from $6.8 million in fiscal 1993 to $37.1 million in fiscal 1994 due primarily to the incurrence of indebtedness pursuant to a new $35.0 million bank term loan used to complete the LHC acquisition. The Company's net cash provided by operating activities increased to $25.1 million in fiscal 1995 due primarily to a $3.4 million increase in net earnings and the addition of non-cash items, including a $2.7 million increase in depreciation and amortization. Net cash used in investing activities decreased from $53.6 million in fiscal 1994 to $17.8 million in fiscal 1995 due primarily to a $37.6 million decrease in purchase of new markets attributable to the inclusion of the LHC acquisition in fiscal 1994, offset by a $1.8 million increase in capital expenditures and purchases of intangibles. Net cash used in financing activities decreased $46.5 million in fiscal 1995 due to a $44.5 million decrease in proceeds from issuance of long term debt compared to fiscal 1994. For the nine months ended July 31, 1996, net cash provided by operating activities was $15.6 million, a $4.8 million increase from $10.8 million in the corresponding period of 1995. The increase occurred, despite a $2.1 million decrease in net earnings, due primarily to a $5.6 million increase in deferred taxes due to the benefit of the Company's net operating loss carryforward having been fully recognized at year end October 31, 1995, and a $1.9 million increase in deferred income generated by the additional logo sign franchises offset by a $1.9 million increase in receivables. Net cash used in investing activities increased $17.7 million for the nine months ended July 31, 1996 as compared to the same period in 1995 due to a $8.9 million increase in capital expenditures primarily due to the build-out of the Company's new logo sign franchises, a $7.1 million increase in purchase of new markets, a $1.0 million increase in purchase of intangible assets and a $0.7 increase in notes receivable. Net cash provided by financing activities increased $15.0 million for the nine months ended July 31, 1996 as compared to the same period in 1995. The increase was due to the increase in borrowings of $15.5 million under revolving credit facilities to finance capital expenditures, purchase new markets and meet seasonal operating requirements. A $2.8 million decrease in principal payments on long-term debt was partially offset by the $3.0 million stock redemption in March 1996. 38 39 During the three fiscal years ended October 31, 1995, the Company's aggregate capital expenditures, as shown in the Consolidated Statements of Cash Flows, were $35.0 million. Of this amount, the Company spent in the fiscal years 1993, 1994 and 1995 approximately $2.4 million, $5.0 million and $6.6 million, respectively, to build and maintain structures within its existing markets and $2.0 million, $2.8 million and $1.6 million, respectively, to meet the capital expenditure requirements of state logo sign franchise operations. During fiscal 1995, the Company was awarded new state logo sign franchises in the following four states: Georgia, Minnesota, South Carolina and Virginia. During fiscal 1996, the Company was awarded new contracts in New Jersey and Michigan as well as the expansion of the existing Texas program which it currently operates. It also acquired the Kansas and Tennessee franchises from one of its competitors. Due to the capital needed to fund these new franchises, the Company amended its existing bank credit agreement effective October 1995, partially deferring short-term principal payments. In December 1995, the Company entered into a $15 million reducing credit line with its bank group. This line may only be used to finance the cost of logo sign franchises awarded to the Company after October 31, 1995. As of July 31, 1996, the Company had borrowed approximately $9.5 million to finance the cost of these logo sign franchises. In addition, the Company is currently negotiating with its existing lenders the terms of the New Credit Agreement, which would increase the amount of the bank loan commitment to the Company to $225 million and would replace the Existing Credit Agreement. Effective May 1, 1994, the Company completed the LHC acquisition in a transaction accounted for as a purchase for a price of $43.5 million, which was financed with the proceeds of a bank term loan in the amount of $35.0 million, with the remainder financed from the Company's revolving credit facilities. On May 19, 1993, the Company issued $100 million in aggregate principal amount of Existing Notes. Simultaneously with the sale of the Existing Notes, the Company entered into a new bank credit agreement which provided an $8 million term loan and a $20 million working capital line of credit. The line of credit has recently been amended to provide for borrowings of up to $50 million. The majority of the net proceeds from the issuance of Existing Notes was utilized to extinguish existing variable rate debt prior to maturity and pay related expenses. See "Description of Other Indebtedness -- Existing Notes." On October 17, 1996, the Company commenced a cash Tender Offer for all of the Existing Notes. See "The Transactions -- The Tender Offer." The Company expects to pursue a policy of continued growth through acquisitions. In this regard, the Company recently acquired FKM for an aggregate cash purchase price of $40 million with borrowings under the Existing Credit Agreement and acquired logo sign franchises in Kansas and Tennessee for an aggregate cash purchase price of $1.4 million. Since July 31, 1996, the Company has also acquired outdoor advertising properties for an aggregate cash cost of approximately $13 million. Furthermore, the Company has executed agreements to purchase an additional outdoor advertising company for an aggregate cash purchase price of approximately $60 million, two additional logo sign franchises for approximately $3.8 million in cash and certain transit advertising displays for approximately $1.1 million in cash. In addition, the Company has executed a letter of intent to acquire the assets of an additional outdoor advertising company at a cash purchase price of approximately $75 million. The Company intends to finance its acquisition activities from external sources, including the proceeds of this Offering, the proceeds of the Note Offering and borrowings under the New Credit Agreement. There can be no assurance, however, that the Company will enter into the New Credit Agreement. See "The Transactions." The Company believes that internally generated funds and funds available for borrowing under its bank credit facilities will be sufficient for the foreseeable future to satisfy all debt service obligations and to finance its current operations. INFLATION In the last three years, inflation has not had a significant impact on the Company. SEASONALITY The Company's revenues and operating results have exhibited some degree of seasonality in past periods. Typically, the Company experiences its strongest financial performance in the fourth fiscal quarter and its lowest revenues in the first fiscal quarter. The Company expects this trend to continue in the future. Because a 39 40 significant portion of the Company's expenses are fixed, a reduction in revenues in any quarter is likely to result in a period to period decline in operating performance and net earnings. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which established a new accounting principle for accounting for the impairment of certain loans, certain investments in debt and equity securities, long-lived assets that will be held and used including certain identifiable intangibles and goodwill related to those assets and long-lived assets and certain identifiable intangibles to be disposed of. This statement is effective for fiscal years beginning after December 15, 1995. While the Company has not completed its evaluation of the impact that will result from adopting this statement, it does not believe that adoption of the statement will have a significant impact on the Company's financial position and results of operations. The Financial Accounting Standards Board also issued SFAS No. 123, "Accounting for Stock Based Compensation," effective also for fiscal years beginning after December 15, 1995. The new statement encourages, but does not require, companies to measure stock-based compensation cost using a fair value method, rather than the intrinsic value method prescribed by the Accounting Principles Board (APB) Opinion No. 25. Companies choosing to continue to measure stock-based compensation using the intrinsic value method must disclose on a pro forma basis net earnings per share as if the fair value method were used. Management is currently evaluating the requirements of SFAS No. 123. Management does not believe that SFAS No. 123 will have a material impact on operating income. 40 41 BUSINESS GENERAL Lamar Advertising Company is one of the largest and most experienced owners and operators of outdoor advertising structures in the United States. It conducts a business that has operated under the Lamar name since 1902. As of September 30, 1996, the Company operated approximately 24,000 outdoor advertising displays in 13 southeastern, midwestern and mid-Atlantic states. After giving effect to the acquisition of FKM and assuming consummation of the acquisition of Outdoor East, the Company will operate approximately 29,000 outdoor advertising displays in 14 states. In each of the Company's existing 36 primary markets, the Company believes that it is the only full-service outdoor advertising company serving such markets. The Company also operates the largest logo sign business in the United States. Logo signs are erected pursuant to state-awarded franchises on public rights-of-way near highway exits and deliver brand name information on available gas, food, lodging and camping services. The Company currently operates logo sign franchises in 15 of the 21 states which have a privatized logo sign program, was awarded the logo sign franchise for the state of Florida in November 1996, and in October 1996 was selected to operate a tourism signing franchise for the province of Ontario, Canada. In addition, the Company has recently entered into an agreement to acquire the existing logo sign franchises for the states of Kentucky and Nevada. As of September 30, 1996, the Company maintained over 18,000 logo sign structures containing over 51,000 logo advertising displays under these franchises. The Company has recently expanded into the transit advertising business through the operation of displays on bus shelters, benches and buses in 8 of its 36 primary markets and several other markets in the state of South Carolina. For the fiscal year ended October 31, 1995, the Company reported net revenues and EBITDA of $102.4 million and $41.0 million, respectively. Assuming all of the Transactions were consummated, the Company's net revenues and EBITDA for the twelve months ended July 31, 1996, would have been $133.4 million and $54.1 million, respectively. The Company's strategy is to be the leading provider of outdoor advertising in each of the markets it serves, with an emphasis on markets with a media industry ranking based on population between 50 and 250. Important elements of this strategy are the Company's decentralized management structure and its focus on providing high quality local sales and service. In order to be more responsive to local market demands, the Company offers a full complement of outdoor advertising services coupled with local production facilities, management and account executives through its local offices. While maintaining its local focus, the Company seeks to expand its operations within existing and contiguous markets. The Company also pursues expansion opportunities, including acquisitions, in additional markets. In this regard and as described more fully below, the Company has acquired or has agreed to acquire several outdoor advertising companies and has executed a letter of intent to acquire another such company. In the logo sign business, the Company's strategy is to maintain its position as the largest operator of logo signs in the U.S. by expanding through the addition of state logo franchises as they are awarded and through possible acquisitions. The Company may also pursue expansion opportunities in transit and other out-of-home media which the Company believes will enable it to leverage its management skills and market position. Management believes that operating in small to medium-sized markets provides the Company with certain advantages, including a diverse and reliable mix of local advertisers, geographic diversification and an ability to package inventory effectively. Local advertising constituted over 81% of the Company's outdoor advertising net revenues in fiscal 1995, which management believes is higher than the industry average. INDUSTRY OVERVIEW Outdoor Advertising The outdoor advertising industry generated total revenues of approximately $1.8 billion in 1995, or approximately 1.1% of the total advertising expenditures in the United States, according to recent estimates by the OAAA. This represents growth of approximately 8.2% over estimated total 1994 revenues and compares favorably to the growth of total U.S. advertising expenditures of approximately 7.7% during the same period. Outdoor advertising offers repetitive impact and a relatively low cost-per-thousand impressions (a standard measurement of the cost-effectiveness of an advertising medium) compared to broadcast media, newspapers, 41 42 magazines and direct mail marketing, making it attractive to both local businesses targeting a specific geographic area or set of demographic characteristics and national advertisers seeking mass market support. Over the past 25 years, outdoor advertising industry revenues have grown from $0.3 billion in 1971 to $1.83 billion in 1995, representing a compound annual growth rate of approximately 8%. According to OAAA, in eleven of the last twenty years, outdoor advertising revenue growth exceeded total advertising revenue growth. The Company believes that this revenue growth is primarily the result of long term contracts that are generally renewable, a broadening client mix, the increased use of vinyl and computer printing and acquisition opportunities. Advertisers purchase outdoor advertising for a variety of reasons. Outdoor advertising is a highly targeted medium that can be used to concentrate on a particular geographic location or demographic group. In the case of local businesses such as hotels, restaurants, service stations and other roadside businesses, the use of outdoor advertising generates a message that reaches potential customers close to the point of sale and provides ready directional information. Similarly, national advertisers often use outdoor advertising when test marketing a product because of the medium's ability to reach a broad audience in a specific market. In addition, outdoor advertising is attractive because of its constant repetition and comparatively low cost-per-thousand impressions as compared to broadcast media, magazines, newspapers and direct mail marketing. As a result, advertisers desiring to build brand awareness and develop mass-market support often find outdoor advertising effective in generating high visibility in a cost-effective manner. Outdoor advertising is also often combined with other media to reinforce messages being provided to consumers. Outdoor advertising, which began in the late 19th century when advertising "bills" were pasted or "posted" on rented wooden boards, has evolved over the years to its present form with two types of standardized displays -- posters in standard and junior sizes and more permanent fixed and rotary bulletins. The outdoor advertising industry continues to evolve as a result of a number of factors. The category of out-of-home advertising (advertising transmitted other than through the print and broadcast media) now includes more than just traditional billboard and roadside displays. The use of displays in shopping centers, malls, airports, stadiums, movie theaters and supermarkets has expanded, and the presence of advertising on subways, buses, taxicabs and transit shelters is now commonplace. In addition, while tobacco product companies, historically the largest users of outdoor advertising, have reduced their reliance on the medium, the outdoor advertising industry has continued to grow through increasing visibility and attractiveness to local advertisers and national retail and consumer products companies. Also, advances in production technology, such as computer printing, vinyl advertising copy and improved lighting techniques, have facilitated a more creative and effective use of the medium and a more durable product. These technological improvements also permit outdoor advertising companies to respond more promptly to customer needs, operate more efficiently and make greater use of advertising copy used in other print media, thus providing advertisers the opportunity to present a unified campaign. Finally, the outdoor advertising industry has benefitted from the increase in automobile travel time for business and leisure due to increased highway congestion and the movement of businesses and residences from cities to outlying suburbs. A study recently published by the Office of Highway Information Management of the Federal Highway Administration indicated that, during the period from 1983 to 1990, licensed drivers in the United States increased by 11%, vehicles owned increased by 15%, the number of vehicle trips increased by 25% and vehicle miles increased by 40%. The Company believes that these trends demonstrate that consumer exposure to existing billboard structures also increased during this period. According to media publications, the top ten categories of business ranked by outdoor advertising expenditures for 1995 were entertainment and amusements, tobacco products, retail establishments, business and consumer services, automotive, travel and hotels, publishing and media, beer and wine, insurance and real estate, and drugs and remedies. The Company's sales by category of business is described under "Company Operations" below. The outdoor advertising industry is comprised of several large outdoor advertising and media companies with operations in multiple markets, as well as many smaller and local companies operating a limited number of displays in a single or a few local markets. The OAAA estimates that there are approximately 1,000 companies in the industry operating a total of approximately 396,000 displays. There has been a trend toward 42 43 consolidation in the outdoor advertising industry in recent years and the Company expects this trend to continue. Logo Signs Throughout the 1970's and 1980's many states developed logo sign programs using state and federal highway matching dollars. Logo signs provide brand name information on available gas, food, lodging and camping services near highway exits. Brand name advertising display plates are posted on logo sign structures to provide this information to highway travellers. In 1985, Minnesota became the first state to privatize its logo sign program by contracting with a private firm for the construction, marketing, administration and maintenance of logo signs in lieu of using government resources. Since then 21 other states have awarded contracts for privatized logo sign programs, and several others are considering such privatization programs. Conversion of state-run logo sign programs to privately owned and operated programs is attractive to state governments, in part because of the efficiencies offered by private contractors. Transit A relatively new opportunity within the out-of-home advertising industry is transit advertising. Increasing numbers of local governments are providing transit shelters and benches to enhance the service and image of local transit systems. New government regulations pertaining to the Americans with Disabilities Act, as well as demands by the public, are creating a need for bus shelter locations which are practical and accessible by handicapped individuals. These locations, as well as buses, are increasingly being used for out-of-home advertising. As with state-awarded logo sign franchises, municipalities have begun to issue contracts for transit displays on bus shelters, benches and buses to private enterprises. Under these contracts, the private party constructs the shelters or benches, which it can use for advertising displays. In some cases, the rights for bus displays are also included under the contract. The primary benefits of privatizing transit advertising are the avoidance of capital expenditures by the municipality, the prospect of additional revenue for the municipality, the consistent quality that a coordinated transit program can provide and the benefits of regular cleaning and maintenance undertaken by private enterprises. 43 44 MARKETS The following table sets forth certain information regarding the Company's existing primary outdoor advertising markets and the assets proposed to be acquired in the acquisition of Outdoor East. OUTDOOR ADVERTISING EXISTING OUTDOOR ADVERTISING MARKETS(1)
NUMBER OF DISPLAYS(4) NET --------------------- REVENUES(5) STATE/PRIMARY MARKET MARKET RANK(3) BULLETINS POSTERS -------------- - ---------------------------------------------------------- -------------- --------- ------- (IN THOUSANDS) LOUISIANA Baton Rouge............................................. 81 419 684 $ 7,280 Shreveport.............................................. 126 268 730 3,389 Lafayette............................................... 97 154 353 2,035 Lake Charles............................................ 202 189 285 1,915 Monroe.................................................. 226 123 508 1,534 Alexandria.............................................. 198 49 224 757 Houma(2)................................................ -- 40 164 -- ----- ------ -------- Total............................................. 1,242 2,948 16,910 TENNESSEE Nashville............................................... 44 326 1,174 7,488 Knoxville............................................... 69 694 896 7,171 Clarksville............................................. -- 98 357 1,533 ----- ------ -------- Total............................................. 1,118 2,427 16,192 FLORIDA Pensacola............................................... 125 250 662 $ 3,113 Lakeland................................................ 104 554 372 2,875(6) Panama City............................................. 225 268 470 2,262(6) Fort Myers.............................................. 77 133 297 2,153 Tallahassee............................................. 167 121 302 1,908 Fort Walton............................................. 207 157 220 1,643(6) Daytona Beach........................................... 93 54 339 1,456 ----- ------ -------- Total............................................. 1,537 2,662 15,410 ALABAMA Mobile.................................................. 84 381 630 4,755 Montgomery.............................................. 142 248 499 3,598 ----- ------ -------- Total............................................. 629 1,129 8,353 TEXAS Brownsville............................................. 63 204 873 2,577 Beaumont................................................ 127 204 308 2,165 Corpus Christi.......................................... 128 195 519 1,707(6) Wichita Falls........................................... 235 89 165 902 Laredo.................................................. 216 87 373 868(6) ----- ------ -------- Total............................................. 779 2,238 8,219 MISSISSIPPI Jackson................................................. 118 268 698 4,420 Gulfport................................................ 134 207 559 2,953 ----- ------ -------- Total........................................... 475 1,257 7,373 GEORGIA Savannah................................................ 154 344 604 3,307 Augusta................................................. 107 163 471 2,482 Albany.................................................. 243 106 383 1,109(6) ----- ------ -------- Total............................................. 613 1,458 6,898
44 45
NUMBER OF DISPLAYS(4) NET --------------------- REVENUES(5) STATE/PRIMARY MARKET MARKET RANK(3) BULLETINS POSTERS -------------- - ---------------------------------------------------------- -------------- --------- ------- (IN THOUSANDS) VIRGINIA Richmond................................................ 56 309 616 4,288 Roanoke................................................. 101 262 450 1,958(6) ----- ------ -------- Total............................................. 571 1,066 6,246 PENNSYLVANIA Statewide Highways...................................... N/A 553 0 4,713(6) KENTUCKY Lexington............................................... 105 117 507 3,127 WEST VIRGINIA Wheeling................................................ 213 261 551 2,626 COLORADO Colorado Springs........................................ 98 141 355 2,486 OHIO Dayton.................................................. 52 3 529 1,960 Youngstown.............................................. 90 122 537 243(6) Total............................................. 125 1,066 2,203 ----- ------ -------- Subtotal.......................................... 8,161 17,664 $100,756 ----- ------ -------- THE OUTDOOR EAST ACQUISITION (PENDING) SOUTH CAROLINA Columbia................................................ 88 338 571 3,725(7) NORTH CAROLINA Statewide Highways...................................... N/A 924 112 2,472(7) WEST VIRGINIA Bluefield............................................... -- 306 281 1,863(7) VIRGINIA Dublin.................................................. -- 99 221 --(8) Harrisonburg............................................ 253 9 123 --(8) Hopewell................................................ -- 56 291 --(8) ----- ------ -------- Total............................................. 164 635 1,632(7)(8) GEORGIA Valdosta................................................ -- 338 181 1,289(7) ----- ------ -------- Subtotal.......................................... 2,070 1,780 $ 10,981 ----- ------ -------- TOTAL..................................................... 10,231 19,444 $111,737 ===== ====== ========
LOGO SIGN FRANCHISES The following table sets forth certain information regarding the Company's logo business operations. As of September 30, 1996, the Company operated 51,140 logo advertising displays.
