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ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 333-3338
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Minnesota 41-1540241
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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ADAMS OUTDOOR ADVERTISING, INC.
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(Exact name of registrant as specified in its charter)
Commission File No. 333-3338-01
Minnesota 41-1540245
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1380 West Paces Ferry Road, N.W., Suite 170, South Wing, Atlanta, GA 30327
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 233-1366
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. (Applicable only to Adams
Outdoor Advertising, Inc.)
Class Outstanding as of March 21, 1998
- ----- ---------------------------------
Common Stock,
$.001 par value 10,000
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CONTENTS
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PART I
ITEM 1. Business
General...................................................... 1
History...................................................... 1
Industry Overview............................................ 1
Business Strategy............................................ 3
Markets...................................................... 4
Sales and Marketing.......................................... 6
Local Market Operations...................................... 7
Competition.................................................. 8
Government Regulation........................................ 9
Employees.................................................... 11
ITEM 2. Facilities..................................................... 11
ITEM 3. Legal Proceedings.............................................. 12
ITEM 4. Submission of Matters to a Vote of Security Holders............ 12
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 12
ITEM 6. Selected Financial Data........................................ 12
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General...................................................... 14
Results of Operations........................................ 17
Liquidity and Capital Resources.............................. 19
Impact of Inflation.......................................... 20
Seasonality.................................................. 20
ITEM 8. Financial Statements and Supplementary Data.................... 21
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 21
PART III
ITEM 10. Management
Executive Officers and Directors............................. 21
Other Significant Management Personnel....................... 22
ITEM 11. Executive Compensation......................................... 24
ITEM 12. Security Ownership of Certain Beneficial Owners and Management. 27
ITEM 13. Certain Relationships and Related Transactions................. 28
PART IV
ITEM 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K.................................................... 29
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Item 1.
BUSINESS
General
Adams Outdoor Advertising Limited Partnership (the "Company") is the sixth
largest owner and operator of outdoor advertising structures in the United
States. Adams Outdoor Advertising, Inc. is the managing general partner of the
Company. The Company provides outdoor advertising services to fourteen markets
and surrounding areas in the Midwest, southeast and mid-Atlantic states:
Charlotte, NC; Charleston, SC; Orangeburg, SC; Florence, SC; Laurens, SC;
Kalamazoo, MI; Lansing, MI; Jackson, MI; Lehigh Valley, PA; Northeast PA;
Madison, WI; Minneapolis, MN; Norfolk, VA; and Peoria, IL. As of December 31,
1997, the Company operated, in the aggregate, 9,754 advertising displays,
including 2,719 painted bulletins, 6,372 30-sheet posters, 240 junior (8-sheet)
posters and 423 transit displays.
History
The Company's business was founded in 1983 with the acquisition of Central
Outdoor Advertising, which had offices in Lansing, Jackson and Kalamazoo, MI.
Over the next five years, the Company pursued a strategy of geographic expansion
into additional medium-sized markets, primarily through the acquisition of
existing outdoor advertising businesses in selected Midwest, southeast and
mid-Atlantic markets. This geographic expansion strategy has enabled the Company
to capitalize on the efficiencies, economies of scale and marketing
opportunities associated with operating outdoor advertising businesses located
in proximate or contiguous geographic markets to its primary markets. Since
1988, the Company's sales and growth in Operating Cash Flow (operating income
plus depreciation, amortization and deferred compensation expense) have resulted
from a concentration on rate and occupancy levels of existing inventory,
construction of new displays, upgrading of displays in existing markets,
acquisition of displays in existing markets, and new market acquisitions in
South Carolina and Pennsylvania.
Industry Overview
Outdoor advertising is one of several major advertising media that includes
television, radio, newspapers and magazines, among others. According to the
Outdoor Advertising Association of America, Inc. ("OAAA"), an industry trade
association, outdoor advertising in the United States generated total revenues
of approximately $2.1 billion in 1997, a record for the industry and an 8.8%
increase over 1996. Because of its repetitive impact and relatively low
cost-per-thousand impressions (a commonly used media standard), outdoor
advertising is attractive to both large national advertisers and smaller local
and regional businesses.
The principal outdoor advertising display is the billboard, of which there
are three standardized formats:
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. Painted bulletins are generally 14 feet high and 48 feet wide (672 square
feet) and consist of panels or a single sheet of vinyl that are hand
painted at the facilities of the outdoor advertising company or computer
painted in accordance with design specifications supplied by the
advertiser. The panels or vinyl are then transported to the billboard site
and mounted to the face of the display. On occasion, to attract more
attention, some of the displays are designed to extend beyond the linear
edges of the display face and may include three-dimensional embellishments
for which the outdoor advertising company often receives additional
revenue. Because of painted bulletins' greater impact and higher cost
relative to other types of billboards, they are usually located near major
highways, and space is usually sold to advertisers for periods of four to
twelve months.
. 30-sheet posters are generally 12 feet high by 25 feet wide (300 square
feet) and are the most common type of billboard. Lithographed or
silk-screened paper sheets that are supplied by the advertiser are
pre-pasted and packaged in airtight bags by the outdoor advertising company
and applied, like wallpaper, to the face of the display. The 30-sheet
posters are concentrated on major traffic arteries and space is usually
sold to advertisers for periods of one to twelve months.
. Junior (8-sheet) posters are usually 6 feet high by 12 feet wide (72 square
feet). The displays are prepared and mounted in the same manner as 30-sheet
posters. Most junior posters, because of their smaller size, are generally
concentrated on city streets and are targeted at pedestrian traffic. Space
on junior posters is usually sold to advertisers for periods of one to
twelve months.
Typically, billboards are mounted on structures that are owned by the
outdoor advertising company and located on sites that are owned or leased by it
or on which it has an easement. Leases of structure sites usually provide for a
term of three to ten years depending on locale. A structure may contain one or
more displays (generally two), each of which is referred to as a "face."
A more recent addition to the various types of outdoor advertising displays
is bus shelter displays and transit ads, which are located on the sides of
buses. Bus shelter displays are usually enclosed within glassed, back-lit cases
on two or more sides of a pedestrian shelter located at an urban bus stop.
Transit displays are inserted into panels on the sides and back exteriors of
buses. The advertisements appear on lithographed or silk-screened posters
supplied in a single sheet by the advertiser. Transit displays and bus shelter
displays generally are sold to advertisers for periods of one to twelve months.
Advertisers usually contract for outdoor displays (and other media
exposure) through advertising agencies, which are responsible for the artistic
design and written content of the advertising as well as the choice of media and
the planning and implementation of the overall campaign. Outdoor advertising
companies pay commissions to the agencies for advertising contracts secured
through such agencies. Advertising contracts are negotiated on the basis of the
monthly rates that are published in the outdoor advertising company's "rate
card." These rates, which are typically set annually during the first quarter of
each year, are based on a particular
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display's exposure (or number of "impressions" delivered) in relation to the
demographics of the particular market and its location within that market. The
number of "impressions" delivered by a display (measured by the number of
vehicles passing the site during a defined period and weighted to give effect to
such factors as its proximity to other displays and the speed and viewing angle
of approaching traffic) are determined by surveys that are verified by the
Traffic Audit Bureau, an independent agency which is the outdoor advertising
industry's equivalent of television's Arbitron ratings and which audits
approximately 175,000 outdoor advertising sites annually.
Advertisers purchase outdoor advertising for a variety of reasons. In the
case of restaurants, motels, service stations and similar roadside businesses,
the message reaches potential customers close to the point of sale and provides
ready directional information. For advertisers seeking to build product brand
name awareness, outdoor advertising is attractive because of its constant
repetition and comparatively low cost per thousand impressions.
According to the OAAA, the top ten categories of businesses ranked by
outdoor advertising expenditures for 1997 were entertainment, business and
consumer services, tobacco products, retail establishments, hotel/motel,
automotive, publishing and media, insurance and real estate, drugs and remedies,
and beer and wine.