# LOGO YEAR ADVERTISING AWARDED FRANCHISE DISPLAYS - ------- ------------------------ ----------- 1989 Nebraska................ 788 1989 Oklahoma................ 1,120 1990 Utah.................... 1,494 1991 Missouri(9)............. 8,254 1992 Ohio.................... 5,686 1993 Texas................... 2,177 1993 Mississippi............. 2,866 1995 Georgia................. 9,240 # LOGO YEAR ADVERTISING AWARDED FRANCHISE DISPLAYS - ------- ------------------------ ----------- 1995 Minnesota(10)........... 2,491 1995 South Carolina.......... 1,982 1996 Virginia................ 7,658 1996 Michigan................ 1,376 1996 Tennessee............... 4,216 1996 Kansas.................. 1,792 1996 New Jersey(11).......... --
- --------------- (1) Includes additional or outlying markets served by the office in the applicable market. (2) Houma was established as a separate primary market in fiscal 1995, and, therefore, net revenues are not included. 45 46 (3) Indicates the Spring 1996 Arbitron Radio Metro Market ranking within which the office is located, as determined by The Arbitron Company. The Company believes that Metro Market ranking, which ranks, according to population of persons 12 years or older, the largest 263 markets in the U.S., is a standard measure of market size used by the media industry. Where no market ranking is shown, such market is not ranked by Arbitron. (4) The two standardized types of industry displays are bulletins and posters. See "Business -- Company Operations." The display count is as of October 31, 1995 pro forma for acquisitions completed within the last twelve months. (5) Except as otherwise noted, represents net revenues for fiscal year ended October 31, 1995 attributable to each outdoor advertising market. These revenues, together with logo sign and transit advertising revenues and production revenue, comprise outdoor advertising net revenues shown in the Company's consolidated statements of earnings (loss). (6) Reflects net revenues for the most recently completed applicable fiscal year with respect to acquisitions completed by the Company since July 31, 1996. See "The Transactions -- Recent Acquisition Activity -- Completed Acquisitions." (7) Represents net revenues for the most recently completed applicable fiscal year attributable to the outdoor advertising market proposed to be acquired by the Company. See "The Transactions -- Recent Acquisition Activity." (8) Net revenues for specific markets proposed to be acquired in the state of Virginia are not available. (9) Franchise operated by a 66.7% owned partnership. (10) Franchise operated by a 95.0% owned partnership. (11) The Company was recently awarded the New Jersey franchise, and, accordingly, no logo signs had been erected as of September 30, 1996. BUSINESS STRATEGY OUTDOOR ADVERTISING The Company's overall business strategy is to be the leading provider of outdoor advertising in each of the markets it serves, with an emphasis on markets with a population ranking between 50 and 250. This strategy includes the following elements: Operating Strategy Small and Medium-Sized Market Focus. The Company's leading position in each of its 36 primary outdoor advertising markets is a result of a successful operating strategy dedicated to growth and acquisitions primarily within the target range of markets having a population ranking between 50 and 250. Management believes that operating in these markets provides certain advantages, including the benefits of a diverse and reliable mix of local advertisers, geographic diversification and an ability to package inventory effectively. High Quality Local Sales and Service. The Company identifies and closely monitors the needs of its customers and seeks to provide them with quality advertising products at a lower cost than competitive media. The Company believes it has a reputation for providing excellent customer service and quality outdoor advertising space and displays. The Company's 118-person sales force is supported by 36 full-service offices. In each primary market, the Company has recruited and trained a skilled sales force, placing an emphasis on market research and use of artistic creativity. Each salesperson is compensated under a performance-based compensation system and supervised by a local sales manager executing a coordinated marketing plan. Art departments assist local customers in the development and production of creative, effective advertisements. The Company believes repeat sales are evidence that the Company delivers quality products and services. Centralized Control/Decentralized Management. Management believes that, in its existing 36 primary markets, the Company is the only full-service outdoor advertising company offering a full complement of outdoor advertising services coupled with local production facilities, management and account executives. Local offices operate in defined geographic areas and function essentially as independent business units, consistent with senior management's philosophy that a decentralized organization is more responsive to particular local market demands. The Company maintains centralized accounting and financial control over its local operations, but local managers are responsible for the day-to-day operations in each local market and are compensated according to that market's financial performance. Each local manager reports to one of five regional managers who in turn report to the Company's Chief Executive Officer. Management believes empowering local management and sales personnel to respond to market conditions has been a major factor in the Company's success. 46 47 Effective Inventory Management. The Company believes that the local presence of sales personnel contributes to the Company's ability to increase occupancy rates by attracting and servicing local customers. Additionally, a national sales office at corporate headquarters allows the Company to package inventory effectively to take advantage of national advertising campaigns in the Company's markets. The Company's inventory is managed by state-of-the-art mapping, charting and accounting software. GROWTH STRATEGY Internal Growth. Within its existing markets, the Company enhances revenue and cash flow growth by employing highly targeted local marketing efforts to improve display occupancy rates and by selectively increasing advertising rates. This strategy is facilitated through its local sales and service offices which allow management to respond quickly to the demands of its local customer base. In addition, the Company routinely invests in upgrading its existing structures and constructing new display faces in order to provide quality service to its current customers and to attract new advertisers. Acquisitions. Aggressive internal growth is enhanced by focused acquisitions in small to medium-sized markets, resulting in increased operating efficiencies, greater geographic diversification and increased market penetration. The Company has demonstrated its ability to grow successfully through acquisitions, having completed over 80 acquisitions since 1983. In addition to acquiring positions in new markets, the Company purchases smaller outdoor advertising properties within existing or contiguous markets. Acquisitions offer opportunities for inter-market cross-selling and the opportunity to centralize and combine accounting and administrative functions, thereby achieving economies of scale. The table below sets forth certain information regarding acquisitions which the Company has made or has agreed to make subsequent to the fiscal year ended October 31, 1993:
YEAR MARKET BULLETINS POSTERS - ---- -------------------- --------- ------- 1994 Panama City, FL 214 317 1994 Daytona Beach, FL(1) 56 349 1994 Shreveport, LA(1) 271 760 1994 Savannah, GA(1) 357 621 1994 Beaumont, TX(1) 202 302 1994 Fort Myers, FL(1) 122 289 1994 Clarksville, TN(1) 112 325 1994 Lakeland, FL(1) 214 357 1994 Augusta, GA 8 69 1994 Pensacola, FL 49 218 1994 Montgomery, AL 76 33 1994 Beaumont, TX 40 0 1995 Richmond, VA 184 0 1995 Nashville, TN 0 254 1995 Nashville, TN 317 0 1995 Roanoke, VA 129 0 1995 Augusta, GA 98 0 YEAR MARKET BULLETINS POSTERS - ---- -------------------- --------- ------- 1996 Lakeland, FL 249 0 1996 Corpus Christi, TX 195 519 1996 Laredo, TX 87 373 1996 Panama City, FL 45 164 1996 Fort Walton, FL 6 0 1996 Albany, GA 14 112 1996 Lakeland, FL 121 0 1996 Roanoke, VA 50 0 1996 Youngstown, OH(2) 122 537 1996 PA highways(2)(4) 553 0 1996 Valdosta, GA(3) 338 181 1996 Columbia, SC(3) 338 571 1996 Dublin, VA(3) 99 221 1996 Hopewell, VA(3) 56 291 1996 Harrisonburg, VA(3) 9 123 1996 Bluefield, WV(3) 306 281 1996 NC highways(3)(4) 924 112
- --------------- (1) Acquired on May 1, 1994 from LHC, which prior to such date was a 49% owned and managed subsidiary of the Company. (2) Acquired from FKM on November 1, 1996. See "The Transactions -- Recent Acquisition Activity -- Completed Acquisitions -- The FKM Acquisition." (3) Proposed to be acquired from Outdoor East. See "The Transactions -- Recent Acquisition Activity -- Pending Acquisitions -- The Outdoor East Acquisition." (4) These acquisitions relate to displays located along interstate highways and other primary roads throughout the states of Pennsylvania and North Carolina and which are not located within one of the Company's existing markets. The Company believes that there will be future opportunities for implementing the Company's acquisition strategy given the industry's fragmentation and current consolidation trends. Additionally, the small to medium-sized markets which fit the Company's growth strategy offer a large number of potential acquisition opportunities. 47 48 Logo Signs The Company entered the business of logo sign advertising in 1988. The Company is now the largest provider of logo sign services in the United States, having been awarded 16 of the 22 privatized state logo sign franchises awarded to date and having entered into an agreement to acquire two additional franchises. The Company's strategy is to be the leading logo sign provider in the country. The Company was also selected to operate the tourism signing franchise for the province of Ontario, Canada in October 1996. The Company is currently negotiating a definitive agreement with the province with respect to the franchise, which the Company expects will be executed by December 31, 1996. Adopting many of the decentralized operational strategies of the outdoor advertising division, the Company's logo sign division maintains contacts and local sales offices in each of the states in which it operates. Relationships with customers are developed and maintained at the state level; accounting, MIS and certain administrative functions are centralized at the Company's headquarters. In competing for state-awarded logo sign franchises, the Company seeks to form strategic alliances with premier signing contractors in order to present to state highway departments the combined benefits of entities with substantial local presence and national resources. As the industry leader, the Company has gained significant operating experience and compiled a database of information it believes is unequalled in this industry. The Company shares its knowledge and database information with state highway departments initiating new logo sign programs, and believes this interaction provides significant advantages when seeking new logo sign franchises. After securing a franchise, the Company generally contracts with an independent construction firm for the erection and maintenance of the logo sign structures in order to avoid the expense of staffing and maintaining a construction presence. The Company then processes orders for logo sign services through its corporate staff and a small sales force in the state. The Company maximizes participation and customer satisfaction through the use of market surveys, coupled with a customer focused sales program to potential logo sign advertisers. Employing these methods, in Mississippi, for example, the revenue from logo sign advertising displays increased from $263,100 for the twelve months prior to the Company receiving the state's logo sign franchise to $621,000 for the twelve months following the Company being awarded such franchise. This revenue increase was the result of a 57% increase in the number of logo advertising displays and an increase in advertising rates during the twelve months following receipt of the franchise. The Company believes its market-leading position in the logo sign industry will continue to increase as additional states privatize their logo sign programs and recognize the track record and core competency of the Company in building and servicing logo sign programs. The Company anticipates bidding on the logo sign franchise in an additional state during 1996. The Company plans to pursue additional logo sign franchises, through both new franchise awards and, possibly, the acquisition of other logo sign franchise operators. Logo sign opportunities arise periodically, both from states initiating new logo sign programs and states converting from government owned and operated programs to privately owned and operated programs. Furthermore, the Company plans to pursue tourism signing programs in Canada and is seeking to expand into other state- authorized signage programs, such as those involving directional signs providing tourist information. Transit and Other The Company has recently expanded into the transit advertising business through the operation of displays on bus shelters, benches and buses in eight of its 36 primary markets and other markets throughout the state of South Carolina. The Company plans to continue pursuing transit advertising opportunities that arise in its primary markets and to expand into other markets. With the growth in wireless communication, particularly the buildout of personal communications services systems following the recent FCC allocation of radio spectrum, the Company is exploring ways to realize additional revenue by contracting with communications providers for use of the Company's billboard 48 49 structures to attach transmission and reception devices. The Company has agreements with two of the largest potential wireless communication service providers regarding possible future use of its billboards. COMPANY OPERATIONS Outdoor Advertising Sales and Service The Company conducts its outdoor advertising operations through its 36 local offices. Local offices operate in defined geographic areas and function essentially as independent business units, consistent with senior management's philosophy that a decentralized organization is more responsive to particular local market demands and provides greater incentives to employees. The Company's management policy is one of centralized accounting and financial control coupled with decentralized sales and production. Local managers in each of the Company's primary markets are responsible for the day-to-day operations of their outdoor office and are compensated according to the Company's financial performance in that market. Each local manager reports to one of five regional managers who in turn report to the Company's Chief Executive Officer. The following is a list of the Company's regional managers and their experience with the Company and in the outdoor advertising industry as of September 30, 1996:
YEARS YEARS WITH IN NAME REGION COMPANY INDUSTRY ---------------------------------------- ------------------- ------- -------- Gerald H. Marchand...................... Baton Rouge Region 38 38 Robert E. Campbell...................... Central Region 24 24 Phillip C. Durant....................... Eastern Region 19 21 Thomas F. Sirmon........................ Mobile Region 17 17 Myron A. LaBorde........................ Florida Region 25 25
The Company's regional managers have been with the Company, on average, for 25 years. The Company's local managers have been with the Company, on average, for 14 years and have worked in the industry, on average, for 11 years. Inventory The Company operates the following types of outdoor advertising displays: Bulletins generally are 14 feet high and 48 feet wide (672 square feet) and consist of panels on which advertising copy is displayed. The advertising copy is either handpainted onto the panels at the Company's facilities in accordance with design specifications supplied by the advertiser and attached to the outdoor advertising structure, or printed with computer-generated graphics on a single sheet of vinyl that is "wrapped" around the structure. On occasion, to attract more attention, some of the panels may extend beyond the linear edges of the display face and may include three-dimensional embellishments. Because of their greater impact and higher cost, bulletins are usually located on major highways. Standardized posters generally are 12 feet high by 25 feet wide (300 square feet) and are the most common type of billboard. Advertising copy for these posters consists of lithographed or silk-screened paper sheets supplied by the advertiser that are pasted and applied like wallpaper to the face of the display, or single sheets of vinyl with computer-generated advertising copy that are wrapped around the structure. Standardized posters are concentrated on major traffic arteries. Junior posters usually are 6 feet high by 12 feet wide (72 square feet). Displays are prepared and mounted in the same manner as standardized posters, except that vinyl sheets are not typically used on junior posters. Most junior posters, because of their smaller size, are concentrated on city streets and target pedestrian traffic. 49 50 For the Company's fiscal year ended October 31, 1995, approximately 55% of the Company's outdoor advertising net revenues were derived from bulletin sales and 45% from poster sales. Over the same period, bulletin and poster occupancy averaged approximately 82% and 77%, respectively. The Company regularly donates unoccupied display space for use by charitable and civic organizations. The physical structures are typically owned by the Company and are built on locations the Company either owns or leases. In each local office one employee typically performs site leasing activities for the markets served by that office. See "-- Company Operations -- Facilities." Bulletin space is generally sold as individually selected displays which remain in one location, usually an interstate highway or other main road, for the duration of the advertising contract. Bulletins may also be sold as part of a rotary plan where advertising copy is periodically rotated from one location to another within a particular market. Poster space is generally sold in packages called "showings," which comprise a given number of displays in a market area. Posters provide advertisers with access either to a specified percentage of the general population or to a specific targeted audience. Displays making up a showing are placed in well-traveled areas and are distributed so as to reach a wide audience in a particular market. Production The Company's production staff in each of its existing 36 primary markets performs the full range of activities required to create and install outdoor advertising in all of its markets. Production work includes creating the advertising copy design and layout, painting the design or coordinating its printing and installing the designs on displays. The Company provides its production services to local advertisers and to advertisers that are not represented by advertising agencies, since national advertisers represented by advertising agencies often use preprinted designs that require only installation. The Company's creative and production personnel typically develop new designs or adopt copy from other media for use on billboards. The Company's artists also often assist in the development of marketing presentations, demonstrations and strategies to attract new advertisers. With the increased use of vinyl and pre-printed advertising copy furnished to the outdoor advertising company by the advertiser or its agency, outdoor advertising companies require less labor-intensive production work. In addition, increased use of vinyl and preprinted copy is also attracting more customers to the outdoor advertising medium. The Company believes that this trend over time will reduce operating expenses associated with production activities. 50 51 Categories of Business The following table sets forth the top ten categories of business from which the Company derived its outdoor advertising revenues for fiscal 1995 and the respective percentages of such revenue. These business categories accounted for approximately 73.6% of the Company's total outdoor advertising net revenues in the fiscal year ended October 31, 1995. No one advertiser accounted for more than 3.0% of the Company's total outdoor advertising net revenues in that period.
PERCENTAGE NET ADVERTISING CATEGORIES REVENUES --------------------------------------------------------------- --------------- Restaurants.................................................... 14.9% Retail establishments.......................................... 11.4 Tobacco products............................................... 9.2 Hotels and motels.............................................. 7.3 Entertainment and sports....................................... 5.9 Automotive..................................................... 5.9 Hospitals and medical care..................................... 5.1 Services....................................................... 4.8 Media.......................................................... 4.6 Financial institutions......................................... 4.5 ---- Total................................................ 73.6% ====
Beginning in 1992, the leading tobacco companies substantially reduced their domestic advertising expenditures in response to societal and governmental pressure and other factors. Because tobacco advertisers tend to occupy displays in highly desirable locations, the Company historically has been able to attract substitute advertising for space which has become unoccupied as a result of reduced tobacco product advertisements, and management believes that the Company will continue to be able to attract such substitute advertising should tobacco advertisers further reduce their spending in the future. Logo Signs The Company is the largest provider of logo sign services in the United States and operates over 18,000 logo sign structures containing over 51,000 logo advertising displays. The Company has been awarded exclusive franchises to erect and operate logo signs in the states of Florida, Georgia, Michigan, Mississippi, Nebraska, New Jersey, Ohio, Oklahoma, South Carolina, Texas, Utah, Virginia, through a 66.7% owned partnership in the state of Missouri and through a 95.0% owned partnership in the state of Minnesota. In addition, the Company has recently acquired the logo sign franchises in Tennessee and Kansas and has entered into an agreement to acquire the logo sign franchises in Kentucky and Nevada. In addition, in October 1996, the Company was also selected to operate the tourism signing franchise for the province of Ontario, Canada. State logo sign franchises represent the exclusive contract right to erect and operate logo signs within a state. The term of the contracts vary, but generally range from ten to twenty years, including renewal terms. The logo sign contracts generally provide for termination by the state prior to the end of the term of the franchise, in most cases with compensation to be paid to the Company. Typically, at the end of the term of the franchise, ownership of the structures is transferred to the state without compensation to the Company. None of the Company's logo sign franchises terminates in the next two years and only two are subject to renewal during that period. In one of those cases, the state authority has verbally agreed to the renewal of the term for five years. The Company expects to be able to compete effectively for retention of franchises when their terms expire. The Company also designs and produces logo sign plates for customers throughout the country, including for use in states which have not yet privatized their logo sign programs. 51 52 EMPLOYEES The Company employed approximately 815 persons at September 30, 1996. Of these, 44 were engaged in overall management and general administration at the Company's management headquarters and the remainder were employed in the Company's operating offices. Of these, approximately 110 were direct sales and marketing personnel. The Company has three local offices covered by collective bargaining agreements, consisting of painters, billposters and construction personnel. A union is organized in one other local office, but this union is currently operating without a collective bargaining agreement. The Company believes that its relations with its employees, including its 26 unionized employees, are good, and the Company has never experienced a strike or other labor dispute. The Company believes its employee retention record evidences its good employee relations. The average tenure for the Company's employees is six years. The Company offers most employees a range of benefits including a profit sharing/401(k) plan and life, health and dental insurance. FACILITIES The Company's 53,500 square foot management headquarters is located in suburban Baton Rouge, Louisiana. The Company occupies approximately 30% of the space in this facility and leases the remaining space. The Company owns 26 local operating facilities with front office administration and sales office space connected to back-shop poster and bulletin production space, and leases an additional 24 operating facilities at an aggregate lease expense in 1995 of approximately $775,000. The Company owns approximately 450 parcels of property beneath outdoor structures. As of October 31, 1995, the Company had approximately 12,000 active outdoor site leases accounting for a total annual lease expense of $14.2 million. This amount represented 15.4% of total net outdoor advertising revenues for that period, which is consistent with the Company's historical lease expense experience. The Company's leases are for varying terms ranging from month-to-month to in some cases a term of over ten years, and many provide the Company with renewal options. There is no significant concentration of displays under any one lease or subject to negotiation with any one landlord. The Company believes that an important part of its management activity is to manage its lease portfolio and negotiate suitable lease renewals and extensions. COMPETITION Outdoor Advertising The Company competes in each of its markets with other outdoor advertisers as well as other media, including broadcast and cable television, radio, print media and direct mail marketers. In addition, the Company also competes with a wide variety of out-of-home media, including advertising in shopping centers, malls, airports, stadiums, movie theaters and supermarkets, as well as on taxis, trains and buses. Advertisers compare relative costs of available media and cost-per-thousand impressions, particularly when delivering a message to customers with distinct demographic characteristics. In competing with other media, outdoor advertising relies on its relative cost efficiency and its ability to reach a broad segment of the population in a specific market or to target a particular geographic area or population with a particular set of demographic characteristics within that market. The outdoor advertising industry is highly fragmented, consisting of several large outdoor advertising and media companies with operations in multiple markets as well as smaller and local companies operating a limited number of structures in single or a few local markets. Although some consolidation has occurred over the past few years, according to the OAAA there are approximately 1,000 companies in the outdoor advertising industry operating approximately 396,000 billboard displays. In several of its markets, the Company encounters direct competition from other major outdoor media companies, including Outdoor Systems, Inc., Eller Media, Inc. (formerly Patrick Media Group) and 3M National Advertising Co. (a division of Minnesota Mining and Manufacturing Company), each of which has a larger national network and greater total resources than the Company. The Company believes that its strong emphasis on sales and 52 53 customer service and its position as a major provider of advertising services in each of its primary markets enables it to compete effectively with the other outdoor advertising companies, as well as other media, within those markets. See "Risk Factors -- Competition." Logo Signs The Company faces competition in obtaining new logo sign franchises and in bidding for renewals of expiring franchises. The Company faces competition from four other national providers of logo signs in seeking logo franchises. In addition, local companies within each of the states which solicit bids will compete against the Company in the open-bid process. Competition from these sources is also encountered at the end of each contract period. The Company believes its operations model, which includes local sales offices, comprehensive databases of information and strategic alliances and its knowledge of the industry, should provide a competitive advantage in pursuing future franchises. In marketing logo signs to advertisers, the Company competes with other forms of out-of-home advertising. The Company believes, however, that logo sign advertising offers an effective, low-cost directional advertising service, which makes it attractive to potential advertisers. REGULATION Outdoor advertising is subject to governmental regulation at the federal, state and local levels. Federal law, principally the Highway Beautification Act of 1965 (the "HBA") regulates outdoor advertising on federally aided primary and interstate highways. The HBA requires, as a condition to federal highway assistance, states to restrict billboards on such highways to commercial and industrial areas, and requires certain additional size, spacing and other limitations. All states have passed state billboard control statutes and regulations at least as restrictive as the federal requirements, including removal at the owner's expense and without compensation of any illegal signs on such highways. The Company believes that the number of its billboards that may be subject to removal as illegal is immaterial. No state in which the Company operates has banned billboards, but some have adopted standards more restrictive than the federal requirements. Municipal and county governments generally also have sign controls as part of their zoning laws. Some local governments prohibit construction of new billboards and some allow new construction only to replace existing structures, although most allow construction of billboards subject to restrictions on zones, size, spacing and height. Federal law does not require removal of existing lawful billboards, but does require payment of compensation if a state or political subdivision compels the removal of a lawful billboard along a federally aided primary or interstate highway. State governments have purchased and removed legal billboards for beautification in the past, using federal funding for transportation enhancement programs, and may do so in the future. Governmental authorities from time to time use the power of eminent domain to remove billboards. Thus far, the Company has been able to obtain satisfactory compensation for any of its billboards purchased or removed as a result of governmental action, although there is no assurance that this will continue to be the case in the future. Local governments do not generally purchase billboards for beautification, but some have attempted to force removal of legal but nonconforming billboards (billboards which conformed with applicable zoning regulations when built but which do not conform to current zoning regulations) after a period of years under a concept called "amortization," by which the governmental body asserts that just compensation is earned by continued operation over time. Although there is some question as to the legality of amortization under federal and many state laws, amortization has been upheld in some instances. The Company generally has been successful in negotiating settlements with applicable localities for billboards required to be removed. Restrictive regulations also limit the Company's ability to rebuild or replace nonconforming billboards. In recent years, bills have been introduced in Congress that would affect billboard advertising of tobacco or alcohol products. No bills have become law except those requiring the familiar health hazard warnings appearing on cigarette packages and advertisements. It is uncertain whether such regulation will be enacted in the future, what such regulation might provide or what impact such regulation might have on the Company's business. Federal law generally prevents state or local restrictions on the content of billboard advertisements. 53 54 In August 1996, President Clinton signed an executive order adopting rules proposed by the U.S. Food and Drug Administration regulating the advertising of certain tobacco products. These rules, which will become effective on August 22, 1997, prohibit the placement of tobacco products advertising within 1,000 feet of playgrounds and primary and secondary schools and limit such advertising to a format consisting of black text on a white background. Certain advertising industry and tobacco industry organizations have filed lawsuits challenging these regulations, seeking an injunction to keep them from going into effect. In addition, some members of Congress have indicated that they may sponsor legislation to prevent the regulations from going into effect. If these regulations are not modified or nullified by legislative or judicial action, the Company's outdoor advertising revenues could be adversely affected. To date, however, regulations in the Company's markets have not materially adversely affected its operations. However, the outdoor advertising industry is heavily regulated and at various times and in various markets can be expected to be subject to varying degrees of regulatory pressure affecting the operation of advertising displays. Accordingly, although the Company's experience to date is that the regulatory environment can be managed, no assurance can be given that existing or future laws or regulations will not materially and adversely affect the Company. LITIGATION The Company from time to time is involved in litigation in the ordinary course of business, including disputes involving advertising contracts, site leases, employment claims and construction matters. The Company is also involved in routine administrative and judicial proceedings regarding billboard permits, fees and compensation for condemnations. The Company is not a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the Company. 54 55 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company as of October 1, 1996 were as follows:
YEARS WITH NAME AGE TITLE THE COMPANY - ------------------------------ --- ------------------------------------- ----------- Kevin P. Reilly, Jr........... 42 Chairman, President, Chief Executive 18 Officer and Director Keith A. Istre................ 44 Chief Financial Officer, Treasurer 18 and Director Charles W. Lamar, III......... 48 General Counsel, Secretary and 20 Director Gerald H. Marchand............ 65 Vice President, Regional Manager of 38 Baton Rouge Region, and Director T. Everett Stewart, Jr........ 42 President of Interstate Logos, Inc., 16 a subsidiary of the Company, and Director Robert E. Campbell............ 48 Vice President, Regional Manager of 24 Central Region Phillip C. Durant............. 50 Vice President, Regional Manager of 19 Eastern Region Myron A. LaBorde.............. 47 Vice President, Regional Manager of 25 Florida Region Thomas F. Sirmon.............. 41 Vice President, Regional Manager of 17 Mobile Region Robert B. Switzer............. 43 Vice President of Operations 20 Dudley W. Coates*............. 65 Director -- Jack S. Rome, Jr.*............ 48 Director -- William R. Schmidt*........... 45 Director --
- --------------- * Outside directors Kevin P. Reilly, Jr. has served as the Company's President and Chief Executive Officer since February 1989 and as a director of the Company since February 1984. Mr. Reilly served as President of the Company's Outdoor Division from 1984 to 1989. Mr. Reilly, an employee of the Company since 1978, has also served as Assistant and General Manager of the Company's Baton Rouge Region and Vice President and General Manager of the Louisiana Region. Mr. Reilly received a B.A. from Harvard University in 1977. Keith A. Istre has been Chief Financial Officer of the Company since February 1989 and a director of the Company since February 1991. Mr. Istre joined the Company as Controller in 1978 and became Treasurer in 1985. Prior to joining the Company, Mr. Istre was employed by a public accounting firm in Baton Rouge from 1975 to 1978. Mr. Istre graduated from the University of Southwestern Louisiana in 1974 with a degree in accounting. Charles W. Lamar, III joined the Company in 1982 as General Counsel and has been a director of the Company since June 1973. Prior to joining the Company, Mr. Lamar maintained his own law practice and was employed by a law firm in Baton Rouge. Mr. Lamar received a B.A. in Philosophy from Harvard University in 1971, a M.A. in Economics from Tufts University in 1972 and a J.D. from Boston University in 1975. Gerald H. Marchand has been Regional Manager of the Baton Rouge Region, which encompasses operations in Louisiana, Mississippi and Texas, since 1988 and a director of the Company since 1978. He 55 56 began his career with the Company in leasing and went on to become President of the Outdoor Division. He has served as General Manager of the Lake Charles and Mobile operations. Mr. Marchand received a Masters in Education from Louisiana State University in 1955. T. Everett Stewart, Jr. has been President of Interstate Logos, Inc. since 1988, and has recently been named a director. He served as Regional Manager of the Company's Baton Rouge Region from 1984 to 1988. Previously, he served the Company as Sales Manager in Montgomery and General Manager of the Monroe and Alexandria operations. Before joining the Company in 1979, Mr. Stewart was employed by the Lieutenant Governor of the State of Alabama and by a United States Senator from the State of Alabama. Mr. Stewart received a B.S. in Finance from Auburn University in 1976. Robert E. Campbell has been Regional Manager of the Central Region, which encompasses operations in Alabama, Colorado, Kentucky, Ohio, Texas and Virginia, since 1983. Mr. Campbell served from 1972 to 1983 as Sales Manager of the Company's Mobile operation and as General Manager of the Company's Midland and Mobile operations. Mr. Campbell received a B.A. in Political Science and History from the University of South Alabama in 1971. Phillip C. Durant joined the Company in 1974 in Pensacola, Florida and is currently the Regional Manager of the Eastern Region, which encompasses operations in Tennessee and West Virginia. Previously he served as Sales Manager in Pensacola and General Manager of Monroe, Alexandria, Lake Charles and Lafayette, Louisiana and Nashville. Myron A. LaBorde joined the Company in 1972 as an account executive in Baton Rouge and is currently the Regional Manager of the Florida Region and General Manager of the Shreveport, Louisiana operation. Previously he served as General Manager of the Company's Lake Charles, Louisiana and Tallahassee, Florida operations. Mr. LaBorde received a degree in Marketing from the University of Southwestern Louisiana. Thomas F. Sirmon has served the Company as Regional Manager of the Mobile Region, which encompasses operations in Alabama, Florida and Georgia, since 1990. He began his career with the Company as an Account Executive in the Mobile operation in 1979. In 1981, he was appointed General Manager in Augusta; in 1984, General Manager in Nashville; and in 1988, General Manager in Mobile. Mr. Sirmon received a degree in Marketing from the University of South Alabama in 1978. Robert B. Switzer has been Vice President of Operations of the Company since 1984. In 1976, he joined the Company as Posting Superintendent in Mobile and became Operations Manager in Pensacola. Since 1991, he has also served as General Manager of the Pensacola operation and, since 1993, as General Manager of the Fort Walton operation. Mr. Switzer received a B.S. in Zoology from the University of South Florida in 1975. Dudley W. Coates has been a director of the Company since 1973. Mr. Coates received a Liberal Arts degree from Yale University in 1953, and, since that time, has been an investment broker with the firm of Legg Mason, Inc. Jack S. Rome, Jr. has been a director of the Company since 1974. Since 1988, Mr. Rome has been President of No Fault Industries, Inc., a construction company specializing in outdoor recreational facilities. Mr. Rome has also served as President of Jack Rome, Jr. & Associates, Inc., a management consulting company, since October 1987. Mr. Rome served the Company in various capacities from 1975 to 1986. Mr. Rome received his B.S. in accounting from Southeastern Louisiana University in 1971. William R. Schmidt became a director of the Company in 1994. He is an Assistant Vice President for Pacific Mutual Life Insurance Company in its Securities Department, where he has been employed since 1990. He has a B.S. in Finance from Pennsylvania State University and an MBA from the Amos Tuck School of Business at Dartmouth College. Kevin P. Reilly, Jr., Charles W. Lamar, III and Robert B. Switzer are cousins. 56 57 BOARD COMMITTEES The Board of Directors has a Compensation Committee, which makes recommendations concerning salaries for employees and consultants to the Company, and an Audit Committee, which reviews the results of the Company's audit and other services provided by the Company's independent auditors. The Compensation Committee and the Audit Committee currently consist of Dudley Coates, Jack S. Rome, Jr. and William R. Schmidt. During fiscal year 1995, the Compensation Committee consisted of Jack S. Rome, Jr., Mary Lee Lamar Dixon and Carolyn Sample Abshire, who were directors. Mr. Rome was employed by the Company from 1975 to 1985. The Executive Committee, which has authority to operate the affairs of the Company between Board meetings, currently consists of Kevin P. Reilly, Jr., Gerald H. Marchand, Keith A. Istre and Charles W. Lamar, III. BOARD COMPENSATION All directors of the Company hold office until the next annual meeting of stockholders of the Company or until their successors are duly elected and qualified. Directors who are not employed by the Company receive a fee of $2,500 for each Board meeting attended and are reimbursed for travel expenses incurred to attend Board meetings. Executive officers of the Company are elected by the Board of Directors on an annual basis and serve at the discretion of the Board of Directors. EXECUTIVE COMPENSATION The following table sets forth certain compensation information for the Chief Executive Officer and each of the four most highly compensated executive officers of the Company for the fiscal year ended October 31, 1995.
ANNUAL COMPENSATION ---------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) -------------------------------------- ---- --------- -------- ------------------ Kevin P. Reilly, Jr................... 1995 120,000 200,000 5,500 President and Chief 1994 120,000 150,000 5,000 Executive Officer 1993 120,000 100,000 Gerald H. Marchand.................... 1995 106,000 156,543 50,000 Vice President, Regional 1994 106,000 197,443 50,000 Manager of Baton Rouge Region 1993 106,000 75,000 Robert E. Campbell.................... 1995 90,000 96,984 7,500 Vice President, Regional 1994 90,000 73,208 7,500 Manager of Central Region 1993 84,000 61,000 T. Everett Stewart.................... 1995 80,000 116,500 4,500 President of Interstate Logos, Inc. 1994 80,000 65,000 4,000 1993 80,000 50,000 Hollis T. Wood(2)..................... 1995 90,000 93,862 6,500 Vice President, Regional 1994 90,000 89,638 6,000 Manager of Knoxville Region 1993 90,000 40,000
- --------------- (1) The reported amounts consist of employer contributions under the Company's deferred compensation plan. (2) Mr. Wood is no longer employed by the Company. 57 58 EMPLOYMENT AGREEMENTS The Company does not have employment contracts with any of its officers or employees. The Company had a consulting agreement with Kevin P. Reilly, Sr., its former Chairman, which expired on January 15, 1996. Under that agreement, Mr. Reilly, Sr. received $120,000 in annual consulting fees and was eligible for a $100,000 annual bonus, which was paid for the fiscal year ended October 31, 1995. The Company continued to pay Mr. Reilly, Sr. his consulting fee on a month-to-month basis until July 1, 1996. Effective July 1, 1996, the Lamar Texas Limited Partnership, a subsidiary of the Company, and Reilly Consulting Company, L.L.C., of which Mr. Reilly, Sr. is the manager and, with his wife, the sole members, entered into a replacement consulting agreement. This new consulting agreement has a ten year term and provides for a $120,000 annual consulting fee. The agreement contains a non-disclosure provision and a noncompetition restriction which extends for two years beyond the termination of the agreement. STOCK OPTION PLANS The Company's 1996 Equity Incentive Plan (the "1996 Plan") was adopted by the Board of Directors in July 1996. The purpose of the 1996 Plan is to attract and retain key employees and consultants of the Company, to provide an incentive for them to achieve long-range performance goals, and to enable them to participate in the long-term growth of the Company. The 1996 Plan authorizes the grant of stock options (incentive and nonstatutory), stock appreciation rights ("SARs") and restricted stock to employees and consultants of the Company capable of contributing to the Company's performance. The Company has reserved an aggregate of 2.0 million shares (subject to adjustment for stock splits and similar capital changes) of Class A Common Stock for awards under the 1996 Plan. Stock options and SARs may not be granted at less than fair market value of the Class A Common Stock and not more than 200,000 shares may be granted in any calendar year to any participant. Incentive stock options may be granted only to persons eligible to receive them under the Internal Revenue Code of 1996, as amended. The Company has granted options to purchase approximately 1.2 million shares of Class A Common Stock since the IPO. The Board of Directors has appointed the Compensation Committee (the "Committee") to administer the 1996 Plan. Awards under the 1996 Plan contain such terms and conditions not inconsistent with the 1996 Plan as the Committee in its discretion approves. The Committee has discretion to administer the 1996 Plan in the manner which it determines, from time to time, is in the best interest of the Company. For example, the Committee will fix the terms of stock options, SARs and restricted stock grants and determine whether, in the case of options and SARs, they may be exercised immediately or at a later date or dates. Awards may be granted subject to conditions relating to continued employment and restrictions on transfer. The Committee may provide, at the time an award is made or at any time thereafter, for the acceleration of a participant's rights or cash settlement upon a change in control of the Company. The terms and conditions of awards need not be the same for each participant. The foregoing examples illustrate, but do not limit, the manner in which the Committee may exercise its authority in administering the 1996 Plan. In addition, all questions of interpretation of the 1996 Plan are determined by the Committee. 58 59 CERTAIN TRANSACTIONS The Company has from time to time made various personal loans to the persons listed below. The loans bear interest at a rate equal to 100 basis points above the rate applicable to United States Treasury six-month bills.
LARGEST OUTSTANDING BALANCE SINCE APPROXIMATE BEGINNING OF LAST BALANCE OUTSTANDING AS OF NAME FISCAL YEAR OCTOBER 31, 1996 ------------------------------------------- ------------------- ------------------------- Jack S. Rome(1)............................ $ 147,230 $ 123,314 Robert B. Switzer(2)....................... 80,592 50,592 Kevin P. Reilly, Sr.(3)(4)................. 154,586 34,030 T. Everett Stewart, Jr.(1)(2).............. 75,000 25,000 Wendell S. Reilly(3)....................... 500,000 0 Anna Reilly Cullinan(3).................... 80,000 0 Gerald H. Marchand(2)...................... 175,000 0 Kevin P. Reilly, Jr.(1)(2)(3).............. 135,000 0 Sean E. Reilly(2).......................... 73,945 0
- --------------- (1) The named individual is a director of the Company. (2) The named individual is an executive officer of the Company. (3) Member of the Reilly family. (4) Kevin P. Reilly, Sr. was President and Chairman of the Board of the Company until January 1992. In October 1995 and in March 1996, the Company repurchased 3.6% and 12.9%, respectively, of its then outstanding common stock (1,220,500 and 3,617,884 shares, respectively, after giving effect to the 778.9 for 1 split of the Company's then-existing common stock and recapitalization occurring after such dates) from certain of its existing stockholders for an aggregate purchase price of approximately $4.0 million. The terms of the March 1996 repurchase entitled the selling stockholders to receive additional consideration from the Company in the event that the Company consummated a public offering of its common stock at a higher price within 24 months of the repurchase. In satisfaction of that obligation, upon completion of the IPO in August 1996, the Company paid the selling stockholders an aggregate of $5.0 million in cash from the proceeds of the IPO and issued to them $20.0 million aggregate principal amount of ten-year subordinated notes. Of the total $25.0 million paid on account of the common stock repurchased, $6.3 million was paid to the Company's executive officers, directors, beneficial owners of 5% or more of the Company's common stock and their respective affiliates. On December 31, 1995, the Company issued 5,719.49 shares of its Class A Preferred Stock with an aggregate liquidation preference of $3.6 million to certain of its stockholders in exchange for an equal number of shares of its then outstanding common stock. See "Description of Capital Stock -- Class A Preferred Stock." Of the Class A Preferred Stock so issued, 3,134.80 shares were issued to the Reilly Family Limited Partnership, 1,500 shares to Charles W. Lamar, III and 1,084.69 shares to Mary Lee Lamar Dixon and trusts for her children. See "Description of Capital Stock -- Class A Preferred Stock." In 1993, the Company acquired LHC shares from certain members of the Reilly family, Charles W. Lamar, III, Mary Lee Lamar Dixon and Robert B. Switzer in exchange for 8.0% of the then outstanding shares of common stock of the Company. In 1994, in connection with the Company's acquisition of the interest in LHC which it did not already own, certain officers and directors of the Company who were stockholders of LHC received approximately $226,000 from the proceeds of the transaction. In May 1993, the Company purchased the outstanding stock of Lamar Advertising of Wichita Falls, Inc., which was substantially owned by Kevin P. Reilly, Sr., Kevin P. Reilly, Jr., Charles W. Lamar, III, Gerald H. Marchand and certain of their relatives. The total consideration for the stock purchase was approximately $1.2 million, which approximated the book value of the underlying assets. In 1993, the Company purchased a building from a joint venture whose principals included Kevin P. Reilly, Sr., Kevin P. Reilly, Jr., and Charles W. Lamar, III for $740,000. The Company has made investments totalling $1.25 million in Wireless One, Inc., a publicly-held company in the wireless cable business, of which Sean E. Reilly, a member of the Reilly family and a former director, is Chief Executive Officer. The current market value of these investments, which are restricted from sale by the Company until October 1997, exceeds the Company's cost. 59 60 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the ownership of the Company's capital stock as of October 1, 1996, as adjusted to reflect the sale of the shares offered hereby, (i) by each person known by the Company to own beneficially five percent or more of any class of the Company's capital stock, (ii) by each director of the Company, (iii) by each executive officer of the Company and (iv) by all directors and executive officers as a group. The capital stock of the Company is owned substantially by members of four related families.
PERCENT OF CLASS PRIOR PERCENT OF DIRECTORS, OFFICERS NUMBER OF TO THIS CLASS AFTER AND 5% STOCKHOLDERS CLASS(1) SHARES(2) OFFERING THIS OFFERING - -------------------------------------------------- ---------- ----------- ------------- ------------- The Reilly Family Limited Common 13,791,389 47.90% 44.49% Partnership(3) Preferred 3,134.80 54.81% 54.81% c/o The Lamar Corporation 5551 Corporate Blvd. Baton Rouge, LA 70808 Charles W. Lamar, III(4) Common 4,470,782 15.53% 14.42% c/o The Lamar Corporation Preferred 1,500.00 26.23% 26.23% 5551 Corporate Blvd. Baton Rouge, LA 70808 Mary Lee Lamar Dixon(5) Common 2,087,444 7.25% 6.73% c/o The Lamar Corporation Preferred 1,084.69 18.96% 18.96% 5551 Corporate Blvd. Baton Rouge, LA 70808 Dudley W. Coates(6) Common 163,564 * * Phillip C. Durant(7) Common 10,000 * * Keith A. Istre(8) Common 20,625 * * Myron LaBorde(7) Common 11,000 * * Gerald H. Marchand Common 155,775 * * Jack S. Rome, Jr. Common 1,500 * * William R. Schmidt Common 500 * * Robert S. Switzer(9) Common 743,635 2.58% 2.40% Robert E. Campbell(8) Common 21,250 * * Thomas F. Sirmon(8) Common 21,875 * * T. Everett Stewart(10) Common 25,851 * * All Directors and Executive Officers Common 19,437,746 67.27% 62.51% as a Group (13 Persons)(11) Preferred 4,634.80 81.04% 81.04%
- --------------- * Less than 1% (1) Common shares refer to Class A Common Stock, except with respect to shares of the Reilly Family Limited Partnership, which refer to shares of Class B Common Stock. Preferred shares refer to Class A Preferred Stock. Upon the sale of any shares of Class B Common Stock to a person other than to a Permitted Transferee (as defined herein), such shares will automatically convert into shares of Class A Common Stock. See "Description of Capital Stock." (2) The persons and entities named in the table have sole voting and investment power with respect to all shares beneficially owned by them, except as noted below. (3) These shares are owned by the Reilly Family Limited Partnership. Kevin P. Reilly, Jr. is the managing general partner of the Reilly Family Limited Partnership; Wendell S. Reilly, Sean E. Reilly and Anna R. Cullinan are each general partners; and Kevin P. Reilly, Sr. holds all of the outstanding preferred interests in the partnership. (4) Includes 1,335,775 shares of Class A Common Stock held in trust for Mr. Lamar's three children, of which Mr. Lamar is considered the beneficial owner. (5) Includes 545,214 shares of Class A Common Stock and 700 shares of Class A Preferred Stock held in a trust, of which LaBanc & Co. is the nominee of the trustee, for the benefit of Mrs. Dixon. (6) Consists of shares which are held in trust for Mr. Coates' three children, as to which he disclaims beneficial ownership. (7) Includes 10,000 shares of Class A Common Stock subject to stock options exercisable within 60 days of October 1, 1996. (8) Includes 20,000 shares of Class A Common Stock subject to stock options exercisable within 60 days of October 1, 1996. 60 61 (9) Includes 76,336 shares of Class A Common Stock held by Mr. Switzer's wife, as to which he disclaims beneficial ownership, and 257,028 shares of Class A Common Stock currently held by Mr. Switzer as custodian for his three children. (10) Includes 19,600 shares of Class A Common Stock subject to stock options exercisable within 60 days of October 1, 1996. (11) Includes 99,600 shares of Class A Common Stock subject to stock options exercisable within 60 days of October 1, 1996. Also includes 1,499,339 shares of Class A Common Stock held in trust for the benefit of the children of directors and officers of the Company, 76,336 shares of Class A Common Stock held by the wife of an officer of the Company, and 257,028 shares of Class A Common Stock held by an officer of the Company as custodian for his three children. Kevin P. Reilly, Jr. is the Managing General Partner of the Reilly Family Limited Partnership, owner of all of the issued and outstanding Class B Common Stock of the Company. The other general partners of the partnership, Mr. Reilly's three siblings, may by unanimous vote, remove Mr. Reilly and replace him with one of his siblings. DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 50,000,000 shares of Class A Common Stock, $0.001 par value per share, 25,000,000 shares of Class B Common Stock, $0.001 par value per share, 10,000 shares of Class A Preferred Stock, $638 par value per share, and 1,000,000 additional shares of Preferred Stock, the terms and provisions of which may be designated by the Board of Directors in the future. The following summary of the Company's capital stock is qualified in its entirety by reference to the Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and By-Laws (the "By-Laws"), each of which is incorporated by reference into the registration statement of which this Prospectus is a part. COMMON STOCK Following this Offering, 17,204,340 shares of Class A Common Stock will be issued and outstanding and 13,791,389 shares of Class B Common Stock will be issued and outstanding. See "Capitalization." Except for voting rights, the rights of the holders of the Class A Common Stock and the Class B Common Stock are substantially identical. The holders of the Class A Common Stock and the holders of the Class B Common Stock vote together as a single class (except as may otherwise be required by Delaware law), with the holders of the Class A Common Stock entitled to one vote per share and the holders of Class B Common Stock entitled to ten votes per share, on all matters on which the holders of Common Stock are entitled to vote. Each share of Class B Common Stock is convertible at the option of its holder into one share of Class A Common Stock at any time. In addition, each share of Class B Common Stock converts automatically into one share of Class A Common Stock upon the sale or other transfer of such share of Class B Common Stock to a person who, or entity which, is not a Permitted Transferee. Permitted Transferees include (i) Kevin P. Reilly, Sr.; (ii) a descendant of Kevin P. Reilly, Sr.; (iii) a spouse or surviving spouse (even if remarried) of any individual named or described in (i) or (ii) above; (iv) any estate, trust, guardianship, custodianship, curatorship or other fiduciary arrangement for the primary benefit of any one or more of the individuals named or described in (i), (ii) and (iii) above; and (v) any corporation, partnership, limited liability company or other business organization controlled by and substantially all of the interests in which are owned, directly or indirectly, by any one or more of the individuals and entities named or described in (i), (ii), (iii) and (iv) above. 