Business Strategy
The Company's strategy is to focus its operations on providing value-added
outdoor advertising services to advertisers in medium-sized markets in which it
is or could be the leading provider of such services. The Company believes that
its focus on medium-sized markets allows it to achieve a dominant share of
outdoor advertising revenues and display faces within those markets. The Company
also believes that by educating current and potential customers on the
effectiveness of the outdoor medium, it has a significant opportunity to gain a
larger share of overall advertising expenditures. The Company's business
strategy comprises the following elements:
. Focus marketing efforts on local and regional advertisers in order to
develop and maintain a diverse client base and to limit reliance on
national advertising accounts. The Company believes that focusing on
local and regional advertisers helps generate stable revenue growth and
reduce its reliance on any single local economy or industry segment. In
1997 net revenues attributable to local and regional advertising
accounted for 89.5% of total net revenues.
. Take advantage of recent technological advances in computer and printing
technology, which allow the Company to provide higher quality
reproduction to its customers, thereby attracting new advertisers to the
outdoor medium.
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. Raise potential customers' awareness of the reach, impact and value of
outdoor advertising and convince customers to use outdoor advertising as
an integral part of their advertising plan.
. Continue to enhance sales, marketing and customer service capabilities.
The Company's salespersons are paid pursuant to a performance-based
compensation system and supervised by a local sales manager executing a
coordinated marketing plan.
. Increase revenues from existing display faces by developing programs
that maximize advertising rates and optimize occupancy levels in each
market. In addition, the Company also plans to continue to pursue new
advertising categories, such as transit buses and passenger shelters, to
further diversify the Company's revenue base.
. Expand operations within the Company's markets through construction of
new display faces and the upgrading of existing displays, placing an
emphasis on painted bulletins, which generally command higher rates and
longer contracts from advertisers.
. Pursue strategic acquisitions of outdoor displays in existing and
contiguous markets and capitalize on the efficiencies, economies of
scale and significant opportunities for inter-market cross-selling that
are associated with operating in proximate or contiguous geographic
markets.
The Company recognizes, and closely monitors, the needs of its customers
and seeks to provide them with a quality advertising product at a lower cost
than competitive media. The Company believes it has a reputation of providing
excellent customer service and quality outdoor advertising space. As such, the
Company is nationally recognized as a five star member (the highest ranking) of
the OAAA, a distinction currently held by only 35 of the approximately 800
members of the OAAA.
Markets
The Company operates in eleven geographically diverse medium-sized
markets that offer to local, regional and national advertisers significant areas
of population to whom advertising may be targeted. In addition, the Company
offers comprehensive outdoor advertising services, including local production
facilities and local representation, in all of its markets except in the
Minneapolis market.
The following table sets forth information as of December 31, 1997 with
respect to each of the Company's markets, including the ADI (as defined herein)
rank of that market and the number of each display type operated by the Company
in that market:
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<TABLE>
<CAPTION>
ADI Painted 30-Sheet 8-Sheet Transit
Market Ranking(a) Bulletins Posters Posters Displays Total
- ------ ---------- --------- -------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Charlotte, NC.................... 29 635 936 60 -- 1631
Lansing, MI...................... 108 306 504 -- -- 810
Jackson, MI (b).................. -- 164 423 -- -- 587
Kalamazoo, MI.................... 38 293 755 -- -- 1,048
Lehigh Valley, PA (c)............ -- 200 731 -- -- 931
Madison, WI...................... 88 77 253 -- 423 753
Norfolk, VA...................... 39 159 607 26 -- 792
Peoria, IL....................... 115 75 320 35 -- 430
Minneapolis, MN.................. 14 110 -- -- -- 110
Northeast PA..................... 48 173 557 -- -- 730
South Carolina................... 111 527 1286 119 -- 1932
---- ----- --- --- -----
Total............... 2719 6,372 240 423 9,754
==== ===== === === =====
</TABLE>
(a) Indicates the market rank of the area of dominant influence ("ADI"), as
determined by The Arbitron Company, within which the office is located.
ADIs are ranked based on population, with the market having the largest
population ranked first. ADI rank is the standard measure of market size
used by the media industry.
(b) The Jackson, MI market is included in the Lansing, MI ADI ranking.
(c) The Lehigh Valley market is included in the Philadelphia ADI ranking.
According to the U.S. Census Bureau, the Lehigh Valley market was the 86th
largest metropolitan statistical area in the United States at December 31,
1990, the latest date for which such information is available.
The following tables set forth information with respect to the net
revenues, operating income and operating margins for the Company's displays in
each of its markets for each of the past five years. Amounts presented for
Northeast PA and South Carolina include results from their acquisition dates of
November 8, 1996 and December 2, 1996, respectively, through December 31, 1997.
Net Revenues
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
Market 1997 1996 1995 1994 1993
-------------- ---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Charlotte, NC.................... $11,882 $10,499 $ 9,680 $ 8,646 $ 7,518
Lansing/Jackson, MI.............. 9,296 8,683 8,227 7,541 6,873
Kalamazoo, MI.................... 6,460 5,628 5,535 4,976 4,640
Lehigh Valley, PA................ 6,461 6,293 5,909 5,045 4,532
Madison, WI...................... 3,782 3,430 3,070 2,545 2,039
Norfolk, VA...................... 6,065 6,359 5,672 4,827 4,309
Peoria, IL....................... 3,016 2,836 2,562 2,397 2,028
Minneapolis, MN.................. 3,274 2,930 2,236 1,674 1,523
Northeast PA..................... 2,212 273 -- -- --
South Carolina................... 4,837 329 -- -- --
------- ------- ------- ------- -------
Total............... $57,285 $47,260 $42,891 $37,651 $33,462
======= ======= ======= ======= =======
</TABLE>
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Operating Income
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
Market 1997 1996 1995 1994 1993
------ ---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Charlotte, NC................. $5,425 $4,251 $ 3,602 $2,701 $1,904
Lansing/Jackson, MI........... 3,636 3,738 3,570 3,044 2,603
Kalamazoo, MI................. 2,646 2,409 2,440 1,967 1,852
Lehigh Valley, PA............. 2,500 2,495 2,161 1,466 1,155
Madison, WI................... 1,799 1,597 1,232 915 791
Norfolk, VA................... 2,479 2,798 2,279 1,387 955
Peoria, IL.................... 1,329 1,110 863 851 582
Minneapolis, MN............... 1,036 889 631 233 401
Northeast PA.................. 166 (8) -- -- --
South Carolina................ (735) (50) -- -- --
Corporate..................... (4,724) (4,342) (3,844) (2,871) (1,847)
------- -------- -------- ------- -------
Total....... $15,557 $14,887 $12,934 $9,693 $8,396
======= ======== ======== ======= =======
</TABLE>
Operating Margin
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
Market 1997 1996 1995 1994 1993
------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Charlotte, NC................. 45.7% 40.5% 37.2% 31.2% 25.3%
Lansing/Jackson, MI........... 39.1% 43.1 43.4 40.4 37.9
Kalamazoo, MI................. 41.0% 42.8 44.1 39.5 39.9
Lehigh Valley, PA............. 38.7% 39.6 36.6 29.1 25.5
Madison, WI................... 47.6% 46.6 40.1 36.0 38.8
Norfolk, VA................... 40.9% 44.0 40.2 28.7 22.2
Peoria, IL..................... 44.1% 39.1 33.7 35.3 28.7
Minneapolis, MN............... 31.6% 30.3 28.2 13.9 26.3
Northeast PA.................. 7.5% -- -- -- --
South Carolina................ (15.2%) -- -- -- --
----- ----- ----- ----- -----
Total....... 27.2% 31.5% 30.2% 25.7% 25.1%
===== ===== ===== ===== =====
</TABLE>
Sales and Marketing
The growth in the Company's revenues and Operating Cash Flow is primarily a
result of its focus on the use of sales and marketing staff to increase the
productivity of its inventory of displays while maintaining strict controls on
its expenses.
Historically, outdoor advertising companies have derived a significant
portion of their revenues from large national advertisers, such as tobacco
companies, auto manufacturers and distributors of alcoholic beverages. As
tobacco industry advertising purchases have declined in recent years, some
outdoor advertising companies have recently shifted their marketing focus to
local and regional advertisers to replace these lost revenues. Nonetheless,
large national advertisers continue to account for a significant percentage of
outdoor advertising industry revenues. Despite this fact, the Company believes
that sales to local and regional advertisers lend stability to its revenue
stream by diversifying its customer base. The Company emphasizes sales to local
and regional customers. In 1997, the Company generated approximately 89.5% of
its net
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revenues from local and regional sales. The Company believes that the Company's
local and regional focus enables it to capitalize on the growing use of outdoor
media by advertisers that historically have relied on other media in marketing
their products and services, such as consumer product companies, professional
service firms, health care providers and financial institutions.