61 62 All of the outstanding shares of Common Stock are, and all of the shares of Class A Common Stock sold in this Offering will be, when issued and paid for, fully paid and nonassessable. In the event of the liquidation or dissolution of the Company, following any required distribution to the holders of outstanding shares of Preferred Stock, the holders of Common Stock are entitled to share pro rata in any balance of the corporate assets available for distribution to them. The Company may pay dividends if, when and as declared by the Board of Directors from funds legally available therefor, subject to the restrictions set forth in the Company's existing and future debt instruments. Subject to the preferential rights of the holders of any class of preferred stock, holders of shares of Common Stock are entitled to receive such dividends as may be declared by the Company's Board of Directors out of funds legally available for such purpose. No dividend may be declared or paid in cash or property on any share of either class of Common Stock unless simultaneously the same dividend is declared or paid on each share of the other class of Common Stock, provided that, in the event of stock dividends, holders of a specific class of Common Stock shall be entitled to receive only additional shares of such class. See "Dividend Policy." Under Delaware law, the affirmative vote of the holders of a majority of the outstanding shares of any class of common stock is required to approve any amendment to the Certificate of Incorporation that would increase or decrease the par value of such class, or modify or change the powers, preferences or special rights of the shares of any class so as to affect such class adversely. The Certificate of Incorporation provides that no such separate class vote shall be available for increases or decreases in the number of authorized shares of Class A Common Stock. The Common Stock is redeemable in the manner and on the conditions permitted under Delaware law and as may be authorized by the Board of Directors. Holders of Common Stock have no preemptive rights. CLASS A PREFERRED STOCK All outstanding shares of the Company's Class A Preferred Stock are fully paid and nonassessable. For information regarding ownership of the issued and outstanding shares of Class A Preferred Stock, see "Principal Stockholders." Rank. The Class A Preferred Stock, with respect to dividends and upon liquidation, ranks senior to Class A and Class B Common Stock. Dividends. Holders of shares of Class A Preferred Stock are entitled to receive, when and if declared by the Board of Directors out of funds legally available therefor, cash dividends at a rate of $15.95 per share per quarter. Dividends accrue and are cumulative from the date of the issuance of shares. As of the date of this Prospectus, all accrued dividends have been paid. The Company intends to continue paying dividends on the Class A Preferred Stock. Dissolution or Liquidation. In the case of voluntary or involuntary dissolution or liquidation of the Company, subject to the rights of holders of any additional Preferred Stock issued in the future, the holders of the Class A Preferred Stock are entitled to receive out of the assets of the Company the sum of the par value of the Class A Preferred Stock ($638 per share) and any accrued and unpaid dividends thereon before any payment may be made or any assets distributed to the holders of Common Stock. Upon any distribution or liquidation, whether voluntary or involuntary, if the assets distributed among the holders of the Class A Preferred Stock are insufficient to permit the payment to a stockholder of the full preferential amounts, subject to the rights of holders of any additional Preferred Stock issued in the future, the entire assets of the Company to be distributed will be distributed ratably among the holders of the Class A Preferred Stock and, after payment of such preferential amounts and any preferential amounts due holders of additional Preferred Stock, if any, the holders of Common Stock will be entitled to receive ratably all the remaining assets. A merger or consolidation of the Company with or into any other corporation or corporations, will not, however, be deemed to be a dissolution or liquidation. Voting Rights. Holders of Class A Preferred Stock have no voting rights with respect to general corporate matters except as provided by law. Under Delaware law, holders of the Class A Preferred Stock are entitled to vote as a class upon any proposed amendment, whether or not entitled to vote thereon by the Certificate of 62 63 Incorporation, if such amendment would increase or decrease the par value of the shares of such class, or alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely. ADDITIONAL PREFERRED STOCK Additional Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of the Company's Certificate of Incorporation, including those regarding the rights of the holders of Class A Preferred Stock, and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares and to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences, and relative participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights, sinking fund provisions, redemption prices conversion rights and liquidation preferences of the shares constituting any class or series of this additional Preferred Stock, in each case without any further action or vote by the stockholders. The Company has no current plans to issue any shares of additional Preferred Stock of any class or series. One of the effects of undesignated additional Preferred Stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's management. The issuance of shares of additional Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, additional Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of additional Preferred Stock may discourage bids for the Common Stock or may otherwise adversely affect the market price of the Class A Common Stock. SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BY-LAWS AND DELAWARE LAW Certain provisions of the Company's Certificate of Incorporation and By-Laws as well as certain provisions of Delaware law may be deemed to have an anti-takeover effect or may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in such stockholder's best interest, including those attempts that might result in a premium over the market price for the shares held by a stockholder. These provisions are in addition to the anti-takeover effect of the substantial ownership and voting power of the controlling stockholders of the Company. Delaware Anti-Takeover Law. Section 203 of the Delaware General Corporation Law ("Section 203") generally provides that a person who, together with affiliates and associates owns, or within three years did own, 15% or more of the outstanding voting stock of a corporation, but less than 85% of such stock (an "Interested Stockholder"), may not engage in certain business combinations with the corporation for a period of three years after the date on which the person became an Interested Stockholder unless (i) prior to such date, the corporation's board of directors approved either the business combination or the transaction in which the stockholder became an Interested Stockholder or (ii) subsequent to such date, the business combination is approved by the corporation's board of directors and authorized at a stockholders' meeting by a vote of at least two-thirds of the corporation's outstanding voting stock not owned by the Interested Stockholder. Section 203 defines the term "business combination" to encompass a wide variety of transactions with or caused by an Interested Stockholder, including mergers, asset sales, and other transactions in which the Interested Stockholder receives or could receive a benefit on other than a pro rata basis with other stockholders. The provisions of Section 203, coupled with the Board's authority to issue Preferred Stock without further stockholder action and the fact that, after giving effect to the Offering, 88.5% of the voting power of the Common Stock will be held by the Reilly Family Limited Partnership, could delay or frustrate the removal of incumbent directors or a change in control of the Company. The provisions also could discourage, impede or prevent a merger, tender offer or proxy contest, even if such event would be favorable to the interests of stockholders. The Company's stockholders, by adopting an amendment to the Certificate of Incorporation, may elect not to be governed by Section 203 which election would be effective twelve months after such 63 64 adoption. Such a change in the Company's Certificate of Incorporation could not be made without the affirmative vote of shares held by the Reilly Family Limited Partnership. Neither the Certificate of Incorporation nor the By-Laws exclude the Company from the restrictions imposed by Section 203. These restrictions will not apply to stockholders who were interested stockholders prior to the date of this Offering. Notice Provisions. The By-Laws provide that only business or proposals, properly brought before an annual meeting of stockholders may be conducted at such meeting. In order to bring business or a proposal before an annual meeting, a stockholder is required to provide written notice to the Company at least 45 days prior to the annual meeting which described the business or proposal to be brought before the annual meeting, the name and address of the stockholder proposing the business, the class and number of shares of stock held by such stockholder, and any material interest of the stockholder in the business to be brought before the meeting. These procedures may operate to limit the ability of stockholders to bring business before the annual meeting or consider any transaction that could result in a change of control of the Company. In addition, the By-Laws provide that in order for a stockholder to nominate a candidate for election to the Board of Directors, the stockholder must provide written notice of intent to nominate a candidate at least 45 days prior to the meeting of stockholders called for the election of directors. Such written notice is required to contain the name and address of the stockholder, a representation that the stockholder is a holder of record of the Company's voting stock and intends to appear in person or by proxy at the meeting to nominate the persons specified in the notice, such information regarding each nominee as would have been required to have been included in a proxy statement filed pursuant to Regulation 14A of the rules and regulations of the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended (the "Exchange Act") had proxies been solicited with respect to such nominee by the Board of Directors, a description of all arrangements or other understandings among the stockholder and any other person pursuant to which such nominations are to be made by the stockholder and the written consent of each nominee to serve as a director of the Company if elected. These requirements will limit the ability of stockholders to nominate candidates for election to the Board of Directors to the extent that the notice requirements are not satisfied. Procedures for Special Meeting of Stockholders. The By-Laws provide for special meetings of stockholders only upon the direction of the Chairman of the Board of Directors, the President, or a majority of the Board of Directors. Exculpation and Indemnification. The Company's Certificate of Incorporation provides that no director of the Company shall be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. The effect of these provisions is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. The Commission has taken the position that the provision will have no effect on claims arising under federal securities law. The Company's By-Laws provide that the Company will indemnify its directors and officers to the fullest extent permissible under Delaware law. These indemnification provisions require the Company to indemnify such persons against certain liabilities and expenses to which they may become subject by reason of their service as a director or officer of the Company. The provisions also set forth certain procedures, including the advancement of expenses, that apply in the event of a claim for indemnification. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Class A Common Stock is Chase Mellon Shareholder Services, L.L.C. 64 65 SHARES ELIGIBLE FOR FUTURE SALE Prior to the IPO, there was no public market for the Common Stock of the Company. No prediction can be made as to the effect, if any, that market sales of shares of Common Stock or the availability of shares of Common Stock for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock of the Company in the public market after the restrictions described below lapse could adversely affect the prevailing market price of the Common Stock and the ability of the Company to raise equity capital in the future. Upon completion of this Offering, the Company will have 30,995,729 outstanding shares of Common Stock (excluding 330,000 shares of Class A Common Stock issuable upon the exercise of the Underwriters' over-allotment option). See "Capitalization." Of these shares, the 2,200,000 shares (2,530,000 shares if the Underwriters' overallotment option is exercised in full) of Class A Common Stock sold in this Offering will be freely tradable without restriction under the Securities Act except for any shares purchased by "affiliates," as that term is defined in the Securities Act, of the Company. The 5,445,250 shares issued in connection with the IPO are freely tradeable, to the extent not owned by affiliates of the Company. The remaining 23,330,814 shares are "restricted securities" within the meaning of Rule 144 adopted under the Securities Act (the "Restricted Shares"). The Restricted Shares generally may not be sold unless they are registered under the Securities Act or are sold pursuant to an exemption from registration, such as the exemption provided by Rule 144. The Company's executive officers and directors and certain stockholders of the Company have agreed that, for a period of 90 days from the date of this Prospectus (the "Lock-up Period"), they will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell, or otherwise dispose of any shares of Common Stock of the Company. See "Underwriting." Following the Lock-up Period, the Restricted Shares will not be eligible for sale in the public market without registration unless such sales meet the conditions and restrictions of Rule 144 as described below. In general, under Rule 144, as currently in effect, any person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares for a period of at least two years (as computed under Rule 144) is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then-outstanding shares of Common Stock (approximately 309,957 shares after giving effect to this Offering) and (ii) the average weekly trading volume in the Company's Common Stock during the four calendar weeks immediately preceding the date on which the notice of such sale on Form 144 is filed with the Commission. Sales under Rule 144 are also subject to certain provisions relating to notice and manner of sale and the availability of current public information about the Company. In addition, a person (or persons whose shares are aggregated) who has not been an affiliate of the Company at any time during the 90 days immediately preceding a sale, and who has beneficially owned the shares for at least three years (as computed under Rule 144), would be entitled to sell such shares under Rule 144(k) without regard to the volume limitation and other conditions described above. The foregoing summary of Rule 144 is not intended to be a complete description thereof. In addition, the Commission has proposed reducing the two-year and three-year periods referred to above to one and two years, respectively. On August 16, 1996, the Company filed a registration statement under the Securities Act to register the 2,000,000 shares of Class A Common Stock available for issuance pursuant to its 1996 Equity Incentive Plan. Shares issued pursuant to such plan will be available for sale in the open market subject to the Lock-up Period and, for affiliates of the Company, subject to certain conditions and restrictions of Rule 144. DESCRIPTION OF INDEBTEDNESS The following is a description of the principal agreements governing the indebtedness of the Company and the terms of the principal agreements that would be entered into in connection with the Transactions. The following summaries are qualified in their entirety by reference to the credit and security agreements and indenture to which each summary relates, copies of which are exhibits to the Registration Statement of which 65 66 this Prospectus is a part. Defined terms used below and not defined herein have meanings set forth in the respective agreements. EXISTING CREDIT AGREEMENT The Company expects to replace the Existing Credit Agreement with the New Credit Agreement. If the New Credit Agreement is not executed, the Existing Credit Agreement will remain in effect. Primary Facility and New Logo Facility. The Company presently has two syndicated bank credit facilities under the Existing Credit Agreement, both of which are agented by Chase Manhattan Bank (National Association): (i) a revolving credit facility (the "Primary Facility") providing for a reducing revolving credit facility with a maximum borrowing availability of $50 million and (ii) a revolving credit facility (the "New Logo Facility") with a maximum borrowing availability of $15 million. The proceeds of the Primary Facility may be used for general corporate purposes, including working capital requirements of the Company and its subsidiaries in the outdoor advertising and logo sign business created prior to October 31, 1995. The proceeds of the New Logo Facility may be used for start-up and construction costs in connection with the logo sign business of subsidiaries created after October 31, 1995 (the "New Logo Subsidiaries"). The Primary Facility and New Logo Facility are collectively referred to herein as the "Existing Credit Agreement." Interest. Borrowings under the Existing Credit Agreement bear interest computed as a margin over either Chase's "Base Rate" or the London Interbank Offered Rate (the "LIBOR Rate"). The margins range from 0 to 75 basis points and from 125 (100, upon execution of the Proposed Amendment) to 200 basis points over the Base Rate and LIBOR Rate, respectively, depending on the Company's current leverage ratio, as such ratio is defined under the subheading "Covenants." Reductions in Commitments; Amortization. The Primary Facility and the New Logo Facility, both of which mature October 31, 2001 (a recent amendment shortens the maturity of the Primary Facility to April 30, 1997), provide for reductions in revolving credit commitments and amortization of term loans as follows:
NEW LOGO FACILITY REVOLVING CREDIT TERM LOAN REVOLVING CREDIT FISCAL YEAR REDUCTION AMORTIZATION(1) REDUCTION(2) ---------------------------------------- ---------------- --------------- ----------------- 1996 (after 4/30/96).................... -- $ 1,000,000 -- 1997.................................... -- $ 4,000,000 $ 2,000,000 1998.................................... -- $ 8,000,000 $ 3,000,000 1999.................................... $ 3,000,000 $11,000,000 $ 4,000,000 2000.................................... $ 5,000,000 $12,000,000 $ 6,000,000 2001.................................... $ 12,000,000 $ 2,250,000 --
- --------------- (1) A recent amendment eliminates revolving credit commitment reductions for the Primary Facility. (2) The term loan amortizes quarterly, and the New Logo Facility revolving credit commitment is reduced quarterly. Guarantees; Security. The obligations of the Company under the Primary Facility are guaranteed by all of the Company's Restricted Subsidiaries with the exception of Missouri Logos, a partnership, and, subject to the approval of the Primary Facility Banks, any joint ventures that may be formed hereafter between Restricted Logo Subsidiaries and entities not affiliated or related to the Company or any Restricted Subsidiary. The obligations under the Primary Facility and the guarantees in respect thereto are secured, on an equal and ratable basis with the subsidiary guarantees and Company obligations in respect of the Existing Notes, by a pledge of the capital stock of all of the Company's Restricted Subsidiaries with the exception of the New Logo Subsidiaries. The obligations of the Company under the New Logo Facility are guaranteed by the New Logo Subsidiaries. Such obligations and guarantees are secured by a pledge of the capital stock, and security interest in the assets, of the New Logo Subsidiaries. Covenants. The Existing Credit Agreement places certain restrictions upon the ability of the Company and its Restricted Subsidiaries that are parties thereto, to among other things, (i) incur indebtedness, 66 67 (ii) incur liens or guarantee obligations, (iii) declare dividends and make other distributions, (iv) make investments and enter into joint ventures, (v) make capital expenditures, (vi) dispose of assets and (vii) engage in transactions with affiliates except on an arms-length basis. In addition, the Existing Credit Agreement requires the Company and its Restricted Subsidiaries which are parties thereto to maintain (a) a minimum leverage ratio, defined as Total Debt to Operating Cash Flow, of between 4.5 to 1 and 3.0 to 1 under the Primary Facility and from 6.0 to 1 and 4.0 to 1 under the New Logo Facility; (b) an interest coverage ratio, defined as pro forma Operating Cash Flow for the period of 12 months most recently ended to total accrued cash interest expense for such period, of at least 2.0 to 1; and (c) a fixed charge coverage ratio, defined as pro forma Operating Cash Flow for the period of 12 months most recently ended to total projected payments of principal and interest on debt to be made in the succeeding four fiscal quarters plus (i) capital expenditures (excluding logo contract expenditures) and (ii) income and franchise tax payments and stock dividends and redemptions during such period, of at least 1.1 to 1. Change of Control. A change of control of the Company constitutes an event of default, permitting the banks under the Existing Credit Agreement to accelerate the indebtedness and terminate the Existing Credit Facilities. Such a change in control would occur if Kevin P. Reilly, Sr. and his immediate family (including grandchildren) and certain entities under their control cease to own at least 20% of the total amount of voting stock of the Company. NEW CREDIT AGREEMENT The Company expects to enter into the New Credit Agreement with a syndicate of financial institutions and the agent under the Existing Credit Agreement providing the Company with a committed reducing revolving credit facility in the amount of $225 million and a $75 million incremental facility funded at the discretion of the lenders. The New Credit Agreement would replace the Existing Credit Agreement and substantially increase the Company's borrowing availability. The New Credit Agreement is expected to bear interest computed as a margin over "Base Rate" or the LIBOR Rate, with the loan commitment reducing over a period from 1999 to 2003. The obligations of the Company under the New Credit Facility are expected to be guaranteed by its subsidiaries and secured by a pledge of the capital stock of the Company's subsidiaries in a manner similar to the Existing Credit Agreement. The New Credit Agreement will also have restrictive covenants covering similar matters as the Existing Credit Agreement and a change of control event of default comparable to that under the Existing Credit Agreement. EXISTING NOTES On October 17, 1996, the Company commenced a cash tender offer for all of the Existing Notes and a solicitation of consents to (i) eliminate substantially all of the restrictive covenants described below (other than a less restrictive covenant with respect to the incurrence of indebtedness) and the change of control repurchase option described below, (ii) release the security for the Existing Notes and (iii) release the Subsidiary Guarantors from their obligations as guarantors of the Existing Notes. See "The Transactions -- The Tender Offer." Consummation of the Tender Offer is subject to the valid tender of a majority in principal amount of the outstanding Existing Notes and certain other conditions. As of the date of this Prospectus, the holders representing over a majority in principal amount of the Existing Notes have validly tendered their Existing Notes and delivered their consents. Any Existing Notes not validly tendered and accepted for payment pursuant to the Tender Offer will remain outstanding. The terms and conditions of the Existing Notes are set forth below. General. On May 15, 1993, the Company issued the $100 million aggregate principal amount of 11% Senior Secured Notes due May 15, 2003 pursuant to an indenture between the Company, as issuer, its Restricted Subsidiaries, as "Subsidiary Guarantors," and State Street Bank and Trust Company, as Trustee. The Existing Notes are senior secured obligations of the Company and Restricted Subsidiaries ranking pari passu with all present and future indebtedness of the Company and the Subsidiary Guarantors that by its terms is not subordinated to the obligations represented by the Existing Notes. Upon consummation of the Tender Offer the Subsidiary Guarantors will be released from their obligations as guarantors. 67 68 Interest. The Existing Notes bear interest at 11% per annum. Interest is payable semi-annually on each May 15 and November 15. Security. The Existing Notes and the Guarantees in respect thereof are secured, on an equal and ratable basis with the Company obligations and subsidiary guarantees in respect of the Primary Facility, by a pledge of the capital stock of all the Company's Restricted Subsidiaries with the exception of the New Logo Subsidiaries. Upon consummation of the Tender Offer all of the foregoing security will be released and any remaining Existing Notes not validly tendered and accepted for payment in the Tender Offer will be unsecured obligations of the Company. Redemption. The securities may be redeemed at the election of the Company, as a whole or from time-to-time in part, at any time after May 15, 1998 at redemption prices declining from 105.5% of the principal amount for the twelve months after May 15, 1998 to 102.75% of such amount for the twelve months after May 15, 1999, and thereafter at a redemption price equal to 100.0% of such principal amount, plus in each case accrued in unpaid interest to the applicable redemption date. Covenants. The Existing Note Indenture places certain restrictions on the ability of the Company and its Restricted Subsidiaries to (i) incur liens or guaranty obligations, (ii) make restricted payments (dividends, redemptions and certain other payments), (iii) engage in transactions with affiliates except on an arms-length basis, (iv) dispose of assets and (v) enter into mergers, consolidations or acquisitions. Upon consummation of the Tender Offer the foregoing covenants will be eliminated and the existing indebtedness covenant will be replaced with a covenant that would restrict the Company from incurring any indebtedness unless the ratio of the Company's consolidated indebtedness to consolidated operating cash flow would be less than 7.5 to 1. Change of Control. Upon a Change of Control (as defined below), each holder of an Existing Note may require the Company to repurchase all or portions of such holder's Existing Notes at a purchase price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. A "Change of Control" occurs if (a) any person or group, other than stockholders of the Company as of May 15, 1993 and related and affiliated persons ("Permitted Holder") beneficially owns at least 30% of the aggregate voting power of all classes of voting stock of the Company or (b) any person or group other than Permitted Holders succeed in electing a majority of the Board of Directors of the Company. Upon consummation of the Tender Offer, the foregoing Change of Control provision will be eliminated. THE NOTES The Company intends to issue $255 million aggregate principal amount of Notes pursuant to the Note Offering. The Notes will be issued pursuant to the Indenture and will be general unsecured obligations of the Company subordinated in right of payment to all existing and future senior indebtedness of the Company, including the New Credit Agreement and any Existing Notes that are not tendered in the Tender Offer, pari passu in right of payment to any future senior subordinated indebtedness of the Company and senior in right of payment to all existing and any future subordinated indebtedness of the Company. The Notes will not be redeemable by the Company until December 1, 2001 and will be redeemable thereafter at a premium until November 30, 2004, after which they will be redeemable at par. The Notes will bear interest at a rate of 9 5/8% and will mature on December 1, 2006. The Indenture will contain covenants covering matters similar to those covered under the Existing Note Indenture and will contain a change of control repurchase option comparable to that under the Existing Note Indenture. This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any Notes which will be done only pursuant to a prospectus for the Notes. SUBORDINATED NOTES The Company will have outstanding three classes of subordinated notes: (i) 8% Series A Unsecured Subordinated Discount Debentures due 2001 ($2.3 million outstanding at October 31, 1996); (ii) 12% Series A Unsecured Subordinated Debentures due 1997 ($0.2 million outstanding at October 31, 1996); and (iii) ten-year subordinated notes ($19.7 million outstanding at October 31, 1996). The Series A debentures referred to in clauses (i) and (ii) of the preceding sentence were issued in consideration of stock redemptions 68 69 occurring in 1993 and 1994. The ten-year subordinated notes referred to in clause (iii) were issued as a portion of the consideration paid on account of stock redemptions occurring in October 1995 and March 1996, bear interest at an annual rate of 8% and amortize monthly until their maturity in 2006. See "Certain Transactions." 69 70 UNDERWRITING Upon the terms and subject to the conditions stated in the Underwriting Agreement dated November 21, 1996, each of the underwriters named below (the "Underwriters") has severally agreed to purchase, and the Company has agreed to sell to each such Underwriter, the number of shares of Class A Common Stock set forth opposite the name of such Underwriter.