The Company's sales and marketing strategy has been successful largely due
to the efforts of its team of general managers in its markets. These general
managers have an average of over 14 years of experience in the outdoor
advertising industry and are responsible for implementing the Company's sales
and marketing strategy. Each of the Company's markets has a team of account
executives that is supported locally by a creative department, which provides
innovative marketing ideas, generates art work and designs billboard advertising
for potential customers' advertising campaigns. In addition, each market has a
business development staff, which makes available comprehensive information
about local market research, customer needs and advertising opportunities. This
allows the Company to assess the impact and potential reach for a potential
target customer's display in a given market. The sales and marketing departments
focus on increasing revenues through developing new marketing programs for
customers, educating both current and potential customers on the effectiveness
of the outdoor advertising product relative to other advertising media and
integrating this medium into a customer's marketing plan. The Company's sales
personnel are compensated primarily on a commission basis which maximizes their
incentive to perform.
The following table illustrates the diversity of the Company's markets and
customers by setting forth the percentage of the Company's gross revenues for
1997 attributable to each of the top ten advertising categories:
1997 Revenues by Category
(Percent of Gross Revenues)
Total
Tobacco....................................................... 12.3%
Restaurants................................................... 9.7%
Automotive.................................................... 8.0%
Amusement..................................................... 5.7%
Hotel/Motel................................................... 5.1%
Radio/Television.............................................. 4.5%
Health Care................................................... 4.0%
Beverage-Alcoholic............................................ 3.1%
Real Estate................................................... 3.1%
Banking....................................................... 3.0%
All Others.................................................... 41.5%
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Total.............................................. 100.0%
=====
Local Market Operations
In each of its primary markets, the Company maintains a complete outdoor
advertising operation including a sales office, a construction and maintenance
facility, an art department
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equipped with state-of-the-art computer technology, a real estate unit and
support staff. The Company conducts its outdoor advertising operations through
these local offices, which is consistent with senior management's belief that an
organization with decentralized sales and operations is more responsive to local
market demand and provides greater incentives to employees. At the same time,
the Company maintains consolidated accounting and financial controls, which
allow it to monitor closely the operating and financial performance of each
market. The general managers, who report directly to the Company's chief
executive officer, are responsible for the day-to-day operations of their
offices and are compensated based on the financial performance of their
respective markets. In general, these local managers oversee market development,
production and local sales.
Each local office is responsible for locating and ultimately obtaining
sites for the displays in its market. Each office has a leasing department,
which maintains an extensive data base containing information on local property
ownership, lease contract terms, zoning ordinances and permit requirements. The
Company owns certain of the sites on which its displays are located and leases
others. Site lease contracts vary in term but typically range from three to ten
years with various termination and renewal provisions. As of and for the twelve
months ended December 31, 1997, the Company had approximately 3,630 active site
leases accounting for a total land lease expense of approximately $6.9 million,
representing approximately 12.0% of net revenues.
In each of its primary markets, the Company has construction and
maintenance facilities, which facilitate the expeditious and economical
construction and maintenance of displays and the painting and mounting of
customers' advertisements. Typically, the Company uses vinyl skins for
bulletins. The vinyl skins are reusable, thereby reducing the Company's
production costs, and are easily transportable. Due to the geographic proximity
of the Company's markets and the transportability of vinyl skins, the Company
can shift production among markets to use its available capacity more
effectively. The local offices also maintain fully equipped art departments to
assist local customers in the development and production of creative, effective
advertisements.
Competition
The Company competes in each of its markets with other outdoor advertisers
as well as other media, including broadcast and cable television, radio,
newspaper and direct mail marketers. In competing with other media, outdoor
advertising relies on its low cost-per-thousand impressions and its ability to
repetitively reach a broad segment of the population in a specific market or
geographic area within that market. In most of its markets, the Company
encounters direct competition from other major outdoor media companies,
including Outdoor Services, Inc. and Whiteco, among others, each of which has a
large national network and resources significantly greater than the Company's.
The Company believes that its focus on local and regional advertisers and its
position as the leading provider of full service outdoor advertising in each of
its primary markets enable it to compete effectively with other outdoor media
operators, as well
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as other media, both within those markets and in each respective region. The
Company also competes with other outdoor advertising companies for sites on
which to build new structures.
Government Regulation
The outdoor advertising industry is subject to governmental regulation at
the federal, state and local level. Federal law, principally the Highway
Beautification Act of 1965, encourages states, by the threat of withholding
federal appropriations for the construction and improvement of highways within
such states, to implement legislation to control outdoor advertising structures
located within 660 feet of or visible from interstates and primary highways,
except in commercial or industrial areas, and to force the removal at the
owner's expense and without any compensation of any nonconforming structures on
such highways. The Highway Beautification Act and the various state statutes
implementing it require the payment of just compensation whenever governmental
authorities require legally erected and maintained structures to be removed from
federally-aided highways.
States and local jurisdictions have, in some cases, passed additional
regulation on the construction, repair, upgrading, height, size and location of
outdoor advertising structures adjacent to federally-aided highways and other
thoroughfares. Such regulations, often in the form of municipal building, sign
or zoning ordinances, specify standards for the height, size and location of
outdoor advertising structures. In the event non-conforming advertising
structures are damaged, including damage caused by natural events, such as
windstorms and hurricanes, the Company may not be able to repair the structures.
In some cases, the construction of new or relocation of existing structures is
prohibited. Some jurisdictions also have restricted the ability to enlarge or
upgrade existing structures, such as converting from wood to steel or from
non-illuminated to illuminated structures. From time to time, governmental
authorities order the removal of structures by the exercise of eminent domain or
through various regulatory actions or other litigation. In such cases, the
Company seeks compensation under appropriate procedures and thus far, the
Company has been able to obtain satisfactory compensation for any of its
structures removed at the direction of governmental authorities. However,
compensation may not always be available in such circumstances. Some
municipalities have attempted to regulate outdoor advertising by taxing revenues
attributable to advertising structures, or by requiring the payment of annual
permit fees based on factors such as the square footage of an outdoor
advertising company's display faces, located in those municipalities. Other
municipalities take into account lease payments received by lessors of property
on which advertising structures are located in making property tax assessments.
These taxes and fees can increase an outdoor advertising company's direct
operating costs.
Amortization legislation has also been adopted in some areas across the
country, including Charlotte, NC, one of the Company's markets. Amortization
only permits the owner of an outdoor advertising structure to operate its
structure as a non-conforming use for a specified period of time, after which it
must remove or otherwise conform its structure to the applicable regulations at
its own cost without any compensation. Some jurisdictions require the removal of
certain structures without any compensation if there is a change in use of the
premises (e.g.,
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construction on previously unimproved land). Amortization and such other
regulations requiring the removal of structures without compensation currently
are subject to vigorous litigation in the state and federal courts, which have
reached differing conclusions as to their constitutionality.
In 1988, the city of Charlotte, NC, adopted a comprehensive sign ordinance
prohibiting the construction of virtually all new off-premises outdoor
advertising signs within the City limits and mandating that all non-conforming
signs either be brought into compliance or be removed by February 1, 1996 at the
owner's expense without payment of compensation. Through March 1998, the Company
received a total of 307 NOV's (notices of violation). The company does not
anticipate the issuance of any additional NOV's by the City of Charlotte. The
removal period for signs that cannot be brought into compliance was extended
until February 1, 1998 by a blanket variance granted by the City. The Company
could be forced to remove approximately 250 nonconforming signs at its expense,
with a material adverse impact on the gross revenues and cash flow attributable
to the Charlotte market, but, in the opinion of management, not on the financial
condition of the Company as a whole. In 1988 the Company filed a lawsuit in the
Superior Court of Mecklenburg County, North Carolina, challenging the
constitutionally of the sign ordinance. This litigation was stayed by mutual
agreement until November 1997. The stay has expired, and the parties are now
engaged in discovery and preparation for trial. The Company has been advised
that it will be approximately five years before that is a final resolution of
the litigation and that no signs will have to be removed until a final judgement
has been entered against the Company. Accordingly, the Company believes it is
unlikely that any nonconforming signs will have to be removed until 2003 or
later, if at all.
In other localities in which the Company operates, outdoor advertising is
subject to restrictive and, in some cases, prohibitive zoning regulations.
Management expects federal, state, and local regulations to continue to be a
significant factor in the operation of the Company's business
In recent years, there have been movements to restrict billboard
advertising of certain products, including tobacco and alcohol. No bills have
become law at the federal level except those requiring health hazard warnings
similar to those on cigarette packages and print advertisements. It is uncertain
whether legislation of this type will be enacted in the future. Most recently,
in May 1996, Phillip Morris U.S.A., the domestic tobacco subsidiary of Phillip
Morris Companies Inc., announced a proposal for comprehensive federal
legislation to address concerns regarding the use of tobacco products by minors
which included provisions that would ban all outdoor tobacco product advertising
within 1,000 feet of any playground or elementary or secondary school, on
8-sheet-posters in urban neighborhoods and on transit displays.
In addition, it has been reported that certain cigarette manufacturers
who are defendants in numerous class-action suits throughout the United States
have reached agreement with the Attorneys General of various states for an out
of court settlement with respect to such suits. The settlement is subject to
various conditions including approval and implementing legislation by the United
States Congress. A reduction in outdoor advertising by the tobacco industry
would cause an immediate reduction in the Company's direct revenue from such
advertisers at least in the immediate term following the imposition of such ban
while alternate sources of advertising
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are secured. Such ban would also increase the available space on the existing
inventory of billboards in the outdoor advertising industry. This could in turn
result in a reduction of outdoor advertising rates in each of the Company's
outdoor advertising markets or limit the ability of industry participants to
increase rates for some period of time. Accordingly, there can be no assurance
that the Company will immediately replace tobacco industry advertising revenue
in the event of a total ban of tobacco advertising on outdoor billboards and
signs and the consequences of such ban could have a material adverse affect on
the Company. Furthermore, even in the event the advertising ban does not take
place, state and local governments have recently proposed and some have enacted
regulations restricting or banning outdoor advertising of tobaccos in certain
jurisdictions.
To date regulations applicable in the Company's markets have not materially
affected its operations, and compliance with those regulations has not had a
material impact on its costs. No assurance can be given, however, as to the
effect of changes in those regulations or of new regulations that may be adopted
in the future.
Employees
As of December 31, 1997, the Company employed 334 persons, of whom
approximately 117 were primarily engaged in sales and marketing, 157 were
engaged in painting, posting, construction and maintenance of displays, and the
balance were employed in financial, administrative and similar capacities. No
employees are covered by a collective bargaining agreement except for five
production shop workers in Peoria, IL covered by a collective bargaining
agreement with the Brotherhood and Painters and Allied Trades that expires on
December 31, 1998. Management considers its employee relations to be good.
Item 2.
Facilities
The Company's corporate office is located in Atlanta, GA. In addition, the
Company has an office and complete production and maintenance facilities in each
of Charlotte, NC; Charleston, SC; Orangeburg, SC; Florence, SC; Laurens, SC;
Kalamazoo, MI; Lansing, MI; Jackson, MI; Lehigh Valley, PA; Northeast PA;
Madison, WI; Norfolk, VA; and Peoria, IL. Additionally, the Company has a sales
office in Minneapolis, MN. The Peoria and Minneapolis facilities are leased, and
all other facilities are owned. The Company considers its facilities to be well
maintained and adequate for its current and reasonably anticipated future needs.
The Company owns approximately 146 parcels of real property that serve as
the sites for its outdoor displays. The Company also has easements on
approximately 48 parcels of real property on which it has outdoor displays.
Additionally, the Company's displays are located on sites leased or licensed by
the Company, typically for three to ten years with renewal options.
11
<PAGE>
Item 3
Legal Proceedings
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, construction matters, condemnation and amortization.
The Company is also involved in routine administrative and judicial proceedings
regarding permits and fees relating to outdoor advertising structures 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. See "Business--Government Regulation."
Information contained in this Annual Report, including, without limitation
information in this Business section may contain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
which can be identified by the use of forward-looking terminology as "may,"
"will," "would," "expect," "anticipate," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable terminology. Certain
factors, including, the Company's substantial leverage, regulation of outdoor
advertising by federal, state and local governments, tobacco advertising
patterns, competition and general economic conditions, could cause actual
results to differ materially from those in such forward-looking statements.
Item 4
Submission of matters to a vote of security holders
None.
Part II
Item 5
Market for Registrant's Common Equity and Related Stockholder Matters
Not Applicable.
Item 6
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data, insofar as it
relates to each of the years in the five-year period ended December 31, 1997,
has been derived from the Company's
12
<PAGE>
financial information and should be read in conjunction with the audited
financial statements, including the Company's balance sheets at December 31,
1996 and 1997 and the related statements of operations for each of the years in
the three-year period ended December 31, 1997 and the notes thereto appearing
elsewhere in this Form 10-K. The selected consolidated financial data should
also be read in conjunction with the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Gross revenues......................... $63,302 $52,421 $ 47,589 $ 41,748 $ 36,972
Agency commissions..................... 6,017 5,161 4,698 4,097 3,510
------- ------- -------- -------- --------
Net revenues........................... 57,285 47,260 42,891 37,651 33,462
Direct advertising expenses............ 29,089 22,412 20,848 19,561 17,539
Corporate general and administrative
expense............................... 3,589 2,405 1,114 1,183 998
Depreciation and amortization.......... 8,149 6,105 5,568 5,684 5,893
Deferred compensation expense(a)....... 901 1,451 2,427 1,530 636
------- ------- -------- -------- --------
Operating income....................... 15,557 14,887 12,934 9,693 8,396
Interest expense....................... 14,601 12,523 11,263 9,877 9,111
Other expenses (income), net........... 43 (32) 16 38 (164)
Loss on disposal of assets, net........ 122 861 93 388 388
------- ------- -------- -------- --------
Net income (loss).................. $791 $1,535 $ 1,562 $ (610) $ (939)
======= ======= ======== ======== ========
As of December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents.............. $3,121 $3,533 $2,131 $1,722 $1,990
Working capital........................ 3,096 4,969 5,944 4,646 4,348
Total assets........................... 77,474 77,114 48,211 50,650 54,637
Total debt............................. 135,034 133,421 107,443 113,261 118,124
Total partners' deficit................ $(69,586) $(68,444) $(66,829) $(68,391) $(67,781)
Year ended December 31,
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Other Data:
Operating Cash Flow(b)................. $24,606 $22,443 $ 20,929 $ 16,907 $ 14,925
Capital expenditures................... $7,646 $4,419 $ 2,251 $ 1,926 $ 1,661
Ratio of earnings to fixed charges(c).. 2.07x 2.19x 1.07x -- --
Ratio of debt to net income(d)......... 170.71 86.92 68.79 -- --
Cash flow provided by (used in):
Operating activities............... $7,150 $12,537 $ 9,151 $ 7,092 $ 4,984
Investing activities............... $(7,462) $(28,675) $ (1,979) $ (1,791) $ (1,654)
Financing activities............... (100) $17,540 $ (6,763) $ (5,569) $ (2,769)
</TABLE>
(a) Deferred compensation expense represents accrued expenses under certain
deferred compensation arrangements, including phantom stock and nonqualified
retirement plan agreements with certain key management personnel. The
phantom stock agreements in effect provide for the repurchase of the
"phantom stock" in three equal annual payments after each executive's
termination, death or disability, the sale of the Company, or the fifth
anniversary of the agreement's execution. See "Management--Agreements with
Management--Incentive Compensation."
(b) The following table sets forth the calculation of "Operating Cash Flow."