NUMBER OF NAME SHARES ---- --------- Smith Barney Inc. ...................................................... 733,334 Alex. Brown & Sons Incorporated......................................... 733,333 Prudential Securities Incorporated...................................... 733,333 --------- Total......................................................... 2,200,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Class A Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters initially propose to offer part of the shares directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price which represents a concession not in excess of $0.67 per share below the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $0.10 per share to certain other dealers. After the initial public offering of the shares to the public, the public offering price and such concessions may be changed by the Underwriters. The Company has granted to the Underwriters an option, exercisable for thirty days from the date of this Prospectus, to purchase up to an aggregate of 330,000 additional shares of Class A Common Stock at the public offering price set forth on the cover page of this Prospectus less the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with this Offering. The Company, its officers and directors, and certain stockholders of the Company have agreed that, for a period of 90 days from the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of Common Stock of the Company or any securities convertible into, or exercisable or exchangeable for, Common Stock of the Company. In connection with this Offering, certain of the Underwriters and selling group members (if any) and their respective affiliates may engage in passive market making transactions on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act during a period before commencement of offers or sales of the shares of Class A Common Stock offered hereby. The passive market making transactions must comply with the applicable volume and price limits and be identified as such. Smith Barney Inc. is the dealer manager for the Tender Offer and is acting as an underwriter in connection with the Note Offering. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933. 70 71 CERTAIN LEGAL MATTERS The validity of the issuance of the shares of Class A Common Stock will be passed upon for the Company by Palmer & Dodge LLP, Boston, Massachusetts. Chadbourne & Parke LLP, New York, New York will pass on certain legal matters for the Underwriters in connection with this Offering. EXPERTS The consolidated financial statements of Lamar Advertising Company and Subsidiaries as of October 31, 1994 and 1995, and for each of the years in the three-year period ended October 31, 1995, included in this Prospectus and Registration Statement have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of Outdoor East, L.P. as of December 31, 1994 and 1995 and for each of the years in the three-year period ended December 31, 1995 have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of FKM Advertising Co., Inc., as of December 31, 1994 and 1995 and for the years then ended, have been included herein and in the registration statement in reliance upon the report of McGrail, Merkel, Quinn and Associates, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company files reports and other information with the Commission pursuant to the informational requirements of the Exchange Act. The Company has filed with the Commission a Registration Statement (which term shall include all amendments thereto) on Form S-3 under the Securities Act with respect to the Class A Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and reference is made to the Registration Statement and the exhibits thereto for further information with respect to the Company and the Class A Common Stock. Such reports, the Registration Statement and the exhibits thereto may be inspected, without charge, at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices at Seven World Trade Center, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained from the public reference section of the Commission at its Washington address upon payment of the prescribed fee. Such reports and other information can also be reviewed through the Commission's Web site (http://www.sec.gov). 71 72 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company hereby incorporates in this Prospectus by reference the following documents heretofore filed with the Commission pursuant to the Exchange Act: (i) the Company's Annual Report on Form 10-K for the year ended October 31, 1995, as amended by Amendments No. 1 and 2 thereto on Form 10-K/A, filed with the Commission on January 26, 1996, March 28, 1996 and August 1, 1996, respectively; (ii) the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1996, as amended by Amendment No. 1 thereto on Form 10-Q/A, filed with the Commission on March 15, 1996 and May 20, 1996, respectively; (iii) the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1996, filed with the Commission on June 13, 1996; (iv) the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1996, filed with the Commission on September 12, 1996; (v) the Company's Current Reports on Form 8-K dated October 17, 1996 and November 1, 1996, filed with the Commission on October 25, 1996 and November 15, 1996, respectively; (vi) the description of the Class A Common Stock contained in the Company's Registration Statement on Form 8-A, filed with the Commission on June 7, 1996, as amended by Form 8-A/A, filed with Commission on July 31, 1996; and (vii) the description of the Notes contained in the Company's Registration Statement on Form 8-A, filed with the Commission on November 4, 1996, as amended by Form 8-A/A, filed with the Commission on November 19, 1996. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to termination of this Offering made hereby shall be deemed to be incorporated in this Prospectus by reference and to be a part hereof from the respective dates of the filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is, or is deemed to be, incorporated by reference herein, modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute part of this Prospectus. The Company hereby undertakes to provide without charge to each person to whom a copy of this Prospectus has been delivered, upon the written or oral request of any such person, a copy of any and all of the documents referred to above which have been or may be incorporated in this Prospectus by reference, other than exhibits to such documents which are not specifically incorporated by reference into such documents. Requests for such copies should be directed to the executive offices of the Company, 5551 Corporate Boulevard, Baton Rouge, Louisiana 70808, Attention: Investor Relations, telephone (504) 926-1000. 72 73 INDEX TO FINANCIAL STATEMENTS
PAGE ----- LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Independent Auditors' Report.......................................................... F-2 Consolidated Balance Sheets as of October 31, 1994 and 1995, and July 31, 1996 pro forma and actual (unaudited)........................................................ F-3 Consolidated Statements of Earnings (Loss) for the years ended October 31, 1993, 1994 and 1995, and the nine months ended July 31, 1995 and 1996 (unaudited).............. F-4 Consolidated Statements of Stockholders' Deficit for the years ended October 31, 1993, 1994 and 1995 and the nine months ended July 31, 1996 (unaudited)................... F-5 Consolidated Statements of Cash Flows for the years ended October 31, 1993, 1994 and 1995 and the nine months ended July 31, 1995 and 1996 (unaudited)................... F-6 Notes to Consolidated Financial Statements............................................ F-7 FKM ADVERTISING CO., INC. Independent Auditor's Report.......................................................... F-19 Balance Sheets as of December 31, 1994 and 1995, and September 30, 1996 (unaudited)... F-20 Statements of Operations for the years ended December 31, 1994 and 1995, and the nine months ended September 30, 1995 and 1996 (unaudited)................................ F-21 Statements of Changes of Stockholders' Equity for the years ended December 31, 1994 and 1995, and the nine months ended September 30, 1995 and 1996 (unaudited)......... F-22 Statements of Cash Flows for the years ended December 31, 1994 and 1995, and the nine months ended September 30, 1995 and 1996 (unaudited)................................ F-23 Notes to Financial Statements......................................................... F-24 OUTDOOR EAST, L.P. Independent Auditors' Report.......................................................... F-33 Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996 (unaudited).... F-34 Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1995 and 1996 (unaudited)........................... F-35 Statements of Partners' Deficit for the years ended December 31, 1993, 1994 and 1995, and the nine months ended September 30, 1996 (unaudited)............................ F-36 Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1996 (unaudited).................................... F-37 Notes to Financial Statements......................................................... F-38
F-1 74 INDEPENDENT AUDITORS' REPORT Board of Directors Lamar Advertising Company: We have audited the accompanying consolidated balance sheets of Lamar Advertising Company and subsidiaries as of October 31, 1994 and 1995, and the related consolidated statements of earnings (loss), stockholders' deficit and cash flows for each of the years in the three-year period ended October 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lamar Advertising Company and subsidiaries as of October 31, 1994 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP New Orleans, Louisiana January 12, 1996, except as to notes 12 and 14, which are as of November 21, 1996 F-2 75 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS
OCTOBER 31 JULY 31, 1996 -------------------- --------------------- PRO FORMA 1994 1995 ACTUAL (NOTE 14) -------- -------- -------- --------- (UNAUDITED) Current assets: Cash and cash equivalents......................... $ 8,016 $ 5,886 $ 1,965 $ 1,965 Receivables (note 3): Trade accounts, less allowance for doubtful accounts of $1,046 (unaudited) in 1996 and $551 in 1995 and 1994......................... 9,963 10,741 14,527 14,527 Affiliates, related parties and employees....... 560 583 531 531 Other........................................... 68 109 433 433 -------- -------- -------- -------- 10,591 11,433 15,491 15,491 Prepaid expenses.................................. 1,200 1,247 1,112 1,112 Other current assets.............................. 1,287 1,266 1,793 1,793 -------- -------- -------- -------- Total current assets....................... 21,094 19,832 20,361 20,361 -------- -------- -------- -------- Property, plant and equipment (note 4).............. 159,707 168,402 189,115 189,115 Less accumulated depreciation and amortization.... (70,884) (77,524) (83,930) (83,930) -------- -------- -------- -------- 88,823 90,878 105,185 105,185 -------- -------- -------- -------- Intangible assets (note 5).......................... 14,062 13,406 16,891 16,891 Receivables -- noncurrent (note 3).................. 751 918 751 751 Deferred taxes (note 10)............................ 2,650 5,951 3,680 3,680 Other assets........................................ 2,628 2,900 3,399 3,399 -------- -------- -------- -------- Total assets............................... $130,008 $133,885 $150,267 $150,267 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Trade accounts payable............................ 1,123 2,435 3,115 3,115 Current maturities of long-term debt (note 9)..... 7,054 3,479 5,326 7,326 Accrued expenses (note 8)......................... 9,647 9,733 5,575 10,575 Deferred income................................... 1,579 2,448 4,866 4,866 -------- -------- -------- -------- Total current liabilities.................. 19,403 18,095 18,882 25,882 Long-term debt (note 9)............................. 146,875 142,572 154,681 172,681 Deferred income..................................... 668 749 779 779 Other liabilities................................... 414 623 1,214 1,214 -------- -------- -------- -------- 167,360 162,039 175,556 200,556 -------- -------- -------- -------- Stockholders' equity (deficit) (note 12): Class A preferred stock, par value $638, $63.80 cumulative, 10,000 shares authorized, 5,719.49 (unaudited) shares issued and outstanding in 1996............................................ $ -- $ -- 3,649 3,649 Class A common stock, par value $.001, 50,000,000 shares authorized, 10,180,483 (unaudited), 15,657,623 and 16,504,263 shares issued and outstanding in 1996, 1995 and 1994, respectively.................................... 17 16 10 10 Class B common stock, par value $.001, 25,000,000 shares authorized, 14,301,537 (unaudited), 16,897,379 and 17,271,240 shares issued and outstanding in 1996, 1995 and 1994, respectively.................................... 17 17 14 14 Accumulated deficit............................... (37,386) (28,187) (28,962) (53,962) -------- -------- -------- -------- Stockholders' equity (deficit)............. (37,352) (28,154) (25,289) (50,289) Commitments and contingencies (notes 7 and 13) -------- -------- -------- -------- Total liabilities and stockholders' deficit.................................. $130,008 $133,885 $150,267 $150,267 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 76 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEARS ENDED OCTOBER 31, JULY 31, ------------------------------------ ----------------- 1993 1994 1995 1995 1996 ----------- ----------- -------- ------- ------- (UNAUDITED) Revenues: Outdoor advertising, net.................. $65,365 $83,627 $101,871 $76,295 $87,647 Management fees from related and affiliated parties..................... 595 334 31 23 45 Rental income............................. 564 512 506 408 473 ------- ------- -------- ------- ------- 66,524 84,473 102,408 76,726 88,165 ------- ------- -------- ------- ------- Operating expenses: Direct advertising expenses............... 23,830 28,959 34,386 26,564 30,969 General and administrative expenses....... 19,504 24,239 27,057 20,636 22,842 Depreciation and amortization............. 8,924 11,352 14,090 9,954 10,568 ------- ------- -------- ------- ------- 52,258 64,550 75,533 57,154 64,379 ------- ------- -------- ------- ------- Operating income.................. 14,266 19,923 26,875 19,572 23,786 ------- ------- -------- ------- ------- Other expense (income): Interest income........................... (218) (194) (199) (133) (140) Interest expense.......................... 11,502 13,599 15,783 11,948 11,957 Loss on disposition of assets............. 729 675 2,328 1,004 818 Other expenses............................ 576 616 655 684 254 ------- ------- -------- ------- ------- 12,589 14,696 18,567 13,503 12,889 ------- ------- -------- ------- ------- Earnings before income taxes and extraordinary item.............. 1,677 5,227 8,308 6,069 10,897 Income tax expense (benefit) -- (note 10)... 476 (2,072) (2,390) (2,480) 4,420 ------- ------- -------- ------- ------- Earnings before extraordinary item............................ 1,201 7,299 10,698 8,549 6,477 ------- ------- -------- ------- ------- Extraordinary loss on debt extinguishment, net of income tax benefit of $98 (note 9)........................................ (1,854) -- -- -- -- ------- ------- -------- ------- ------- Net earnings (loss)............... (653) 7,299 10,698 8,549 6,477 Preferred stock dividends................... -- -- -- -- 274 ------- ------- -------- ------- ------- Net earnings (loss) applicable to common stock..................................... $ (653) $ 7,299 $ 10,698 $ 8,549 $ 6,203 ======= ======= ======== ======= ======= Earnings per common share before extraordinary item........................ $ .03 $ .21 $ .32 $ .26 $ .23 ======= ======= ======== ======= ======= Net earnings (loss) per common share........ $ (.02) $ .21 $ .32 $ .26 $ .23 ======= ======= ======== ======= =======
See accompanying notes to consolidated financial statements. F-4 77 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS, EXCEPT PER SHARE DATA)
CLASS A CLASS A CLASS B ADDITIONAL PREFERRED COMMON COMMON PAID-IN ACCUMULATED STOCK STOCK STOCK CAPITAL DEFICIT TOTAL --------- ------- ------- ---------- ----------- -------- Balance, October 31, 1992........................ $ -- $19 $15 $ 403 $ (42,307) $(41,870) Shares issued.................................. -- 1 2 627 -- 630 Redemption of 1,690,163 shares of common stock....................................... -- (2) -- (899) -- (901) Net loss....................................... -- -- -- -- (653) (653) Dividends ($.01 per share)..................... -- -- -- -- (455) (455) ------ --- --- ------ --------- -------- Balance, October 31, 1993........................ -- 18 17 131 (43,415) (43,249) Redemption of 1,327,985 shares of common stock....................................... -- (1) -- (131) (771) (903) Net earnings................................... -- -- -- -- 7,299 7,299 Dividends ($.01 per share)..................... -- -- -- -- (499) (499) ------ --- --- ------ --------- -------- Balance, October 31, 1994........................ -- 17 17 -- (37,386) (37,352) Redemption of 1,220,500 shares of common stock....................................... -- (1) -- -- (999) (1,000) Net earnings................................... -- -- -- -- 10,698 10,698 Dividends ($.01 per share)..................... -- -- -- -- (500) (500) ------ --- --- ------ --------- -------- Balance, October 31, 1995........................ -- 16 17 -- (28,187) (28,154) Conversion of 4,454,779 shares of common stock to 5,719 shares preferred stock (unaudited)................................. 3,649 (2) (2) -- (3,645) -- Redemption of 3,618,203 shares of common stock, (unaudited)................................. -- (4) (1) -- (2,958) (2,963) Net earnings (unaudited)....................... -- -- -- -- 6,477 6,477 Dividends ($.004 per common share at January 1996, $.005 per common share at April 1996, $15.95 per preferred share) -- (unaudited)....................... -- -- -- -- (649) (649) ------ --- --- ------ --------- -------- Balance, July 31, 1996, (unaudited).............. $ 3,649 $10 $14 $ -- $ (28,962) $(25,289) ====== === === ====== ========= ========
See accompanying notes to consolidated financial statements. F-5 78 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED OCTOBER 31, JULY 31, -------------------------------- -------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- (UNAUDITED) Cash flows from operating activities: Net earnings (loss)............................ $ (653) $ 7,299 $ 10,698 $ 8,549 $ 6,477 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization................ 8,924 11,352 14,090 9,954 10,568 Loss on disposition of assets................ 729 675 2,328 1,004 818 Deferred taxes............................... -- (2,650) (3,301) (3,312) 2,271 Provision for doubtful accounts.............. 471 508 502 330 550 Changes in operating assets and liabilities: Increase in receivables.................... (1,998) (1,391) (1,344) (2,062) (3,988) (Increase) decrease in prepaid expenses.... 4 (321) (47) (198) 97 (Increase) decrease in other assets........ 34 (1,640) (418) (965) (282) Increase (decrease) in trade accounts payable................................. (502) (69) 1,312 384 680 Increase (decrease) in accrued expenses.... 4,817 1,356 86 (3,475) (4,157) Increase (decrease) in deferred income..... 596 (113) 950 517 2,448 Increase (decrease) in other liabilities... (11) 208 209 26 113 -------- -------- -------- -------- -------- Net cash provided by operating activities.............................. 12,411 15,214 25,065 10,752 15,595 -------- -------- -------- -------- -------- Cash flows from investing activities: Capital expenditures........................... (7,550) (13,357) (14,046) (8,780) (17,653) Purchase of new markets........................ -- (40,482) (2,885) (2,353) (9,445) Proceeds from sale of property and equipment... 396 733 717 629 500 Purchase of intangible assets.................. (2,352) (463) (1,603) (545) (1,525) Investments in and advances to affiliated companies.................................... (558) -- -- -- -- Increase in notes receivable................... -- -- -- -- (675) -------- -------- -------- -------- -------- Net cash used in investing activities...... (10,064) (53,569) (17,817) (11,049) (28,798) -------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt....... 105,611 44,515 -- -- 15,500 Principal payments on long-term debt........... (97,453) (5,966) (7,878) (5,376) (2,605) Redemption of common stock..................... (901) (903) (1,000) -- (2,964) Dividends...................................... (455) (499) (500) (375) (649) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities.............................. 6,802 37,147 (9,378) (5,751) 9,282 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents............................. 9,149 (1,208) (2,130) (6,048) (3,921) Cash and cash equivalents at beginning of year.................................... 75 9,224 8,016 8,016 5,886 -------- -------- -------- -------- -------- Cash and cash equivalents at end of year... $ 9,224 $ 8,016 $ 5,886 $ 1,968 $ 1,965 ======== ======== ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid for interest......................... $ 6,994 $ 13,461 $ 15,825 $ 14,728 $ 14,744 ======== ======== ======== ======== ======== Cash paid for income taxes..................... $ 295 $ 267 $ 1,028 $ 803 $ 1,991 ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-6 79 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) OCTOBER 31, 1993, 1994 AND 1995 (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) (1) SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The accompanying consolidated financial statements include Lamar Advertising Company, its wholly-owned subsidiaries, Lamar Holding Company (LHC) and The Lamar Corporation (TLC), their majority-owned subsidiaries and Interstate Logos, Inc., a subsidiary of both LAC and TLC (collectively, the Company or LAC). All intercompany transactions and balances have been eliminated. Prior to May 1994, the Company owned 49.36% of the outstanding stock of LHC, which investment was accounted for by the equity method. On May 10, 1994, LAC acquired substantially all of the assets of LHC. The proceeds from the sale of its assets were used by LHC to repay existing debt and redeem all of its shareholders other than LAC, resulting in LHC becoming a wholly-owned subsidiary of LAC. The acquisition has been accounted for using the purchase method of accounting. (b) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is calculated using accelerated and straight-line methods over the estimated useful lives of the assets. (c) Intangible Assets Debt issuance costs are deferred and amortized over the terms of the related credit facilities using the interest method. Other intangible assets are initially recorded at cost and amortized using the straight-line method over the assets' estimated useful lives, generally from 5 to 10 years. (d) Deferred Income Deferred income consists principally of advertising revenue received in advance and gains resulting from the sale of certain assets to related parties. Deferred advertising revenue is recognized in income as services are provided over the term of the contract. Deferred gains are recognized in income in the consolidated financial statements at the time the assets are sold to an unrelated party or otherwise disposed of. (e) Revenue Recognition The Company recognizes revenue from outdoor and logo sign advertising contracts, net of agency commissions, on an accrual basis ratably over the term of the contracts, as advertising services are provided. (f) Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-7 80 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) (g) Earnings Per Share Earnings per common share are computed by dividing net earnings applicable to common stock by the weighted average number of common shares outstanding during each period presented. (35,470,837 shares, 35,089,188 shares and 33,772,107 shares, respectively for the years ended October 31, 1993, 1994 and 1995 and 33,775,222 shares and 27,068,544 shares for the nine-month periods ended July 31, 1995 and 1996 respectively.) Such amounts have been adjusted to reflect the approximate 778.9-for-1 stock split and the concurrent exchanges of shares in a recapitalization that will occur in connection with the Offering referred to in Note 14. (h) Cash and Cash Equivalents The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. (i) Reclassification of Prior Year Amounts Certain amounts in the prior year's consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications had no effect on previously reported net earnings. (j) Unaudited Interim Financial Statements The unaudited interim financial statements include all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position and the results of operations of the Company. (2) NONCASH FINANCING AND INVESTING ACTIVITIES A summary of significant noncash financing and investing activities follows:
NINE MONTHS ENDED JULY 31, ---------------- 1993 1994 1995 1995 1996 ------ ---- ------ ------ ------ (UNAUDITED) Noncash dispositions of assets.............. $ 336 $445 $3,788 $3,788 $ -- Noncash acquisitions of assets.............. 1,817 -- 4,341 4,341 1,113 Common stock issued in exchange for investment in affiliate................... 630 -- -- -- -- Noncash issuance of preferred stock in exchange for common stock................. -- -- -- -- 3,649
F-8 81 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) (3) RECEIVABLES The following is a summary of accounts and notes receivable as of October 31:
1994 1995 --------------------- --------------------- CURRENT NONCURRENT CURRENT NONCURRENT ------- ---------- ------- ---------- Trade accounts receivable, net.............. $ 9,963 $ -- $10,741 $ -- Related parties............................. 291 -- 452 -- Employees, other than related parties....... 269 -- 131 -- Other....................................... 68 751 109 918 ------- ---- ------- ---- $10,591 $751 $11,433 $918 ======= ==== ======= ====
(4) PROPERTY, PLANT AND EQUIPMENT Major categories of property, plant and equipment at October 31, 1994 and 1995 are as follows:
ESTIMATED LIFE (YEARS) 1994 1995 ------------ -------- -------- Land................................................. - $ 7,739 $ 7,826 Building and improvements............................ 10-32 15,132 15,553 Advertising structures............................... 15 123,592 131,071 Automotive and other equipment....................... 3-7 13,244 13,952 -------- -------- $159,707 $168,402 ======== ========
(5) INTANGIBLE ASSETS The following is a summary of intangible assets at October 31:
ESTIMATED LIFE (YEARS) 1994 1995 ------------ ------- ------- Debt issuance costs.................................. 10 $ 3,604 $ 3,180 Customer lists and unexpired contracts............... 7 7,581 7,103 Non-compete agreements............................... 7-15 1,296 1,036 Organization costs................................... 5 219 673 Loan fees............................................ 7-10 1,027 1,051 Other................................................ 7-10 335 363 ------- ------- $14,062 $13,406 ======= ======= Cost................................................. 18,870 20,473 Accumulated amortization............................. 4,808 7,067 ------- ------- Net intangible assets...................... $14,062 $13,406 ======= =======
(6) LAMAR HOLDINGS CORPORATION Prior to May 1994, the Company owned 49.36% of the common stock of LHC. LHC was founded in 1989 by TLC, members of its management and certain institutional investors to provide outdoor advertising services in markets other than those served by TLC. F-9 82 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) Effective May 1, 1994, LAC acquired substantially all of the assets and assumed certain liabilities of LHC for a purchase price of $43,500. The proceeds from the sale of its assets were used by LHC to repay existing debt and redeem all of its shareholders other than LAC, resulting in LHC becoming a wholly-owned subsidiary of LAC. The acquisition has been accounted for as a purchase and accordingly, the purchase price attributable to shareholders other than LAC (50.64%) has been allocated to the assets acquired based on their fair values. The results of operations of LHC have been included in LAC's consolidated financial statements from May 1, 1994. The following unaudited pro forma financial information presents the combined results of operations of LAC and LHC as if the acquisition had occurred as of the beginning of 1993 and 1994, after giving effect to certain adjustments, including additional depreciation expense, increased interest expense on debt related to the acquisition, and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the companies constituted a single entity during such period.
YEAR ENDED OCTOBER 31, ------------------- 1993 1994 ------- ------- (UNAUDITED) Revenues......................................................... $81,303 $92,480 ======= ======= Net income (loss) before extraordinary item...................... $(1,856) $ 6,265 ======= ======= Net income (loss)................................................ $(3,710) $ 6,265 ======= ======= Earnings (loss) per share before extraordinary item.............. $ (.05) $ .18 ======= ======= Earnings (loss) per share........................................ $ (.10) $ .18 ======= =======
(7) LEASES The Company is party to various operating leases for production facilities and sites upon which advertising structures are built. The leases expire at various dates, generally during the next five years, and have varying options to renew and to cancel. The following is a summary of minimum annual rental payments required under those operating leases that have original or remaining lease terms in excess of one year as of October 31: 1996..................................................... $10,546 1997..................................................... 8,654 1998..................................................... 7,172 1999..................................................... 5,857 2000..................................................... 4,486
Rental expense related to the Company's operating leases was $10,983, $14,999 and $17,053 for the years ended October 31, 1993, 1994 and 1995, respectively. F-10 83 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) The Company leases a portion of its corporate office building to tenants under operating leases. The following is a summary of property held for lease at October 31:
1994 1995 ------- ------- Land........................................................... $ 47 $ 53 Buildings...................................................... 2,454 1,892 Less accumulated depreciation.................................. (1,754) (1,124) ------- ------- $ 747 $ 821 ======= =======
Minimum future rental income for noncancelable leases in effect as of October 31, 1995 is as follows: Year ending October 31: 1996.................................................... $224 1997.................................................... 152 1998.................................................... 115 1999.................................................... 99 2000.................................................... 97 ====
(8) ACCRUED EXPENSES The following is a summary of accrued expenses at October 31:
1994 1995 ------ ------ Payroll............................................................ $2,084 $2,134 Interest........................................................... 5,442 5,400 Insurance benefits................................................. 1,374 1,457 Other.............................................................. 747 742 ------ ------ $9,647 $9,733 ====== ======
F-11 84 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) (9) LONG-TERM DEBT Long-term debt consists of the following at October 31 and July 31, 1996:
JULY 31, 1996 1994 1995 ----------- -------- -------- (UNAUDITED) Senior Secured Notes................................ $100,000 $100,000 $ 100,000 Note payable to a bank group........................ 43,000 39,250 37,750 1993 Series A Line of Credit, payable to bank....... 2,000 -- 6,000 1995 Series B Line of Credit, payable to bank....... -- -- 9,500 8% Series A unsecured subordinated discount debentures, maturing through 2001 (11.5% effective yield)............................................ 3,095 2,706 2,409 5% to 10% notes payable to banks and others with varying maturities secured by plant and equipment......................................... 4,960 3,713 3,974 10% to 12% Series A unsecured subordinated debentures maturing in 1996 and 1997.............. 372 372 372 Other notes with various rates and terms............ 502 10 2 -------- -------- -------- 153,929 146,051 160,007 Less current maturities............................. (7,054) (3,479) (5,326) -------- -------- -------- Long term debt, excluding current maturities........ $146,875 $142,572 $ 154,681 ======== ======== ========
Long term debt matures as follows: 1996...................................................... $ 3,479 1997...................................................... 5,465 1998...................................................... 9,235 1999...................................................... 12,154 2000...................................................... 12,516 Later years............................................... 103,202 -------- $146,051 ========
The Senior Secured Notes were issued on May 19, 1993. The notes bear interest at 11% payable semiannually. The notes mature in 2003 and are subject to redemption at the option of the Company at any time on or after May 15, 1998. There is no sinking fund obligation associated with the notes. The notes rank senior in right of payment to all subordinated debt of the Company and pari passu in right of payment with all unsubordinated borrowings of the Company and are unconditionally guaranteed by certain subsidiaries of the Company. The notes are secured by a pledge of the capital stock of all of the Subsidiary Guarantors, subject to certain provisions. Additionally, the Company is obligated to pledge the capital stock and obtain the guarantee of all future restricted subsidiaries as security. A portion of the proceeds from the Senior Secured Notes was used to extinguish existing variable and fixed rate debt prior to maturity. In connection with the extinguishment, the Company incurred a loss of approximately $1,900 which has been reflected as an extraordinary item in the accompanying consolidated financial statements. The per share amount of the aggregate loss net of related income tax effect is $0.05 for the year ended October 31, 1993. F-12 85 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) The indenture contains certain restrictive financial covenants, including the following: - Limitation on outstanding debt of the Company and any of its restricted subsidiaries; - Limitation of the payment of cash dividends and other restricted payments; - Limitation on sale and leaseback transactions, and - Limitation on sales or disposals of assets. The Company was in compliance with such covenants as of October 31, 1995. On May 19, 1993, the Company also entered into a Bank Credit Agreement which provided an $8,000 term loan and a $20,000 working capital line of credit. The term loan will amortize over four years beginning in 1995 and the availability under the revolving credit facility will be reduced over a three-year period beginning in 1995 until the facility terminates in 1998. The term loan and the revolving credit facility are secured by a pledge of the capital stock of all of the Company's present subsidiaries. During 1994, the Company executed certain amendments to the Bank Credit Agreement, including increasing of the term loan to $43,000. During 1995, the Company executed additional amendments to the Bank Credit Agreement, including a change in the Commitment to reduce the revolving line of credit over a three-year period beginning in 1999 until the facility terminates in 2001. As of October 31, 1995, the balance of the term loan was $39,250 with an interest rate of 8.09%. The Bank Credit Agreement contains certain restrictive financial covenants, including the following: - Maintaining specific ratios of cash flow to debt service and total debt; - Limitation of the payment of dividends; - Limitation on investments and joint ventures, - Limitation on capital expenditures, and - Limitation on sales or disposals of assets. The Company was in compliance with such covenants as of October 31, 1995. The 8% Series A, unsecured subordinated debentures with an original face amount of $4,844 were issued in 1986 at a discount of $986, which is being amortized over the life of the debentures. The total unamortized discount was $314 and $238 at October 31, 1994 and 1995, respectively. (10) INCOME TAXES LAC files a consolidated federal income tax return which includes all of its qualifying subsidiaries. Total income tax expense (benefit) for the years ended October 31, 1993, 1994 and 1995 is allocated as follows:
1993 1994 1995 ---- ------- ------- Income from continuing operations........................ $476 $(2,072) $(2,390) Extraordinary item....................................... (98) -- -- ---- ------- ------- $378 $(2,072) $(2,390) ==== ======= =======
F-13 86 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) Income tax expense (benefit) attributable to continuing operations for the years ended October 31, 1993, 1994 and 1995 consists of:
CURRENT DEFERRED TOTAL ------- -------- ------- 1993: U.S. federal......................................... 155 -- 155 State and local...................................... 321 -- 321 ---- ------- ------- $ 476 $ -- $ 476 ==== ======= ======= 1994: U.S. federal......................................... 165 (2,650) (2,485) State and local...................................... 413 -- 413 ---- ------- ------- $ 578 $ (2,650) $(2,072) ==== ======= ======= 1995: U.S. federal......................................... $ 290 $ (3,301) $(3,011) State and local...................................... 621 -- 621 ---- ------- ------- $ 911 $ (3,301) $(2,390) ==== ======= =======
Income taxes attributable to continuing operations in 1994 and 1995 include adjustments to the beginning-of-the-year valuation allowance on the Company's deferred tax assets in the amount of $3,882 and $5,939, respectively. The improved business conditions and resulting profitability has resulted in a change in management's judgment regarding the realizability of the deferred tax assets. Income tax expense (benefit) for 1993, 1994 and 1995, differs from the amounts computed by applying the U.S. federal income tax rate of 34 percent to pretax income from continuing operations as follows:
1993 1994 1995 ----- ------- ------- Computed "expected" tax expense........................... $ 570 $ 1,777 $ 2,825 Increase (reduction) in income taxes resulting from: Change in beginning of the year balance of the valuation allowance for deferred tax assets........ (217) (3,882) (5,939) State and local income taxes, net of federal income tax benefit........................................ 214 273 410 Other differences, net............................... (91) (240) 314 ----- ------- ------- Actual income tax expense (benefit)............. $ 476 $(2,072) $(2,390) ===== ======= =======
F-14 87 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at October 31, 1994 and 1995 are presented below:
1994 1995 ------- ------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation................................................ $(5,411) $(4,656) Intangibles, due to differences in amortizable lives........... (569) (594) ------- ------- Deferred tax liabilities............................... $(5,980) $(5,250) ======= ======= Deferred tax assets: Receivables, principally due to allowance for doubtful accounts and accounts written off.................................... $ 187 $ 193 Plant and equipment, due to additional costs capitalized for tax purposes pursuant to the Tax Reform Act of 1986......... 641 764 Plant and equipment, due to basis differences on acquisitions of assets................................................... 4,276 4,064 Investment in affiliates and plant and equipment due to gains previously recognized for tax purposes and deferred for financial reporting purposes................................ 1,357 1,719 Net operating loss carryforwards............................... 6,512 2,262 Investment tax credit carryforwards............................ 982 929 Other, net..................................................... 614 1,270 ------- ------- Gross deferred tax assets.............................. 14,569 11,201 Less valuation allowance....................................... (5,939) -- ------- ------- Deferred tax assets.................................... $ 8,630 $11,201 ======= ======= Net deferred taxes..................................... $ 2,650 $ 5,951 ======= =======
The valuation allowance for deferred tax assets as of November 1, 1993 was $9,821. For federal income tax purposes, the following carryforwards are available as of October 31, 1995:
EXPIRATION ----------- Net operating loss.............................................. $6,465 2003-2005 Investment credit............................................... 929 1995-2001 Alternative minimum tax credit.................................. 660 Indefinite
(11) OTHER RELATED PARTY TRANSACTIONS Affiliates, as used within these statements, are companies which are affiliated with Lamar Advertising Company or its subsidiaries through common ownership and directorate control. F-15 88 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) The Company receives income and incurs costs in transactions with related parties and affiliates. The following is a summary of such transactions for the years ending October 31:
1993 1994 1995 ---- ---- ---- Revenues: Management fee income....................................... $595 $334 $ 31 Rental income............................................... 209 -- -- Interest income............................................. 75 59 8 Production of logo plates................................... 341 143 143 Expenses: Interest expense............................................ 390 308 296 Rent expense................................................ 143 71 --
The Company is a party to a consulting agreement with a shareholder and former Chairman of the Board of the Company. The agreement, which expires in 1996, provides for annual payments of $120 and an annual bonus of up to $100. The Company incurred consulting expense of $120 under this agreement in 1993, 1994 and 1995. Additionally, the Company paid consulting fees of $110 to this individual in 1995. As of October 31, 1994 and 1995, debentures totaling $3,600 and $2,950, respectively, are owned by shareholders, directors and employees. During 1993, the Company purchased all outstanding stock of Lamar Advertising of Wichita Falls, Inc., a company which, at the time of the acquisition, was owned by certain stockholders of LAC. The total consideration was approximately $1,200, which approximated the book value of the underlying assets. During 1993, a subsidiary of the Company purchased a building from a joint venture whose principals included the former Chairman of the Board and two officers of the Company for a price of approximately $740. Additionally in 1993, this subsidiary purchased two buildings from a director of the Company for approximately $530. (12) COMMON STOCK The rights of Class A and Class B common stock (as in effect on October 31, 1995) are equal in all respects, except holders of Class A common stock shall have preemptive rights with respect to Class A common stock and Class B is non-voting. In connection with the Initial Public Offering (the "IPO") referred to in Note 14, the Company effected a recapitalization consisting of an approximate 778.9-for-1 stock split and an exchange of common stock for new Class A and Class B common stock which are equal in all respects, except holders of Class B common stock have ten votes per share and holders of Class A common stock have one vote per share. Class B common stock will convert automatically into Class A common stock upon the sale or transfer to persons other than permitted transferees. All share information has been adjusted to reflect the recapitalization. (13) COMMITMENTS AND OTHER CONTINGENCIES The Company sponsors a partially self-insured group health insurance program. Coverage is available to all employees who work in excess of 30 hours per week. The Company is obligated to pay all claims under the program which are in excess of premiums, up to program limits of $150 per employee, per claim, per year. The Company has purchased third-party insurance coverage for claims in excess of this amount. The Company is F-16 89 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) also self-insured with respect to its income disability benefits and against casualty losses on advertising structures. Amounts for expected losses including a provision for losses incurred but not reported, are included in accrued expenses in the accompanying consolidated financial statements. The Company maintains a $1,000 letter of credit with a bank to meet requirements of the Company's workers' compensation insurance carrier. The Company also maintains a $375 letter of credit with an insurance company to partially collateralize a surety bond for a logo company. The Company established The Lamar Corporation Savings and Profit Sharing Plan effective January 1, 1988. Participants include all employees who have completed one year of service and are at least 21 years of age. The Company matches 50% of employees' contributions up to 5% of related compensation. Employees can contribute up to 15% of compensation. Full vesting on the Company's matched contributions occurs after five years. The Company contributed $313, $230 and $512 for the years ended October 31, 1993, 1994 and 1995, respectively. On November 1, 1993, LAC established The Lamar Corporation, Its Affiliates and Subsidiaries Deferred Compensation Plan (the Plan) for the benefit of certain of its senior management who meet specified age and years of service criteria. Employees who have attained the age of 30 and have a minimum of 10 years of service are eligible for annual contributions to the Plan generally ranging from $3 to $8, depending on the employee's length of service. LAC's contributions to the Plan will be maintained in a "rabbi" trust and, accordingly, the assets and liabilities of the Plan will be reflected in the balance sheet of LAC. Upon termination, death or disability, participating employees are eligible to receive an amount equal to the fair market value of the assets in the employee's deferred compensation account. The Company has contributed $101, $442 and $240 to the Plan during 1993, 1994 and 1995, respectively. Contributions to the Plan are discretionary and are determined by the Board of Directors. The Company is the subject of litigation arising during the normal course of business. In the opinion of management and general counsel of the Company, those claims will not have a material impact on the financial position, results of operations or liquidity of the Company. (14) SUBSEQUENT EVENTS (UNAUDITED) On December 30, 1995, the Certificate of Incorporation of the Company was amended to authorize 10,000 shares of Class A preferred stock with a par value of $638 per share and no voting rights. The Class A preferred stock are cumulative and are priority to Class A and Class B common stock dividends at the rate of $15.95 per share per quarter. As of December 30, 1995, 4,454,397 shares of Class A common stock with a $.001 per share par value were converted into 5,719.49 shares of Class A preferred stock with a $638 per share par value. This conversion resulted in a $3,600 charge to accumulated deficit. On March 1, 1996, 3,463,666 shares of Class A common stock and 154,218 shares of Class B common stock, $.001 par value, were redeemed at a price of $0.82 per share. This redemption resulted in a $3,000 charge to accumulated deficit. In connection with the redemption, the Company agreed, contingent upon completion of the IPO referred to below, to pay additional consideration of $1.38 per share in cash and $5.52 per share in ten-year subordinated notes, which resulted in an additional charge to stockholders' equity of $25,000. The accompanying pro forma financial information gives effect to the additional consideration paid upon completion of the IPO, but does not give effect to the IPO proceeds. F-17 90 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION AS OF JULY 31, 1996 AND FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED) Subsequent to April 30, 1996, the Company advanced $450 to a stockholder. The loan was paid on or before October 31, 1996. Effective July 1, 1996, the Company entered into a consulting agreement with an affiliate of a shareholder and former Chairman of the Board of the Company to replace the expiring consulting agreement discussed in Note 11. The agreement provides for a $120 annual consulting fee for a term of ten years. In August, 1996, the Company consummated an initial public offering of 4,294,041 shares of Class A Common Stock, $.001 par value per share. In connection with the IPO, the Company effected the recapitalization referred to in Note 12. Also in connection with the IPO, the Company adopted the 1996 Equity Incentive Plan (the "1996 Plan"). The purpose of the 1996 Plan is to attract and retain key employees and consultants of the Company. The 1996 Plan authorizes the grant of stock options, stock appreciation rights and restricted stock to employees and consultants of the Company capable of contributing to the Company's performance. The Company has reserved an aggregate of 2,000,000 shares of Class A Common Stock for awards under the 1996 Plan. In September, 1996 the Company agreed to acquire all of the outstanding capital stock of FKM for a cash purchase price of $40.0 million and substantially all of the assets of Outdoor East for a cash purchase price of approximately $60.0 million. These acquisitions will be accounted for under the purchase method of accounting. On October 17, 1996, the Company commenced a tender offer for all of its $100,000 outstanding 11% Senior Secured Notes Due May 15, 2003, together with a consent solicitation to effect certain amendments to the indenture under which the Notes were issued and the related pledge agreement. The tender offer is expected to be financed through the New Credit Agreement. On November 21, 1996, the Board of Directors of the Company authorized a Note Offering of $255 million aggregate principal amount of Notes that would be subordinate to amounts borrowed under the New Credit Agreement. The Board of Directors also authorized the offering of up to $100 million of Class A $.001 par value Common Stock. The filings will be registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933. F-18 91 INDEPENDENT AUDITOR'S REPORT Board of Directors and Shareholders FKM Advertising Co., Inc. Allentown, Pennsylvania We have audited the accompanying balance sheets of FKM Advertising Co., Inc. as of December 31, 1994 and 1995, and the related statements of operations, changes in stockholders' equity and cash flows for the years then ended. 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 our 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 FKM Advertising Co., Inc. as of December 31, 1994 and 1995, and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles. MCGRAIL, MERKEL, QUINN & ASSOCIATES Scranton, Pennsylvania March 14, 1996 F-19 92 FKM ADVERTISING CO., INC. BALANCE SHEETS DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996 (UNAUDITED) ASSETS
SEPTEMBER 30, 1994 1995 1996 ----------- ----------- ------------- (UNAUDITED) Current assets Cash..................................................................... $ 27,483 $ 164,643 $ 80,631 Accounts receivable, net of an allowance for doubtful accounts of $55,000 in 1994 and $33,500 in 1995 and $69,900 in 1996 (unaudited)............................................................ 317,039 686,350 593,700 Note receivable -- shareholder........................................... 63,072 69,296 73,704 Prepaid expenses......................................................... 399,215 469,262 554,336 Other current assets..................................................... 23,100 41,150 66,015 ----------- ----------- ----------- Total current assets............................................... 829,909 1,430,701 1,368,386 ----------- ----------- ----------- Property and equipment Land..................................................................... 26,413 126,413 144,763 Buildings................................................................ -- 175,000 175,000 Advertising structures................................................... 5,160,587 7,785,370 8,090,801 Furniture and fixtures................................................... 54,648 56,640 84,502 Equipment................................................................ 118,752 403,785 467,917 Vehicles................................................................. 101,764 118,142 118,142 ----------- ----------- ----------- 5,462,164 8,665,350 9,081,125 Less: Accumulated depreciation........................................... 1,021,410 1,379,025 1,872,442 ----------- ----------- ----------- Net property and equipment......................................... 4,440,754 7,286,325 7,208,683 ----------- ----------- ----------- Other assets Deposits................................................................. 6,400 8,400 7,400 Deferred taxes........................................................... 1,369,940 1,562,383 1,682,383 Intangibles, net of amortization......................................... 4,860,953 10,114,870 8,675,513 ----------- ----------- ----------- Total other assets................................................. 6,237,293 11,685,653 10,365,296 ----------- ----------- ----------- Total assets....................................................... $11,507,956 $20,402,679 $18,942,365 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt........................................ $ 1,451,989 $ 1,214,613 $ 1,489,788 Accounts payable......................................................... 87,612 159,912 37,917 Accrued severance expense................................................ 28,846 -- -- Accrued interest expense................................................. -- 88,743 174,209 Accrued expenses -- other................................................ 160,072 276,477 156,132 Deferred revenue......................................................... 10,311 9,435 17,672 ----------- ----------- ----------- Total current liabilities.......................................... 1,738,830 1,749,180 1,875,718 ----------- ----------- ----------- Other liabilities Long-term accrued expenses............................................... 142,713 -- - Long-term debt, net of current portion................................... 7,257,867 16,812,828 15,747,553 ----------- ----------- ----------- Total other liabilities............................................ 7,400,580 16,812,828 15,747,553 ----------- ----------- ----------- Total liabilities.................................................. 9,139,410 18,562,008 17,623,271 ----------- ----------- ----------- Stockholders' equity Preferred stock, $0.01 par value, 619,972 shares authorized, issued and outstanding............................................................ 6,200 6,200 6,200 Common stock -- Class A, $0.01 par value, 1,000,132 shares authorized, shares issued -- 220,160 in 1994, 270,160 in 1995 and 270,160 in 1996 (unaudited)............................................................ 2,202 2,702 2,702 Common stock -- Class B, $0.01 par value, 170,000 shares authorized, shares issued -- 160,000 in 1994, 110,000 in 1995 and 110,000 in 1996 (unaudited)............................................................ 1,600 1,100 1,100 Additional paid-in capital............................................... 4,992,036 4,992,036 4,992,036 Additional paid-in capital from the sale of treasury stock............... 16,140 16,140 16,140 Deficit.................................................................. (2,644,532) (3,172,407) (3,693,984) Treasury stock -- 30,000 shares of common -- Class B, at cost............ (5,100) (5,100) (5,100) ----------- ----------- ----------- Total stockholders' equity......................................... 2,368,546 1,840,671 1,319,094 ----------- ----------- ----------- Total liabilities and stockholders' equity......................... $11,507,956 $20,402,679 $18,942,365 =========== =========== ===========
The accompanying notes are an integral part of these Financial Statements. F-20 93 FKM ADVERTISING CO., INC. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994 AND 1995, AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