13
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating income...................... $15,557 $14,887 $ 12,934 $ 9,693 $ 8,396
Depreciation and amortization......... 8,148 6,105 5,568 5,684 5,893
Deferred compensation expense......... 901 1,451 2,427 1,530 636
------- ------- -------- -------- --------
Operating Cash Flow................... $24,606 $22,443 $ 20,929 $ 16,907 $ 14,925
======= ======= ======== ======== ========
</TABLE>
Operating Cash Flow is not intended to represent net cash flow provided by
operating activities as defined by generally accepted accounting principles
and should not be considered as an alternative to net income (loss) as an
indicator of the Company's operating performance or to net cash provided by
operating, investing and financing activities as a measure of liquidity or
ability to meet cash needs. The Company believes Operating Cash Flow is a
measure commonly reported and widely used by analysts, investors and other
interested parties in the media industry. Accordingly, this information has
been disclosed herein to permit a more complete comparative analysis of the
Company's operating performance relative to other companies in the media
industry. However, the definition of Operating Cash Flow or of similarly
defined terms may vary among companies and such differences should be noted
in comparing the Company's operating performance relative to other
companies. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(c) Earnings consist of operating income plus fixed charges adjusted to exclude
capitalized interest. The Company's fixed charges consist of interest
expense plus amortization of deferred financing costs. Earnings were
inadequate to cover fixed charges by approximately $1.6 million and $1.3
million for the years ended December 31, 1993 and 1994, respectively.
(d) The ratio of total debt to net income for the years ended December 31, 1993
and 1994 is not meaningful due to the net losses for those periods.
Item 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The Company is the sixth largest owner and operator of outdoor advertising
structures in the United States. The Company provides outdoor advertising
services through fourteen facilities in the Midwest, southeast and mid-Atlantic
states: Charlotte, NC; Charleston, SC; Orangeburg, SC; Florence, SC; Laurens,
SC; Kalamazoo, MI; Lansing, MI; Jackson, MI; Lehigh Valley, PA; Northeast PA;
Madison, WI; Minneapolis, MN; Norfolk, VA; and Peoria, IL. As of December 31,
1997, the Company operated 9,754 advertising displays, including 2,719 painted
bulletins, 6,372 30-sheet posters, 240 junior (8-sheet) posters and 423 transit
displays.
The Company's business was founded in 1983 with the acquisition of Central
Outdoor Advertising, which had offices in Lansing, Jackson and Kalamazoo, MI.
Over the next five years, the Company pursued a strategy of geographic expansion
into additional medium-sized markets, primarily through the acquisition of
existing outdoor advertising businesses in selected Midwest, southeast and
mid-Atlantic markets. This geographic expansion strategy has enabled the Company
to capitalize on the efficiencies, economies of scale and marketing
opportunities associated with operating outdoor advertising businesses located
in proximate or contiguous geographic markets.
As a result of its acquisition of outdoor advertising businesses from 1983
to 1988, the Company incurred substantial debt. Interest expense required to
service such debt, together with depreciation and amortization, has contributed
to historical marginal profits for the Company.
14
<PAGE>
Since 1991, the Company has continued to strengthen its market share
through the construction and acquisition of displays in its existing markets,
introduction of transit advertising in its Madison, WI market and acquisitions,
in the last quarter of 1996, of operations in South Carolina and Pennsylvania.
This expansion has been financed through internally generated cash flow and
borrowings from the Company's $35 million credit facility.
The following table presents certain information from the Consolidated
Statements of Operations as a percentage of net revenues for each of the three
years in the three-year period ended December 31, 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues................................................ 100.0% 100.0% 100.0%
Direct advertising expenses................................. 50.8 47.4 48.6
Corporate general and administrative expenses............... 6.2 5.1 2.6
------ ------ ------
Operating Cash Flow......................................... 43.0 47.5 48.8
Depreciation and amortization............................... 14.2 12.9 13.0
Deferred compensation expense............................... 1.6 3.1 5.6
------ ------ ------
Operating income............................................ 27.2 31.5 30.2
Interest expense............................................ 25.5 26.5 26.3
Other expenses (income), net................................ 0.1 (0.1) 0.1
Loss on disposals of property and equipment, net............ 0.2 1.8 0.2
------ ------ ------
Net income (loss)........................................... 1.4% 3.3% 3.6%
====== ====== ======
</TABLE>
The Company's revenues are a function of both the occupancy rate of the
Company's outdoor advertising display inventory (the percentage of time that its
displays contain paid-for advertisements) and the rates that the Company charges
for use of its displays. The Company's business strategy includes the
optimization of the mix of rate and occupancy of its display inventory in order
to maximize revenues. Advertising rates for the Company's displays are based
upon a variety of factors, including historical base rates, the time of year,
and the occupancy rate of a particular market's display inventory.
The following table presents the number of painted bulletins and 30-sheet
poster displays operated by the Company and the average rates and occupancy
levels with respect to such displays for the three years ended December 31,
1997:*
15
<PAGE>
Years Ended December 31,
------------------------
1997 1996(2) 1995(2)
---- ---- ----
Number of Displays:
Painted Bulletins...................... 2,135 1,750 1,725
30-Sheet Posters....................... 4,892 4,418 4,464
Average Rates: (1)
Painted Bulletin....................... $1,624 $1,610 $1,495
30-Sheet Posters....................... $529 $523 $ 497
Average Occupancy:
Painted Bulletins...................... 73% 78% 76%
30-Sheet Posters....................... 69% 71% 72%
(1) Represents average rate per display per month
(2) The above figures for 1996 do not include the Company's operations in
Northeast PA or South Carolina acquired during the fourth quarter of 1996;
for 1997, all are included except South Carolina.
The primary operating expenses incurred by the Company are advertising
agency commissions, lease payments to property owners for use of the land on
which the Company's displays are located, operational and administrative costs
and sales expenses (primarily commissions). Of these expenses, advertising
agency commissions, sales expenses, and certain operational and administrative
costs are considered direct costs. Commissions are paid to advertising agencies
that contract for the use of the Company's advertising displays on behalf of
advertisers. These agency commissions are deducted from gross revenues to
calculate net revenues.
The Company currently maintains a phantom stock program under which certain
executive management personnel and general managers have the ability to earn
deferred compensation based upon the operating performance of the Company or, in
the case of the general managers, their respective divisions. Annual accruals
under the program are based upon exceeding a base level of operating profit. The
Company believes that its phantom stock program provides its senior employees
incentives to continue improving the operating performance of the Company.
The Company's marketing strategy of servicing local and regional
advertisers and reducing its dependence on national and tobacco advertising
resulted in moderate increases in overall revenues during a time when national
advertising dollars, primarily tobacco, were declining. The Company concentrates
its marketing efforts on generating sales from local and regional advertisers in
each of its markets, including those advertisers within industries and product
categories that have not historically been traditional users of outdoor media.
These potential advertisers include fast food restaurants, retailers, food
stores, casinos, cellular and telecommunications companies, building supply
retailers, radio stations, travel-related industries and medical care providers.
This focus on local and regional advertisers has been critical to the Company's
ability to control revenue fluctuations resulting from the variability and
potential long-term decline of revenues attributable to the tobacco products
industry, the latter of which
16
<PAGE>
represented 10.5% in 1997, 12.5% in 1996, 12.6% in 1995, 10.3% in 1994, and
10.2% of the Company's net revenues in 1993. Sales to local and regional
advertisers accounted for 89.5% of the Company's net revenues in 1997.
The Company's sales and marketing strategy has been successful largely due
to its team of general managers in its markets. These key managers have an
average of 14 years of industry experience. The Company also has integrated a
business development department into each market, making available to each
region's sales force comprehensive information about local market research,
customer needs and advertising opportunities. The business development
departments have given the Company's sales departments significantly improved
information and tools to develop additional local and regional advertising
customers, especially with many customers that have not historically advertised
through the outdoor medium. Sales representatives have been able to use these
additional resources to develop creative ideas for new customers and educate
them about the cost effectiveness of outdoor advertising in attempting to reach
their customers. The Company considers its emphasis on local and regional sales,
the expertise and tenure of its managers and its marketing and customer service
capabilities to be factors which enhance the productivity of its inventory of
advertising displays.
Results of Operations
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Net revenues (gross revenues net of agency commissions) for 1997 of $57.3
million increased by 21.2% from $47.3 million for 1996. This increase resulted
from higher advertising rates in certain markets and an increase in the number
of displays sold as well as the increased net revenue of $ 6.4 million from
operations in South Carolina and Northeast Pennsylvania which were acquired in
the fourth quarter of 1996.
Direct advertising expenses for 1997 of $29.1 million increased by 29.8%
from $22.4 million in 1996. The increase was attributable to direct costs
associated with increased sales from new displays, an increase in sales
commissions due to higher average rates, and $5.0 million in additional direct
costs associated with the first full year of operations for the South Carolina
and Northeast Pennsylvania branches acquired in 1996.
Corporate, general and administrative expenses for 1997 of $3.6 million
increased by 49.2% from $2.4 million in 1996. This increase was attributable to
increased professional fees, travel expenses, relocation expenses, and single
use business taxes.
Depreciation and amortization for 1997 of $8.1 million increased by 33.5%
from $6.1 million in 1996. Depreciation expense increased as a result of
additions to property, plant and equipment during 1996 and early 1997 from
acquisitions and building of new structures.
17
<PAGE>
Deferred compensation expense for 1997 of $901,000 decreased by 37.9%
from $1.5 million in 1996 primarily due to the removal of the Chief Financial
Officer from the phantom stock plan and management changes in the Michigan
market.
Interest expense for 1997 of $14.6 million increased 16.6% from $12.5
million in 1996. This increase was attributable to a higher outstanding balance
in 1997. The Company's effective interest rate was 10.4% for 1997 and 1996.
Net income for 1997 decreased to $791,000 from $1.5 million in 1996 as a
result of the items discussed above.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Net revenues for 1996 of $47.3 million increased by 10.2% from $42.9
million in 1995. This increase resulted primarily from higher advertising rates.
In addition, $603,000 of the increase was attributable to revenues from
operations in South Carolina and Northeast PA acquired by the Company in the
fourth quarter of 1996.
Direct advertising expenses for 1996 of $22.4 million increased by 7.5%
from $20.8 million in 1995. The increase was attributable to direct costs
associated with increased sales as well as increased lease costs, primarily from
the construction of new displays in the Minneapolis, MN market.
Corporate general and administrative expenses for 1996 of $2.4 million
increased from $1.1 million in 1995. The increase was attributable principally
to additional costs associated with the refinancing of the Company's debt in
1996.
Depreciation and amortization for 1996 of $6.1 million increased by 9.6%
from $5.6 million in 1995. This increase resulted from the depreciation for
outdoor advertising structures newly constructed in 1995 and 1996 as well as
$220,000 of additional depreciation and amortization with respect to operations
in South Carolina and Northeast PA acquired in the last quarter of 1996.
Deferred compensation expense for 1996 of $1.5 million decreased from $2.4
million in 1995. The decrease resulted from the termination in 1995 of the
phantom stock incentive agreement with the chief executive officer of the
Company as well as limitations effected in 1996 with respect to the phantom
stock incentive agreement with the chief financial officer of the Company.
Interest expense for 1996 of $12.5 million increased by 11.2% from $11.3
million in 1995. This increase was attributable to higher interest rates in
1996, on the Company's 10-3/4% Senior Notes issued in March 1996 and costs
associated with such financing. In addition, the acquisitions made in the fourth
quarter increased the Company's borrowings under its revolving
18
<PAGE>
credit agreement. The Company's effective interest rate increased to 11.1% in
1996 from 9.8% in 1995.
The loss on disposal includes a $662,000 one-time charge for the
disposition of in-store advertising equipment
Net income for 1996 decreased to $1.5 million from $1.6 million in 1995
primarily as a result of the items discussed above.
Operating Cash Flow for 1996 of $22.4 million increased by 7.2% from $20.9
million in 1995. This increase was directly attributable to the aforementioned
increase in net revenues coupled with only a modest increase in total operating
expenses.
Liquidity and Capital Resources
Historically, the Company's cash needs have arisen from operating expenses
(primarily direct advertising expenses and corporate general and administrative
expenses), debt service, capital expenditures and deferred compensation payments
under phantom stock agreements. The Company's interest expense was $14.6 million
in 1997, $12.5 million in 1996, and $11.3 million in 1995.
The Company's primary sources of cash are net cash generated from operating
activities and borrowings under its credit facility. The Company's net cash
provided from operations decreased by 43.0% to $7.1 million for 1997 and,
increased by 36.6% to $12.5 million for 1996 and 29.0% to $9.2 million for 1995.
In 1996 the Company issued $105 million in aggregate principal amount of
its 10-3/4% Senior Notes due 2006 and entered into a revolving credit facility,
which was increased to $35 million in December 1996. As a result of such
financings, and borrowings for acquisitions in 1996 and for capital expenditures
in 1997, the average outstanding indebtedness increased in 1996 and 1997. During
1995 the Company had interest expense of approximately $11.3 million on average
outstanding indebtedness of approximately $111.8 million, resulting in an
effective annual interest rate of 10.7%.. During 1996 the Company had interest
expense of $12.5 million on average outstanding indebtedness of approximately
$112.3 million, resulting in an effective annual interest rate of 10.4%. During
1997 the Company had interest expense of $14.6 million on average outstanding
indebtedness of $135.3 million, resulting in an effective annual interest rate
of 10.4%. Scheduled interest payments on the Notes aggregate approximately $11.3
million per year.
Permitted borrowings under the revolving credit facility are subject to
various conditions, including the attainment of certain performance measures by
the Company. Scheduled reductions in the lenders' commitments under the
revolving credit facility will commence in 1998. The
19
<PAGE>
agreement governing the revolving credit facility contains a number of
covenants that are more restrictive than those contained in the Indenture,
including covenants requiring the Company to maintain certain financial ratios
that become more restrictive over time. Adverse operating results could cause
noncompliance with one or more of these covenants, reducing the Company's
borrowing availability and, in certain circumstances, entitling the lenders to
accelerate the maturity of outstanding borrowings.
The Company believes that net cash provided from operations and available
credit under the revolving credit facility will be sufficient to meet its cash
needs for its current operations, required debt payments, anticipated capital
expenditures and the deferred compensation payments for the reasonably
foreseeable future.
The Company increased its debt by $1.8 million in 1997, $26.0 million in
1996, and reduced its debt by $5.8 million in 1995. The Company also made
capital expenditures, primarily for new billboard construction in existing
markets, of $7.6 million in 1997, $4.4 million in 1996, and $2.3 million in
1995. The Company expects that its capital expenditures during 1998 will be
approximately $5.0 million and will be primarily for new billboard construction
and the upgrading of existing displays. The Company expects to finance such
capital expenditures with cash flow provided by operating activities or
borrowings under the revolving credit facility.
Impact of Inflation
Though increases in operating costs could adversely affect the Company's
operations, management does not believe that inflation has had a material effect
on operating profit during the past several years.
Seasonality
Although revenues during the first and fourth quarters are slightly lower
than the other quarters, management does not believe that seasonality has a
significant impact on the operations or cash flow of the Company.
Information contained in this Form 10-K, including, without limitation in
the foregoing Management's Discussion and Analysis of Financial Condition and
Results of Operations may contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, which can be
identified by the use of forward-looking terminology as "may," "will," "would,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. Certain factors, including
the Company's
20
<PAGE>
substantial leverage, regulation of outdoor advertising by federal, state and
local governments, tobacco advertising patterns, competition and general
economic conditions, could cause actual results to differ materially from those
in such forward-looking statements.
New Accounting Standards
Statement of Financial Accounting Standards No. 130. "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
believes that its components of comprehensive income will consist principally of
traditionally-determined net income adjustments. This Statement is effective
for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" establishes revised standards
for the manner in which public business enterprises report information about
operating segments. The Company does not believe that this Statement will
significantly alter the disclosures it currently provides. This Statement is
effective for fiscal years beginning after December 15, 1997.
Item 8
Financial Statements and Supplementary Data
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Part III
Item 10
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of Adams Outdoor Advertising, Inc.,
the managing general partner of the Company, are as follows:
<TABLE>
<CAPTION>
Name Age Position
--------------------------------- --- ------------------------
<S> <C> <C>
Stephen Adams.................... 60 Chairman of the Board
J. Kevin Gleason................. 46 Chief Executive Officer, President and
Director
Abe Levine....................... 44 Chief Financial Officer, Vice
President, Secretary and Treasurer
George Pransky................... 57 Director
David Frith-Smith................ 52 Director
Andris A. Baltins................ 52 Director
</TABLE>
Stephen Adams has been Chairman of Adams Outdoor Advertising, Inc. since
its founding in 1983. Since the 1970's, Mr. Adams has served as chairman of
privately owned banking, bottling,
21
<PAGE>
publishing, outdoor advertising, television and radio companies in which he held
a controlling ownership interest. Mr. Adams is Chairman of the Board of
Directors of Affinity Group, Inc., a membership-based marketing company.