FOR THE YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------- ------------------------- 1994 1995 1995 1996 ---------- ---------- ---------- ---------- (UNAUDITED) Revenue Billboard rentals, net............................................ $4,702,698 $4,955,918 $3,503,686 $5,924,160 Interest income................................................... -- 11,735 7,204 19,961 Other income...................................................... 2,115 44,753 39,498 79,680 ---------- ---------- ---------- ---------- Total revenue............................................... 4,704,813 5,012,406 3,550,388 6,023,801 ---------- ---------- ---------- ---------- Costs and expenses Production........................................................ 742,801 909,560 619,827 1,087,111 Lease expense..................................................... 538,481 603,452 423,180 656,790 Sales and marketing............................................... 405,918 359,062 253,495 482,291 General and administrative........................................ 891,906 759,707 584,723 869,633 ---------- ---------- ---------- ---------- Total costs and expenses.................................... 2,579,106 2,631,781 1,881,225 3,095,825 ---------- ---------- ---------- ---------- Income from operations before depreciation and amortization.............................................. 2,125,707 2,380,625 1,669,163 2,927,976 ---------- ---------- ---------- ---------- Depreciation and amortization Depreciation...................................................... 385,441 430,922 289,944 493,417 Amortization...................................................... 2,032,353 1,391,606 1,054,106 1,481,574 ---------- ---------- ---------- ---------- Total depreciation and amortization......................... 2,417,794 1,822,528 1,344,050 1,974,991 ---------- ---------- ---------- ---------- (Loss) income from operations............................... (292,087) 558,097 325,113 952,985 ---------- ---------- ---------- ---------- Other expenses Employee severance expense........................................ 8,654 577 577 -- Interest expense.................................................. 868,561 1,038,807 663,170 1,588,947 Commitment fees................................................... 4,285 6,270 1,575 5,615 Loss on sale and disposal of fixed assets......................... 4,434 232,761 228,602 -- ---------- ---------- ---------- ---------- Total other expenses........................................ 885,934 1,278,415 893,924 1,594,562 ---------- ---------- ---------- ---------- Net loss before income tax benefit.......................... (1,178,021) (720,318) (568,811) (641,577) Income tax benefit.................................................. 439,969 192,443 155,000 120,000 ---------- ---------- ---------- ---------- Net loss.................................................... $ (738,052) $ (527,875) (413,811) (521,577) ========== ========== ========== ========== Net loss per common share................................... $ (1.94) $ (1.39) $ (1.09) $ (1.37) ========== ========== ========== ==========
The accompanying notes are an integral part of these Financial Statements. F-21 94 FKM ADVERTISING CO., INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994 AND 1995, AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
ADDITIONAL COMMON COMMON PAID-IN STOCK STOCK ADDITIONAL CAPITAL FROM PREFERRED CLASS CLASS PAID-IN THE SALE OF TREASURY STOCK A B CAPITAL TREASURY STOCK DEFICIT STOCK TOTAL --------- ------ ------ ---------- -------------- ----------- --------- ---------- Balance at December 31, 1993... $ 6,200 $2,102 $1,700 $4,992,036 $ -- $(1,865,405) $ -- $3,136,633 Purchase of stock: Preferred stock (15,517 shares).................... -- -- -- -- -- -- (144,576) (144,576) Common stock -- Class A (5,260 shares)............. -- -- -- -- -- -- (20,024) (20,024) Common stock -- Class B (120,000 shares)........... -- -- -- -- -- -- (20,400) (20,400) Stock issued: Preferred stock (15,517 shares).................... -- -- -- -- -- (37,083) 144,576 107,493 Common stock -- Class A (5,260 shares)............. -- -- -- -- -- (3,992) 20,024 16,032 Common stock -- Class B (90,000 shares)............ -- -- -- -- 16,140 -- 15,300 31,440 Conversion of 10,000 shares of common stock -- Class B to Class A...................... -- 100 (100) -- -- -- -- -- Net loss, 1994................. -- -- -- -- -- (738,052) -- (738,052) ------- ------ ------ ---------- -------- ----------- --------- ---------- Balance at December 31, 1994... 6,200 2,202 1,600 4,992,036 16,140 (2,644,532) (5,100) 2,368,546 Conversion of 50,000 shares of common stock -- Class B to Class A...................... -- 500 (500) -- -- -- -- -- Net loss, 1995................. -- -- -- -- -- (527,875) -- (527,875) ------- ------ ------ ---------- -------- ----------- --------- ---------- Balance at December 31, 1995... $ 6,200 $2,702 $1,100 $4,992,036 $ 16,140 $(3,172,407) $ (5,100) $1,840,671 Net loss (unaudited)........... -- -- -- -- -- (521,577) -- (521,577) ------- ------ ------ ---------- -------- ----------- --------- ---------- Balance at September 30, 1996 (unaudited).................. $ 6,200 $2,702 $1,100 $4,992,036 $ 16,140 $(3,693,984) $ (5,100) $1,319,094 ======= ====== ====== ========== ======== =========== ========= ==========
The accompanying notes are an integral part of these Financial Statements. F-22 95 FKM ADVERTISING CO., INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994 AND 1995, AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- ----------------------- 1994 1995 1995 1996 ---------- ------------ ---------- ---------- (UNAUDITED) Operating activities Net loss.................................... $ (738,052) $ (527,875) $ (413,811) $ (521,577) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............ 2,417,794 1,822,528 1,344,050 1,974,991 Deferred taxes........................... (439,969) (192,443) (155,000) (120,000) Bad debt expense......................... 138,714 98,010 98,010 89,353 Loss on sale and disposal of fixed assets................................. 4,434 232,761 228,602 -- (Increase) decrease in: Accounts receivable.................... 170,324 (467,321) 24,394 3,297 Notes receivable -- shareholder........ (1,272) (6,224) (4,287) (4,408) Prepaid expenses....................... (93,863) (70,047) (56,984) (85,074) Other current assets................... 8,503 (18,050) 5,208 (24,865) Deposits............................... 2,980 (2,000) -- 1,000 Increase (decrease) in: Accounts payable....................... 15,017 72,300 (34,207) (121,995) Accrued severance expense.............. (126,443) (28,846) (28,846) -- Accrued expenses....................... 153,316 62,435 (17,891) (34,879) Deferred revenue....................... 980 (876) (10,311) 8,237 ---------- ------------ ---------- ---------- Net cash provided by operating activities........................ 1,512,463 974,352 978,927 1,164,080 ========== ============ ========== ========== Investing activities Acquisition costs........................... -- (6,025,667) (83,073) (42,218) Loan costs.................................. (393,306) (619,856) -- -- Purchase of fixed assets.................... (285,532) (3,509,254) (313,944) (415,774) Proceeds from sale of fixed assets.......... 12,500 -- -- -- ---------- ------------ ---------- ---------- Net cash used by investing activities........................ (666,338) (10,154,777) (397,017) (457,992) ---------- ------------ ---------- ---------- Financing activities Loan proceeds............................... 30,000 10,469,559 -- 22,355 Payments of principal....................... (846,900) (1,151,974) (298,512) (812,455) Acquisition of treasury stock............... (185,000) -- -- -- Issuance of stock........................... 154,965 -- -- -- ---------- ------------ ---------- ---------- Net cash (used) provided by financing activities.............. (846,935) 9,317,585 (298,512) (790,100) ---------- ------------ ---------- ---------- Net (decrease) increase in cash..... (810) 137,160 283,398 (84,012) Cash, beginning of year....................... 28,293 27,483 27,483 164,643 ---------- ------------ ---------- ---------- Cash, end of year............................. $ 27,483 $ 164,643 $ 310,881 $ 80,631 ========== ============ ========== ==========
The accompanying notes are an integral part of these Financial Statements. F-23 96 NOTES TO FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Business FKM Advertising Co., Inc. ("FKM") is a Delaware Corporation engaged in the outdoor advertising business. The Company is located in Allentown, Pennsylvania and Youngstown, Ohio. Advertising structures are primarily located in Pennsylvania and Ohio. 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 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. Revenue Recognition Outdoor advertising revenues are recorded in the month the billboard is displayed, based on the terms of the contract. The date the billboard is actually displayed may vary slightly from the contract date due to scheduling and other concerns. These variances do not materially affect revenue. Allowance for Doubtful Accounts The allowance for doubtful accounts is the amount that, in management's judgment, is sufficient to absorb any anticipated losses related to the accounts receivable. Property and Equipment Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Earnings Per Share Earnings per common share are computed by dividing net earnings applicable to common stock by the weighted average number of common shares outstanding during each period presented (380,160 shares for all periods presented). Intangible Assets and Deferred Costs The amounts representing the excess of the purchase price over the fair value of the identifiable assets acquired ("Goodwill") has been recorded as an intangible asset and is being amortized over a period of fifteen to forty years using the straight-line method. Lease rights represent the fair value at acquisition of below market rate leases assumed in connection with the acquisition referred to above. These lease rights are being amortized over the average remaining terms of the respective leases. Prepaid advertising contracts represent the estimated fair value of contracts existing at the date of acquisition. The contract values are being amortized over their remaining lives. Costs incurred by FKM in securing financing agreements have been recorded as an asset and amortized over the terms of the agreements using the straight-line method. F-24 97 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Income Taxes The Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) effective January 1, 1993. SFAS 109 requires an asset and liability approach for accounting and reporting for income taxes. Deferred taxes are the result of accounting for certain items differently for financial reporting purposes than for income tax purposes. These temporary differences primarily relate to the Company's net operating loss carryover for Federal income tax purposes, the allowance for doubtful accounts, depreciation and employee severance expense. Cash Flow Disclosures The Company has defined cash as only those amounts included under the Balance Sheet caption "Cash". The Company paid interest amounting to $784,499 and $942,458 for the years ended 1994 and 1995, respectively. The Company paid no income taxes for the years ended December 31, 1994 and 1995. Prepaid Expenses The Company prepays certain costs for land leases and painting of displays at the inception of the advertising contracts. These costs are deferred and amortized on a straight-line basis over the period that coincides with the recognition of income. This period is generally twelve months for land leases and painting. Reclassifications Certain prior year amounts have been reclassified to conform to the 1995 presentation. Unaudited Interim Financial Statements The unaudited interim financial statements include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and the results of operations of the Company. NOTE 2 -- ACQUISITIONS On November 15, 1995, the Company acquired certain assets of Naegele Outdoor Advertising and Genesis Outdoor Advertising, both located in Youngstown, Ohio, (the Naegele and Genesis acquisitions) for $8,565,000. The acquisitions were accounted for as purchases, and the operations are included in the accompanying financial statements subsequent to the acquisition date. The aggregate purchase price of the two acquisitions was allocated to the assets acquired based upon the fair values at the date of acquisition. The excess of purchase price over the fair value of assets acquired is recorded as goodwill and is being amortized over fifteen years using the straight-line method. Also, in connection with the Naegele acquisition, the Company acquired real estate on which potential environmental concerns were identified. The areas of environmental concern were identified prior to the acquisition date and the Company has been indemnified against the cost of any environmental remediation that may be required. NOTE 3 -- CASH The current asset caption "Cash" at December 31, 1995 consisted of the following: F-25 98 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Mahoning National Bank.................................................... $125,785 Ambassador Bank........................................................... 38,383 ABN*AMRO Bank N.V. ....................................................... 75 Petty cash................................................................ 400 -------- $164,643 ========
NOTE 4 -- PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expense as incurred, while expenditures for renewals or betterments are capitalized. Depreciation is computed using the straight-line method over the useful lives of the assets. At December 31, 1994 and 1995, property and equipment consisted of the following:
COST ESTIMATED USEFUL ------------------------ DESCRIPTION LIVES 1994 1995 ---------------------------------------------- ---------------- ---------- ---------- Land.......................................... -- $ 26,413 $ 126,413 Buildings..................................... 40 years -- 175,000 Advertising structures........................ 15 years 5,160,587 7,785,370 Furniture and fixtures........................ 5-10 years 54,648 56,640 Equipment..................................... 3- 5 years 118,752 403,785 Vehicles...................................... 3- 5 years 101,764 118,142 ---------- ---------- 5,462,164 8,665,350 Less: Accumulated depreciation................ 1,021,410 1,379,025 ---------- ---------- $4,440,754 $7,286,325 ========== ==========
Depreciation expense amounted to $385,441 and $430,922 for the years ended December 31, 1994 and 1995, respectively. During the current year, management disposed of advertising structures that were no longer in service. The cost of the structures was $273,755 and the resulting loss amounted to $232,761. NOTE 5 -- INTANGIBLE ASSETS Intangible assets at December 31, 1994 and 1995 consisted of the following:
ESTIMATED USEFUL DESCRIPTION LIVES 1994 1995 -------------------------------------------- ---------------- ----------- ----------- Lease rights................................ 7 years $ 2,500,000 $ 2,745,000 Organization costs.......................... 5 years 918,409 918,409 Noncompetition agreements................... 5 years 3,600,000 4,158,775 Loan costs.................................. 10 years 330,050 330,050 Loan costs -- amendments.................... 74-93 months 403,039 1,022,896 Interest cap................................ 30 months 44,550 44,550 Prepaid advertising contracts............... 30 months 2,700,000 2,700,000 Prepaid contracts and permits............... 15 years -- 1,990,021 Goodwill.................................... 15-40 years 1,055,577 4,287,448 ----------- ----------- 11,551,625 18,197,149 Less: Accumulated amortization.............. 6,690,672 8,082,279 ----------- ----------- $ 4,860,953 $10,114,870 =========== ===========
F-26 99 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Amortization expense amounted to $2,032,353 and $1,391,606 for the years ended December 31, 1994 and 1995, respectively. NOTE 6 -- LONG-TERM DEBT Long-term debt at December 31, 1994 and 1995 consisted of the following: SENIOR DEBT
SEPTEMBER 31, 1994 1995 1996 ---------- ----------- ------------- (UNAUDITED) ABN*AMRO BANK N.V. Term loan payable. Interest is payable monthly at the Bank's base rate plus 1 7/8%. Refer below for principal payments and additional information. ............................... $8,519,000 $13,500,000 $ 12,700,000 Revolving note payable. Interest is payable monthly at the Bank's base rate plus 1 7/8% and all principal is due on December 31, 2001. The maximum borrowing is $1,500,000. ................................ 150,000 1,000,000 1,000,000 Acquisition loan payable. Interest is payable monthly at the Bank's base rate plus 1 7/8% and all principal is due on December 31, 2001. The maximum borrowing is $1,000,000. ................................ -- -- -- ---------- ----------- ----------- 8,669,000 14,500,000 13,700,000 ========== =========== =========== SUBORDINATED DEBT CASCADE COMMUNICATIONS VENTURES, L.P. Promissory loan dated November 15, 1995. Interest is payable at a rate of 18%. All principal is due on June 30, 2002........... -- 1,750,000 1,750,000 COAST MEZZANINE INVESTMENTS, LTD. Promissory loan dated November 15, 1995. Interest is payable at a rate of 18%. All principal is due on June 30, 2002. ......... $ -- $ 1,750,000 $ 1,750,000 ---------- ----------- ----------- -- 3,500,000 3,500,000 ---------- ----------- ----------- INSTALLMENT DEBT Note payable at 8.75%, payable in 36 installments of $952 per month, including principal and interest, secured by a vehicle, maturing June, 1997. .............. 25,536 15,976 8,197 Note payable at 7.75%, payable in 60 installments of $409 per month, including principal and interest, secured by a vehicle, maturing July 1998. ............... 15,320 11,465 8,369 Note payable in 24 monthly installments of $1,111 per month, including principal and interest, secured by equipment, maturing July, 1998. ................................ -- -- 20,775 ---------- ----------- ----------- 40,856 27,441 37,341 ---------- ----------- ----------- Total long-term debt.......................... 8,709,856 18,027,441 17,237,341 Less: Current portion......................... 1,451,989 1,214,613 1,489,788 ---------- ----------- ----------- Total long-term debt, net of current portion........................... $7,257,867 $16,812,828 $ 15,747,553 ========== =========== ===========
F-27 100 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Maturities of long-term debt are as follows:
YEARS ENDING DECEMBER 31, - ------------------------- 1996............................................. $ 1,214,613 1997............................................. 1,610,034 1998............................................. 2,002,794 1999............................................. 2,600,000 2000............................................. 3,000,000 Thereafter....................................... 7,600,000 ----------- $18,027,441 ===========
In addition to the above scheduled repayments, the Company is required to make principal payments in the amount of varying percents of excess cash flow. Excess cash flow is defined by the agreement, and the payment is due on April 15th of the following year. For the year ended December 31, 1994, additional principal was due of $238,558 and is reflected in the current portion of long-term debt. There is no excess cash flow payment due for the year ended December 31, 1995. According to the amended and restated Loan Agreement dated November 15, 1995, prepayment of loan principal equal to the percentage of the Company's excess cash flow for the immediately preceding calendar year commences in 1997 for the calendar year ended December 31, 1996. SENIOR DEBT ABN*AMRO BANK N.V. To finance the acquisition of its original operating assets, the Company entered into a loan agreement with ABN*AMRO Bank N.V. dated January 17, 1992 (the "ABN Agreement"). The ABN Agreement provided a total loan facility of $12,000,000 of which $11,000,000 represented a term loan and $1,000,000 represented a revolving line of credit. The ABN Agreement was amended pursuant to the first and second amendments dated March 31, 1994 and 1993, respectively. The Amendments primarily changed certain financial covenants, extended the maturity date and amortization of the term loan and provided for the payment of a fee to the Bank for its agreement to the second amendment. During the current year, the Bank agreed to extend additional credit to the Company for the purpose of making the acquisition referred to in Note 2, to fund future acquisitions and for other purposes specifically permitted by the Agreement. The additional credit was made available through an amendment to and a restatement of the original loan agreement. The amended and restated loan agreement is dated November 15, 1995. Under the terms of this credit agreement, the Bank has committed to advance to the Company the aggregate sum of up to $16,000,000. This commitment includes a term loan commitment of $13,500,000, a revolver loan commitment of $1,500,000 and an acquisition loan commitment of $1,000,000. Interest on the term loan and revolving line of credit is based on the Bank's prime rate plus 1 7/8 percent and is payable monthly. Interest on the term loan is also subject to the interest rate swap agreement entered into by the Company and ABN*AMRO Bank N.V. on March 31, 1994. All unpaid principal and interest is due on the maturity date of the above loans, December 31, 2001. Covenants contained in the ABN Agreement, which among other things, restrict the Company from incurring additional debt or capitalized lease obligations in excess of $200,000 and indebtedness not to exceed $250,000 for the purpose of acquiring motor vehicles at any one time while the loans are outstanding; investing in certain types of securities and granting any security interest in its assets other than permitted liens. The Agreement restricts declaring or paying any dividends and issuing, distributing, redeeming, repurchasing, acquiring or selling any stock or debt securities (except under certain circumstances). The Agreement also F-28 101 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) restricts sales and purchases of assets, mergers, and consolidations. Also, the Company must meet certain financial ratios relating to cash flows and the relationship of debt to cash flows. In addition, the Company will be in default of the Agreement if revenue from the advertisement of alcohol and tobacco products is greater than five percent of gross revenue. The borrowings under the Agreement are collateralized by the assets, the capital stock, existing or subsequently acquired assets, including patents, trademarks, copyrights and licenses, and leases of the Company. In addition, the Company must maintain life insurance of $2,000,000 on the President of the Company. The insurance policy is assigned to ABN*AMRO and serves as additional collateral. SUBORDINATED DEBT The proceeds of the subordinated debt listed above was used solely to partially finance the Naegele and Genesis acquisitions of November 15, 1995. The principal balance of the subordinated loans is due and payable on the maturity date, June 30, 2002. Interest accrues on the outstanding principal balance, including all accrued interest added to the principal of the loans, at a simple interest rate per annum of 18%. Beginning January 1, 1996 and on the first day of each calendar quarter until the maturity date, interest is due and payable at a simple interest rate of 12.5% from the Agreement date through and including December 31, 1996, and at a simple interest rate of 15.5% for the period from and after January 1, 1997. Accrued interest, which is not payable quarterly, shall be added to the outstanding principal amount of the subordinate loans and is compounded quarterly until paid. Under the terms of the subordinated agreements, the Company must comply with all of the covenants (affirmative and negative) as set forth in the Senior Loan Agreement. Also, if the subordinated loans are accelerated at any time prior to the third anniversary of the agreement dates, the present value of the sum of all the interest that would accrue from the acceleration date through and including the third anniversary date becomes due along with the outstanding principal and any accrued interest. NOTE 7 -- REDEEMABLE PREFERRED STOCK Preferred Stock -- Series A -- The holders of the outstanding Series A Preferred Stock shall be entitled to receive cumulative dividends at an annual rate of fifteen percent of the original issue price of $7.00 or $1.05 per share. Dividends shall accrue from day-to-day on each share from the date of issuance of each share whether or not earned or declared. Holders of Series A Preferred Stock can convert their shares at any time into Class A Common Stock on a share-for-share basis. Upon any conversion of Series A Preferred Stock to Class A Common Stock all accrued and unpaid cumulative dividends shall be forfeited. At December 31, 1994 and 1995, dividends on Preferred Stock were in arrears by $1,924,375 and $2,575,345, respectively. The Series A Preferred Stock holders have participation rights in any dividend other than a stock dividend declared and paid on Common Stock of the Company. Beginning in 1997, Series A Preferred Stock holders have the right to redeem their shares based on an optional redemption schedule. The redemption price shall be the greater of the fair market value per share or $7.00 per share plus all unaccrued and unpaid cumulative dividends. Also, upon any event of default, Series A Preferred Stockholders can redeem all shares outstanding at the redemption price, even prior to the redemption date of January 1, 1997, at the redemption price. NOTE 8 -- COMMON STOCK AND WARRANTS Class A Shares -- Of the authorized shares of Class A Common Stock, 619,972 shares are reserved for the conversion of the Preferred Stock to Class A Common Stock and 170,000 shares for the conversion of the Class B Common Stock into Class A Common Stock of the Company. F-29 102 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Class B Shares -- Certain stockholders of the Company to whom shares of Class B Common Stock have been issued will vest their rights in these shares over the next four years, based upon the Company's ability to achieve various performance goals and/or the passage of time. Treasury Stock -- The purchase of the Company's Common Stock is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the first-in -- first-out basis. Warrants -- Cascade Communications Ventures, L.P. and Coast Mezzanine Investments, Ltd., the subordinated lenders referred to in Note 2, were issued stock purchase warrants during the current year. Effective November 15, 1995, each Company is entitled to purchase 25,530 shares of Class A Common Stock at an exercise price of $.02 per share. The exercise period terminates on June 30, 2002. Among other things, the warrant agreements restrict stockholders' equity transactions that would dilute the value of their warrants. NOTE 9 -- DEFINED CONTRIBUTION PLAN The Company sponsors a defined contribution profit sharing plan. The plan was established by adopting a New England Mutual Life Company 401(k) prototype plan. It covers all eligible employees. The Company contributes to the plan an amount equal to fifty percent of the participant's salary reduction contributions for the plan year. Employer matching contributions are further limited to five percent of the participants compensation. Matching contributions for the current year amounted to $12,753. For the year ended December 31, 1994, matching contributions amounted to $9,639. Profit sharing contributions are made by the Company at the discretion of the Board of Directors. For the years ended December 31, 1994 and 1995, discretionary contributions of $15,000 were made. NOTE 10 -- INCOME TAXES The Company has approximately $4,808,000 of net operating losses available for Federal income tax purposes which begin to expire in 2007. The Commonwealth of Pennsylvania provides for the carryover of operating losses up to a maximum of $1,000,000 per year. Current operating loss carryovers are available through 1997. The income tax benefits are comprised of the following for the years ended December 31,
1994 1995 -------- -------- Current payable Federal...................................................... $ -- $ -- State........................................................ -- -- Deferred benefit (provision) Federal...................................................... 359,165 131,941 State........................................................ 80,804 60,502 -------- -------- Income tax benefit................................... $439,969 $192,443 ======== ========
F-30 103 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The components of the deferred income tax benefit, which result from temporary differences, are as follows:
1994 1995 -------- -------- Net operating loss (NOL)....................................... $550,909 $243,715 Allowance for doubtful accounts................................ (90,040) (7,327) Depreciation................................................... (49,524) (32,796) Employee severance expense..................................... (42,991) (9,809) Contribution carryover......................................... 3,619 355 Adjustment for enacted changes in state tax laws............... 67,996 (1,695) -------- -------- Total................................................ $439,969 $192,443 ======== ========
A reconciliation of income taxes at statutory rates to applicable income taxes reported in the statement of operations and deficit is as follows:
1994 1995 -------- -------- Benefit at the expected statutory rates........................ $485,975 $292,403 NOL carryover unallowable for state tax purposes............... (93,372) (19,797) Adjustment for enacted changes in state tax laws............... 67,996 (1,695) Non-deductible expenses for tax purposes....................... (13,889) (13,954) Other reductions, net........................................ (6,741) (64,514) -------- -------- Total................................................ $439,969 $192,443 ======== ========
Significant components of the Company's deferred tax assets and liabilities are as follows for the years ended December 31,
1994 1995 ---------- ---------- Deferred tax assets: Net operating loss (NOL).................................. $1,481,522 $1,948,867 Allowance for doubtful accounts........................... 22,603 12,847 Employee severance expense................................ 12,908 -- Contribution carryover.................................... 4,019 4,325 ---------- ---------- Total deferred tax assets......................... 1,521,052 1,966,039 Less valuation allowance.......................... (58,051) (278,935) ---------- ---------- 1,463,001 1,687,104 Deferred tax liability -- depreciation...................... (93,061) (124,721) ---------- ---------- Net deferred tax asset...................................... $1,369,940 $1,562,383 ========== ==========
NOTE 11 -- RELATED PARTY TRANSACTIONS The Company has entered into the following related party transactions: NOTE RECEIVABLE -- SHAREHOLDER The Corporation made a loan to a shareholder in the amount of $61,243. Interest accrues at a rate equal to the variable interest rate which is charged to the Company under the ABN*AMRO Bank N.V. Loan Agreement. Principal and interest is payable on demand. If no demand is made, the shareholder shall pay the amount of unpaid principal and accrued interest as of July 31, 1997, plus interest thereon, in eight equal quarterly installments commencing August 1, 1997. F-31 104 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) CONSULTING AGREEMENT Brush, Johnsen & Fretty, Inc., is providing the Company with certain consulting and investment banking services pursuant to an Agreement dated January 17, 1992. The principals of Brush, Johnsen & Fretty, Inc., are also shareholders in FKM. The Agreement terminates on January 16, 1999. EMPLOYMENT AGREEMENT The Company entered into an Employment Agreement dated May 18, 1994 with a shareholder of the Company. Under the Agreement, the shareholder was employed as President of the Company. The Agreement primarily provides for an annual salary, benefits and a performance bonus arrangement. Additional non-cash compensation in the form of the Company's Class B Common Stock was also provided to the President under the terms of the Agreement. ABN*AMRO BANK In connection with the second amendment to the loan agreement referred to in Note 5, the Company agreed to pay the Bank a fee equal to $206,880. On the amendment date, $25,860 was paid in cash and $181,020 was deferred and terms of repayment agreed upon. In accordance with section 2.4(d) of the amendment, the Bank opted to purchase shares of the Company's stock for $154,965 through the partial liquidation of the deferred fee. NOTE 12 -- COMMITMENTS AND CONTINGENCIES Leases The Company's advertising structures are located on properties leased from others. The Company also leases its corporate office and plant. Some of the land leases for advertising structures contain renewal options with varying terms and escalation clauses which provide, primarily on a yearly basis, for increased rental. The corporate office and plant lease has a five year term with one five year renewal term available. For the years ended December 31, 1994 and 1995, rent expense was $564,262 and $642,344, respectively. Future office and plant minimum rentals at December 31, 1995 are as follows:
DECEMBER 31, AMOUNT - ------------ ------- 1996................................................ $38,400 =======
NOTE 13 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at December 31, 1995, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying Balance Sheet. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. F-32 105 INDEPENDENT AUDITORS' REPORT The Partners Outdoor East, L.P.: We have audited the accompanying balance sheets of Outdoor East, L.P. as of December 31, 1994 and 1995, and the related statements of operations, partners' deficit, and cash flows for each of the years in the three year period ended December 31, 1995. 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 Outdoor East, L.P. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP March 1, 1996, except for note 8 which is as of June 13, 1996 F-33 106 OUTDOOR EAST, L.P. BALANCE SHEETS ASSETS
DECEMBER 31, --------------------------- SEPTEMBER 1994 1995 30, 1996 ------------ ----------- ----------- (UNAUDITED) Current assets: Cash and cash equivalents.......................... $ 251,659 485,383 1,026,360 Accounts receivable: Trade, net of allowance for doubtful accounts of $52,221 and $25,914 at December 31, 1995 and 1994, respectively, and $48,444 at September 30, 1996...................................... 1,655,990 1,840,843 1,836,483 Other........................................... 130,978 79,814 114,017 Prepaid expenses................................... 874,889 649,083 853,126 ------------ ---------- ---------- Total current assets....................... 2,913,516 3,055,123 3,829,986 Property and equipment, at cost, net of accumulated depreciation (note 2).............................. 17,368,265 16,197,181 15,565,545 Intangible assets, net of accumulated amortization: Site lease rights.................................. 1,710,467 1,213,698 857,740 Goodwill........................................... 1,878,216 1,743,641 1,644,397 Deferred financing costs and other (note 9)........ 214,589 152,923 1,717,172 ------------ ---------- ---------- 3,803,272 3,110,262 4,219,309 Other assets (note 9)................................ -- -- 775,472 ------------ ---------- ---------- $ 24,085,053 22,362,566 24,390,312 ============ ========== ========== LIABILITIES AND PARTNERS' DEFICIT Current liabilities: Current portion of long-term debt (notes 3 and 9).............................................. $ 655,588 21,990,932 866,667 Current portion of notes payable to general partner......................................... 37,072 45,627 -- Note payable (notes 4 and 9)....................... 445,000 445,000 -- Accounts payable: Trade........................................... 873,935 430,022 458,092 General partner (note 5)........................ 18,142 -- -- Accrued interest payable........................... 157,418 159,017 522,062 Other accrued liabilities.......................... 172,499 128,419 177,220 Deferred revenue................................... 485,854 483,957 -- ------------ ---------- ---------- Total current liabilities.................. 2,845,508 23,682,974 2,024,041 Long-term debt, less current portion (notes 3 and 9)................................................. 22,990,501 998,212 22,942,937 Notes payable to general partner (notes 5 and 9)..... 1,227,377 1,183,273 -- ------------ ---------- ---------- Total liabilities.......................... 27,063,386 25,864,459 24,966,978 Partners' deficit: Partners' capital contributions.................... 23,183,150 23,662,316 28,202,316 Accumulated deficit................................ (26,161,483) (27,164,209) (28,778,982) ------------ ---------- ---------- Total partners' deficit.................... (2,978,333) (3,501,893) (576,666) ------------ ---------- ---------- Commitments and contingencies (notes 3, 6, 7 and 9) $ 24,085,053 22,362,566 24,390,312 ============ ========== ==========
See accompanying notes to financial statements. F-34 107 OUTDOOR EAST, L.P. STATEMENTS OF OPERATIONS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------- ----------------------- 1993 1994 1995 1995 1996 ----------- ---------- ---------- --------- ---------- (UNAUDITED) Revenue: Advertising.................... $ 9,792,960 10,554,742 10,981,093 8,152,417 8,684,455 Other.......................... 359,515 809,276 526,440 343,113 545,212 ----------- ---------- ---------- --------- ---------- 10,152,475 11,364,018 11,507,533 8,495,530 9,229,667 ----------- ---------- ---------- --------- ---------- Operating expenses: Technical services............. 3,659,296 4,085,795 3,883,507 2,945,813 3,004,028 Selling, general and administrative.............. 3,324,964 3,835,728 3,548,336 2,737,045 2,698,636 Executive recruiting and severance................... 131,913 163,595 -- -- -- Management fees to general partner (note 5)............ 457,000 249,996 -- -- -- Depreciation and amortization................ 3,543,531 3,222,131 2,674,826 1,925,540 2,191,614 ----------- ---------- ---------- --------- ---------- 11,116,704 11,557,245 10,106,669 7,608,398 7,894,278 Operating income (loss)........ (964,229) (193,227) 1,400,864 887,132 1,335,389 ----------- ---------- ---------- --------- ---------- Other expenses: Interest expense............... 2,102,307 2,073,420 2,059,741 1,547,883 2,159,701 Loss on sale of assets......... 190,189 12,027 -- -- -- Other (note 9)................. 59,942 342,045 343,849 148,901 790,461 ----------- ---------- ---------- --------- ---------- Net income (loss)...... $(3,316,667) (2,620,719) (1,002,726) (809,652) (1,614,773) =========== ========== ========== ========= ==========
See accompanying notes to financial statements. F-35 108 OUTDOOR EAST, L.P. STATEMENTS OF PARTNERS' DEFICIT
PARTNERS' CAPITAL ACCUMULATED CONTRIBUTIONS DEFICIT TOTAL ------------- ----------- ---------- Balances, January 1, 1993............................ $16,233,150 (20,224,097) (3,990,947) Capital contributions.............................. 6,000,000 -- 6,000,000 Net loss........................................... -- (3,316,667) (3,316,667) ----------- ----------- ---------- Balances, December 31, 1993.......................... $22,233,150 (23,540,764) (1,307,614) Capital contributions.............................. 950,000 -- 950,000 Net loss........................................... -- (2,620,719) (2,620,719) ----------- ----------- ---------- Balances, December 31, 1994.......................... $23,183,150 (26,161,483) (2,978,333) Capital contributions.............................. 479,166 -- 479,166 Net loss........................................... -- (1,002,726) (1,002,726) ----------- ----------- ---------- Balances, December 31, 1995.......................... $23,662,316 (27,164,209) (3,501,893) Capital contributions (Note 9)..................... 4,540,000 -- 4,540,000 Net loss........................................... -- (1,614,773) (1,614,773) ----------- ----------- ---------- Balances, September 30, 1996 (unaudited)............. $28,202,316 (28,778,982) (576,666) =========== =========== ==========
See accompanying notes to financial statements. F-36 109 OUTDOOR EAST, L.P. STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------- ------------------------ 1993 1994 1995 1995 1996 ----------- ---------- ---------- --------- ----------- (UNAUDITED) Cash flows from operating activities: Net loss..................................... $(3,316,667) (2,620,719) (1,002,726) (809,652) (1,614,773) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............. 3,543,531 3,225,367 2,674,826 1,925,540 2,191,614 Gain (loss) on sale of assets............. (19,921) 12,027 -- -- -- Loss on disposition of assets............. 261,644 -- -- -- -- Changes in operating assets and liabilities: Decrease (increase) accounts receivable, prepaid expenses and other assets.... (353,900) (315,127) 92,117 30,149 (259,359) (Decrease) increase in accounts payable, accrued interest payable, other accrued liabilities, and deferred revenue.............................. 317,646 (427,469) (515,633) (415,765) (44,041) ----------- ---------- ---------- --------- ----------- Net cash provided by (used in) operating activities............... 432,333 (125,921) 1,248,584 730,272 273,441 ----------- ---------- ---------- --------- ----------- Cash flows from investing activities: Purchases of property and equipment.......... (2,281,251) (475,240) (810,732) (607,046) (783,580) Proceeds from sale of assets................. 27,204 -- -- -- -- ----------- ---------- ---------- --------- ----------- Net cash used in investing activities......................... (2,254,047) (475,240) (810,732) (607,046) (783,580) ----------- ---------- ---------- --------- ----------- Cash flows from financing activities: Capital contributions........................ 6,000,000 950,000 479,166 479,166 4,540,000 Proceeds from notes payable.................. 213,144 73,600 -- -- 22,750,000 Repayments of notes payable and long-term debt...................................... (3,970,883) (494,378) (683,294) (509,675) (23,603,440) Cash deposited in escrow..................... -- -- -- -- (750,000) Payment of debt issuance costs............... (280,645) -- -- -- (1,885,444) ----------- ---------- ---------- --------- ----------- Net cash provided by (used in) financing activities............... 1,961,616 529,222 (204,128) (30,509) 1,051,116 ----------- ---------- ---------- --------- ----------- Net increase (decrease) in cash and cash equivalents................... 139,902 (71,939) 233,724 92,717 540,977 Cash and cash equivalents at beginning of year......................................... 183,696 323,598 251,659 251,659 485,383 ----------- ---------- ---------- --------- ----------- Cash and cash equivalents at end of year....... $ 323,598 251,659 485,383 344,376 1,026,360 =========== ========== ========== ========= =========== Supplemental cash flow information: Cash paid for interest....................... $ 2,274,370 2,083,743 2,067,342 1,559,241 1,796,710 =========== ========== ========== ========= =========== Issuance of Note Payable for purchase of fixed assets (note 6).............................. $ -- 445,000 -- -- -- =========== ========== ========== ========= ===========
See accompanying notes to financial statements. F-37 110 OUTDOOR EAST, L.P. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1994 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Outdoor East, L.P. (the Partnership) is a Delaware limited partnership which acquires, operates and develops outdoor advertising businesses throughout the Southeast United States. The managing general partner of the Partnership is First Carolina Communications, Inc. (FCCI). The balance sheet as of September 30, 1996, and the statements of operations, partners' equity, and cash flows for the nine months ended September 30, 1995 and 1996 have been prepared by the Partnership without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial position, results of operations and cash flows as of September 30, 1996 and for the nine months ended September 30, 1995 and 1996, have been included. (b) Allocation of Profits and Losses The Partnership agreement generally provides for the allocation of profits and losses among the partners in proportion to their respective capital contributions. Profits and losses are allocated to the partners in the following percentages: 19.8% to the general partner and 80.2% to the limited partners. (c) Cash Equivalents For purposes of the statements or cash flows, the Partnership considers investments with original maturities of three months or less to be cash equivalents. (d) Revenue Recognition The Partnership recognizes advertising revenue as the services are provided. The revenue is recorded net of advertising agency commission expense. Allowances for doubtful accounts are provided based on estimated losses. (e) Property and Equipment Property and equipment are recorded at cost and depreciation is computed using various accelerated methods over the estimated useful lives of the assets as follows: buildings and improvements -- 31.5 years; sign structures -- 15 years; vehicles, shop equipment, leasehold improvements, and office furniture and equipment -- 5 to 7 years. Maintenance and repairs are expensed as incurred; and property additions, renewals and improvements are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is recognized. (f) Intangible Assets The Partnership's display structures are generally located on leased sites under long-term operating leases providing for monthly rental payments over the term of the lease, which generally range from 5 to 15 years. The estimated fair value of leases in place (arising from favorable terms) obtained in business combinations is allocated to site lease rights and amortized using the straight-line method over the weighted average remaining life of the leases. Additionally, direct costs associated with obtaining new site leases are capitalized and amortized over a period of five years. Accumulated amortization of site lease rights was approximately $5,299,000 and $5,808,000 at December 31, 1994 and 1995, respectively, and $6,164,000 at September 30, 1996 (unaudited). F-38 111 OUTDOOR EAST, L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Goodwill arising from business combinations is amortized using the straight-line method over a period of 20 years. Accumulated amortization of goodwill was approximately $765,000 and $896,000 at December 31, 1994 and 1995, respectively, and $1,002,000 at September 30, 1996 (unaudited). Direct costs associated with obtaining long-term debt are deferred and amortized using the straight-line method over the term of the loan agreement. Accumulated amortization of deferred finance costs was approximately $189,000 and $239,000 at December 31, 1994 and 1995, respectively, and $407,000 at September 30, 1996 (unaudited). (g) Income Taxes The Partnership's profits and losses are reported directly by the partners for income tax purposes. Accordingly, the Partnership is not liable for federal or state income taxes. (h) 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 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. (2) PROPERTY AND EQUIPMENT Property and equipment are summarized as follows:
SEPTEMBER 30, 1996 1994 1995 ----------- ----------- ----------- (UNAUDITED) Land........................................ $ 131,173 131,173 131,173 Buildings and leasehold improvements........ 1,191,124 1,205,286 1,218,028 Sign structures............................. 25,453,180 26,162,278 26,760,672 Vehicles.................................... 1,138,059 1,239,132 1,265,351 Shop equipment.............................. 183,766 206,401 221,355 Office furniture and equipment.............. 696,006 876,849 1,008,052 Construction in progress.................... 217,079 -- -- ----------- ----------- ----------- 29,010,387 29,821,119 30,604,631 Accumulated depreciation.................... (11,642,122) (13,623,938) (15,039,086) ----------- ----------- ----------- $17,368,265 16,197,181 15,565,545 =========== =========== ===========
F-39 112 OUTDOOR EAST, L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Depreciation expense for the years ended December 31, 1995 and 1994 was approximately $2,059,000 and $1,985,000, respectively, and $1,415,000 at September 30, 1996 (unaudited). (3) LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 30, 1996 1994 1995 ------------- ----------- ----------- (UNAUDITED) Term loan facility, secured by pledged assets and partnership interests, with interest payable quarterly at LIBOR plus 3.25%..................................... $ -- -- 22,500,000 Revolving line of credit, secured by pledged assets and partnership interests, with interest payable at LIBOR plus 3.25%...... -- -- 250,000 Bank credit facility, secured by pledge of assets, partnership interests and partial guarantee of majority limited partner, with interest payable quarterly at 7 7/8%.................................... 22,370,000 21,870,000 -- Note payable, secured by standby letter of credit, payable in 120 monthly installments of $6,250 plus interest at 10%, final installment of $750,000 due June 1, 1999.............................. 1,081,250 1,006,250 950,000 Other....................................... 194,839 112,894 109,604 ----------- ----------- ---------- 23,646,089.. 22,989,144 23,809,604 Less current portion........................ (655,588) (21,990,932) (866,667) ----------- ----------- ---------- $22,990,501 998,212 22,942,937 =========== =========== ==========
The bank credit facility is payable in graduated quarterly installments through December 31, 1999. The Bank Credit Facility Agreement (the "Agreement") contains restrictive covenants which include the maintenance of certain financial ratios. Effective March 28, 1994, the Agreement was amended to waive certain debt covenant violations and defaults and to revise certain provisions which, among other things, restrict capital expenditures and management fees. Effective June 15, 1995, the Agreement was further amended to revise certain covenants and to prohibit payment of management fees to FCCI. The Partnership failed to meet certain covenant requirements which has placed the Partnership in technical default. Consequently, the Partnership has classified the entire outstanding balance of the bank credit facility as a current liability as of December 31, 1995. Scheduled maturities of long-term debt are as follows: 1996............................................ $21,990,932 1997............................................ 106,386 1998............................................ 100,932 1999............................................ 790,894 ----------- $22,989,144 ===========
F-40 113 OUTDOOR EAST, L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Partnership has an open letter of credit with an available balance of $1,175,000. The Partnership pays an annual fee of 1.5% of the available balance. See note 9. (4) NOTE PAYABLE In 1994, the Partnership acquired $445,000 of signboards from Lamar Advertising, Inc., a Georgia based company in exchange for the issuance of a note payable. The note is dated September 30, 1994 and calls for interest at 9%, payable monthly. The note is due in full on May 1, 1996. See note 9. (5) RELATED PARTY TRANSACTIONS FCCI provides management services to the Partnership. During 1994, the Partnership paid $249,996 in management fees. As is required by a covenant in the Partnership's Bank Credit Facility Agreement, the Partnership did not pay management fees to FCCI during 1995. Accounts payable -- general partner primarily represents unpaid management fees due to FCCI, and are noninterest bearing. Notes payable to general partner represent unsecured advances from FCCI, which bear interest at 7 7/8%, payable in graduated quarterly installments. Any unpaid principal and interest is due in full on March 31, 2000. See note 9. (6) COMMITMENTS In the normal course of business, the Partnership maintains long-term operating leases for land site locations. The aggregate future minimum lease payments required under noncancelable operating leases as of December 31, 1995 were as follows: 1996............................................. $ 429,421 1997............................................. 389,410 1998............................................. 330,445 1999............................................. 271,513 2000............................................. 199,795 Thereafter....................................... 988,271 ---------- $2,608,855 ==========
Total site lease expense was approximately $1,467,000, $1,559,000 and $1,615,000, respectively, for the years ended December 31, 1993, 1994 and 1995 and approximately $1,218,000 for the nine months ended September 30, 1996 (unaudited). (7) LITIGATION On December 19, 1995, COA, Inc., formerly known as Columbia Outdoor Advertising, Inc. filed suit against Outdoor South, L.P. in the Court of Common Pleas of Richland County, South Carolina. Outdoor South, L.P. was formerly an affiliate of the Company and ceased to exist on October 25, 1990 in a transaction in which the Company succeeded to Outdoor South, L.P.'s assets and liabilities. The suit alleges that Outdoor South, L.P. is indebted to the plaintiff in the amount of $101,707 arising out of Outdoor South, L.P.'s acquisition of the assets of COA, Inc. in 1990. An answer denying liability has been filed in this action and no further proceedings have yet occurred. No charge has been made to the Company's income related to this litigation. F-41 114 OUTDOOR EAST, L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (8) LIQUIDITY The Partnership had a negative working capital balance of $20,627,851 as of December 31, 1995 as a result of its classifying the outstanding balance of the Bank Credit Facility as a current liability. The Partnership was in technical default of the Bank Credit Facility Agreement, since it failed to meet certain covenant requirements contained therein. On June 13, 1996, the Partnership signed a new Bank Credit Facility (the "Facility"). The Facility is comprised of a Term Loan Facility ( the "Term Loan") for $22.5 million and a Revolving Line of Credit (the "LOC") for up to $7.5 million. Quarterly installment payments on the Term Loan will commence on June 30, 1997. Outstanding balances under the LOC will be due on June 30, 2003, the Facility's termination date. Borrowings under the Facility are secured by the assets of the Partnership and partnership interests. Covenants under the Facility require the Partnership to maintain certain debt to cash flow ratios. The Partnership has placed $750,000 of the proceeds in escrow as provided for in the Facility. The escrow balance has been recorded in other non-current assets in the accompanying September 30, 1996 balance sheet. The remaining proceeds from the Facility were used to pay-off the Partnership's existing Bank Credit Facility, the note payable to Lamar Advertising, Inc., and for general purposes. In addition, the lenders and others invested $4,540,000 in the Partnership. (9) SUBSEQUENT EVENTS (UNAUDITED) In October 1996, the Partnership signed an agreement for the sale of the assets and liabilities of the Partnership to Lamar Advertising, Inc. Through September 30, 1996, the Partnership has recorded approximately $716,000 of cost associated with an initial potential sale and reorganization of the Partnership as other expenses. F-42 115 [PHOTOGRAPH OF POSTER, BULLETIN, HIGHWAY LOGO SIGN AND BUS SHELTER] 116 ====================================================== NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 12 The Transactions...................... 17 Use of Proceeds....................... 20 Dividend Policy....................... 20 Price Range of Class A Common Stock... 21 Capitalization........................ 22 Selected Consolidated Historical and Pro Forma Financial and Operating Data................................ 23 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 34 Business.............................. 41 Management............................ 55 Certain Transactions.................. 59 Principal Stockholders................ 60 Description of Capital Stock.......... 61 Shares Eligible for Future Sale....... 65 Description of Indebtedness........... 65 Underwriting.......................... 70 Certain Legal Matters................. 71 Experts............................... 71 Additional Information................ 71 Incorporation of Certain Documents by Reference........................... 72 Index to Consolidated Historical and Pro Forma Financial Statements...... F-1
====================================================== ====================================================== 2,200,000 SHARES [LAMAR LOGO] CLASS A COMMON STOCK ------------ PROSPECTUS NOVEMBER 22, 1996 ------------ SMITH BARNEY INC. ALEX. BROWN & SONS INCORPORATED PRUDENTIAL SECURITIES INCORPORATED ====================================================== -----END PRIVACY-ENHANCED MESSAGE-----