J. Kevin Gleason has served as the Chief Executive Officer of the Company
and President of Adams Outdoor Advertising, Inc. since 1991. Mr. Gleason has
seventeen years of experience in advertising, eleven of which have been
dedicated to the outdoor advertising industry. Mr. Gleason has been with Adams
Outdoor Advertising, Inc. since 1987, serving as General Manager of various
local markets and then as Executive Vice President at the corporate level. Prior
to joining Adams Outdoor Advertising, Inc., Mr. Gleason served as General
Manager of Naegele Outdoor Advertising ("Naegele") of Southern California from
1985 to 1987. Mr. Gleason also currently serves as a Vice-Chairman of the
Outdoor Advertising Association of America.
Abe Levine has served as Chief Financial Officer of the Company and as Vice
President of Adams Outdoor Advertising, Inc. since 1991. From 1988 to 1991, Mr.
Levine worked as Controller of Adams Outdoor Advertising of Atlanta, Inc. Mr.
Levine was employed by Gulf + Western Industries, Inc. from 1979 through 1987 in
various senior accounting and financial positions, and by KPMG Peat Marwick from
1975 through 1979 in various auditing positions.
George Pransky, Ph.D. has been in private practice as co-director of
Pransky and Associates in La Conner, Washington since 1988. He is a frequent
consultant for government and private agencies and has been a contract faculty
member for a number of educational institutions, including the University of
Washington, the University of Oregon and Antioch College. Dr. Pransky has
trained management groups in team building, stress elimination and management
development for fifteen years.
David Frith-Smith has served as managing partner of Biller, Frith-Smith &
Archibald, Certified Public Accountants, since 1988. Mr. Frith-Smith was a
principal in Maidy and Lederman, Certified Public Accountants, from 1980 to
1984, and with Maidy Biller Frith-Smith & Brenner, Certified Public Accountants,
from 1984 to 1988. Mr. Frith-Smith is a director of various private and non-
profit corporations.
Andris A. Baltins has been a member of the law firm of Kaplan, Strangis and
Kaplan, P.A. since 1979. He is a director of Polaris Industries Inc., a
manufacturer of snowmobiles, all-terrain vehicles, personal watercraft and
related products. Mr. Baltins is also a director of various private and
non-profit corporations.
Other Significant Management Personnel
The following table sets forth certain information with respect to other
significant management personnel:
22
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
----------------------------------- --- ------------------------
<S> <C> <C>
Jon Kane........................... 32 General Manager - Lansing
Dean Grile......................... 38 General Manager - Jackson
Mike Peters........................ 35 General Manager - Kalamazoo, MI
John Hayes......................... 43 General Manager - Lehigh Valley,
and Northeast PA
Michelle Kullmann.................. 30 General Manager - Madison, WI
Gardner King....................... 46 General Manager - Norfolk, VA
Barry M. Asmann.................... 40 General Manager - Charlotte, NC
Robert J. Lord..................... 39 General Manager - Peoria, IL
Robert A. Graiziger................ 44 General Manager - Minneapolis, MN
Jerry Heinz........................ 56 General Manager - South Carolina
</TABLE>
Jon Kane has been general manager of the Madison, WI division since
November 1995. He joined the Company in 1989 as an account executive in its
Lehigh Valley, PA division. He also served as regional sales manager and poster
sales manager for Lehigh until his recent promotion to general manager of
Madison.
Dean Grile has served as General Manager of the Jackson, MI division since
August 1997. He began his outdoor advertising career as a Lease Manager for
Burkhart Advertising in Anderson, IN. Mr. Grile later became an Account
Executive/Sales Manager in Fort Wayne, IN and then General Manager in Lafayette,
IN. He has ten years of experience in the outdoor advertising industry.
Mike Peters has been general manager of the Kalamazoo, MI division since
October, 1996. He began his "outdoor advertising" career in 1985 as an account
executive with Creative Displays in Lehigh Valley, PA. Mr. Peters stayed on as
an account executive when Adams purchased Creative Displays and in 1989 was
promoted to sales manager. He has thirteen years of experience in the outdoor
advertising industry.
John Hayes has served as general manager of the Lehigh Valley, PA division
from 1985 to 1991 and from 1994 to the present. He began his career in outdoor
advertising in 1976 as an account executive with Creative Displays in the Lehigh
Valley market, later becoming sales manager in 1979 and assistant manager in
1981. From 1991 to 1994 Mr. Hayes managed a paging business in the Lehigh Valley
area.
23
<PAGE>
Michelle Kullmann has been general manager of the Madison, Wisconsin
division since June 1997. Michelle first started with Adams in 1991 as an
account executive. In 1993 she was promoted to sales manager of Madison and held
that position until her most recent promotion to General Manager.
Gardner King has served as general manager of the Norfolk, VA division
since January 1988. From 1980 through 1985, Mr. King was the founder and sole
proprietor of an outdoor advertising company in Norfolk, VA, which he sold to
Whiteco. After the expiration of his non-compete agreement with Whiteco, Mr.
King joined the Company in 1988. Mr. King has 16 years of experience in the
outdoor advertising industry.
Barry Asmann has served as general manager of the Charlotte, NC division
since January 1993 and prior thereto was sales manager in both the Charlotte, NC
and Lehigh Valley, PA divisions. Mr. Asmann has 13 years of experience in the
outdoor advertising industry, working in various markets throughout the country
with the Company and Naegele.
Robert Lord has served as general manager of the Peoria, IL division since
December 1993. From February 1993 to December 1993, he served as the sales
manager of the Company's Charlotte division and from 1989 to January 1993, he
served as the sales manager of the Company's Peoria, IL division. Mr. Lord
served as an account executive in the Peoria division from 1986 to 1989.
Robert Graiziger has served as general manager of the Minneapolis, MN
division since 1988, when he sold an outdoor advertising company that he founded
and operated in Minneapolis to the Company. Mr. Graiziger has been involved in
the outdoor advertising business in various capacities since 1978.
Jerry Heinz has served as general manager of the South Carolina division
since December 1996. He came to Adams Outdoor from Burkhart Advertising, Inc.
Mr. Heinz joined Burkhart Advertising, Inc. in 1969 as and account executive.
During the next 27 years Mr. Heinz held the positions of sales manager, general
manager and finally as President and CEO.
Item 11
Executive Compensation
The following table provides certain summary information concerning the
compensation incurred by the Company for its Chief Executive Officer and each of
the two other executive officers for the years ended December 31, 1997, 1996,
and 1995.
24
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-term Compensation
----------------------
Annual Compensation Awards Pay outs
------------------------------------- ---------------------- ---------------------
Other All
Annual Restricted Securities Other
Compen- Stock Underlying LTIP Compen-
Name and Principal Position Year Salary Bonus(a) sation(b) Award(s) Options Payouts sation(c)
- --------------------------- ---- ------ -------- --------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen Adams 1997 $200,000(e)
Chairman(d) 1996 $150,000(e)
1995 --
J. Kevin Gleason 1997 $436,000 $34,750
Chief Executive 1996 $385,000 $34,750
Officer 1995 $321,709 $787,550 $34,620
Abe Levine 1997 $180,000 $19,750
Chief Financial 1996 $180,000 $400,000 $19,154
Officer 1995 $150,000 $993,775 $17,805
</TABLE>
(a) All amounts represent accruals under deferred phantom stock agreements.
(b) Less than the lesser of (i) 10% of total annual salary and bonus and (ii)
$50,000.
(c) Amounts for 1997, 1996 and 1995 include contributions to the accounts of
Messrs. Gleason and Levine under the Company's nonqualified retirement plan
of $30,000 and $15,000, respectively. All other amounts represent Company
contributions to the Company's 401(k) plan.
(d) The Company entered into an employment agreement with Mr. Adams providing
for a salary of $200,000 per year and the reimbursement of business
expenses.
(e) Does not include reimbursement of company travel and entertainment expense
advanced by Mr. Adams aggregating $105,298 in 1997 and $200,000 in 1996.
Employment Agreement
The Company and Stephen Adams entered into an employment agreement
effective January 1, 1996. Under the employment agreement, Mr. Adams is employed
as Chairman of Adams Outdoor Advertising, Inc. until December 31, 2001 at a base
salary of $200,000 plus an annual cost of living increase.
Agreements with Management--Incentive Compensation Under Phantom Stock
Agreements
The Company has deferred phantom stock agreements with certain managers,
including each general manager with respect to the performance of his respective
market. The compensation is calculated using a multiple of the operating profit
of the general manager's respective division for the fiscal year ending
immediately prior to the determination date over the value of the division
25
<PAGE>
at the time of agreement. The agreements provide for three equal annual payments
to the participants upon the determination date, which is defined as termination
of employment, death, disability, sale of the Company or the fifth anniversary
of the execution of the agreement. The Company incurred deferred compensation
expense related to the phantom stock agreements of $2.4 million, $1.5 million,
and $901,000 for the years ended December 31, 1995, 1996, and 1997 respectively.
As of December 31, 1997, the Company has accrued the following amounts of
deferred compensation expense payable related to the phantom stock agreements:
Name Amount
--------------------------------------------- --------------------
(dollars in thousands)
Abe Levine.............................. 1,333
Others.................................. 2,157
--------------------
Total.................... $ 3,490
====================
If amounts accrued as of December 31, 1997 as deferred compensation payable
related to the phantom stock agreements are paid as currently scheduled
(assuming no executive terminations, deaths or disabilities), such payments will
occur as follows:
<TABLE>
<CAPTION>
Name 1998 1999 2000 2001 2002 2003 Total
------------------- ---- ---- ---- ---- ---- ---- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Abe Levine............... $667 $666 -- -- -- -- 1,333
Others................... 665 699 $634 $92 $59 2,157
----- ------ ---- --- --- ------
Total.......... $1,332 $1,368 $634 $92 $59 $3,490
====== ====== ==== === === ======
</TABLE>
Agreements with Management Incentive Compensation Under Nonqualified Retirement
Plan
The Company also maintains a deferred compensation plan for each of Messrs.
Gleason, Levine and each of the area general managers. Under such plan, the
Company contributes $30,000 per year to the retirement account of Mr. Gleason
and $15,000 per year to the account of each of the other participants. In
addition, Messrs. Gleason and Levine deferred a substantial portion of their
1997 compensation into a similar plan. Deferred compensation payable as of
December 31, 1997 related to the nonqualified retirement plans was approximately
$1.3 million.
401(k) Savings Plan
Company employees also participate in a deferred savings and profit sharing
plan (the "401(k) Plan") qualified under Section 401(a) and 401(k) of the
Internal Revenue Code (the "Code"). All employees over age 21 who have completed
one year of service are eligible to participate in the 401(k) Plan. Eligible
employees may contribute to the 401(k) Plan up to 10% of their salary subject to
an annual maximum established under the Code, and the Company
26
<PAGE>
matches these employee contributions at a rate of 50% up to the first 6% of the
employee's salary. Employees may make additional voluntary contributions.
Director Compensation
Following the Refinancing, the Company pays directors who are not also
employees (Messrs. Pransky, Frith-Smith and Baltins) director fees of $4,500 per
quarter.
Item 12
Security Ownership of Certain Beneficial Owners & Management
PRINCIPAL SECURITY HOLDERS
The table below sets forth, the beneficial ownership interests in the
Company as of December 31, 1997.
<TABLE>
<CAPTION>
General Limited Aggregate
------- ------- ---------
Partnership Partnership Partnership
----------- ----------- -----------
Interest Interest Interests
-------- -------- ---------
Name
-------------------------------
<S> <C> <C> <C>
Adams Outdoor Advertising, Inc.(a)............. 0.01% 0.99% 1.00%
1380 W. Paces Ferry Road, NW
Suite 170, South Wing
Atlanta, GA 30327
Stephen Adams................................... 0.70 71.30 72.00
2575 Vista Del Mar Drive
Ventura, CA 93001
Stephen M. Adams(b)............................. -- 6.00 6.00
26529 Oliver Road
Carmel, CA 93923
Mark C. Adams(b)................................ -- 6.00 6.00
c/o Adams Publishing Corp.
68860 Perez Road, Suite J
Cathedral City, CA 92234
Scott L. Adams(b)............................... -- 6.00 6.00
236 Mullen Avenue
San Francisco, CA 94110
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C> <C>
Kent R. Adams(b)................................ -- 6.00 6.00
5017 Vincent Avenue So.
Minneapolis, MN 55410
J. Kevin Gleason(c)............................. -- 3.00 3.00
1380 W. Paces Ferry Road, NW
Suite 170, South Wing
Atlanta, GA 30327
0.71% 99.29% 100.00%
</TABLE>
(a) Stephen Adams holds 100% of the issued and outstanding shares of AOAI, the
managing general partner of the Company, and, accordingly, may control the
affairs of the Issuers.
(b) Stephen M. Adams, Mark C. Adams, Scott L. Adams and Kent R. Adams are sons
of Stephen Adams.
(c) Mr. Gleason purchased his limited partnership interest in the Company from
an affiliate of Mr. Adams contemporaneously with the termination of his
phantom stock agreement.
Item 13
Certain Relationships and Related Transactions
CERTAIN TRANSACTIONS
Management Services Arrangement
Under a management services arrangement with the Company, affiliates of Mr.
Adams provided management services, including in the areas of financial and
strategic planning, acquisition approval, executive compensation, budget review
and approval and financial performance review, to the Company prior to 1996.
Such agreement included the services of Mr. Adams, who did not receive
compensation for his services directly from the Company prior to 1996. In 1992
and 1993, the Company paid management services fees of $66,666 and $50,000,
respectively. No amounts were paid in 1994 and 1995. Effective January 1, 1996,
the management services arrangement was terminated.
Other Certain Transactions
Stephen Adams, J. Kevin Gleason and Abe Levine own 46%, 12% and 12%,
respectively, of HSP Graphics ("HSP"), a printing company headquartered in
Canada. The Company pays the salary and expenses of the HSP salesmen who operate
in the Atlanta, GA area and HSP reimburses the Company for those expenses in
cash and services. At December 31, 1995, 1996 and 1997, the Company had accounts
receivable of $171,828, $208,669 and $227,991 respectively, outstanding from
HSP. The Company expensed $48,000, $54,000, and $42,000 for printing services
provided during 1997, 1996, and 1995, respectively.
28
<PAGE>
Andris A. Baltins is a member of the law firm of Kaplan, Strangis and
Kaplan, P.A., which provides legal services to the Company. Mr. Baltins, who is
a director of Adams Outdoor Advertising, Inc., the managing general partner of
the Company, and held $380,547 in principal amount of the zero coupon 10%
Subordinated Notes of the Company due January 2, 1997 which the Company retired
in 1996. Messrs. Adams, Gleason and Levine also held interests in such notes.
See "Refinancing and Uses of Proceeds."
Item 14
Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) Documents filed
(1) Financial statements (included under Item 8)
(2) Financial statement schedules
S-1 Independent Auditors' Report on Schedule
S-2 Schedule II - Valuation and Qualifying Accounts
(3) Exhibits
(b) Reports on Form 8-K
The company filed no reports on form 8-K during the quarter
ended December 31, 1997.
(c) Exhibits
Included in Item 14 (a) (3) above.
(d) Financial Statements Schedules
Included in Item 14 (a) (2) above.
Financial Statement Schedules
- Identify
Signature Page
- Power of Attorney
Exhibit Index (Item 601, Reg. S-K)
- Financial Data Schedules Item 601 (b) (27)
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Adams Outdoor Advertising Limited Partnership:
Under date of March 18, 1998, we reported on the consolidated balance
sheets of Adams Outdoor Advertising Limited Partnership as of December 31, 1997
and 1996, and the related consolidated statements of operations, changes in
partners' equity (deficit) and cash flows for each of the years in the three-
year period ended December 31, 1997, as contained in the annual report on Form
10-K for the year 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule as listed in the accompanying index. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Atlanta, Georgia
March 18, 1998
30
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------
Balance at Charged to Charged Balance
beginning costs and to other at end
Description of period expenses accounts (a) Deductions (b) of period
----------- --------- -------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
1997 Allowance for
Doubtful Accounts $696,260 231,973 --- (227,804) 700,429
1996 Allowance for
Doubtful Accounts $546,123 57,387 169,740 (76,990) 696,260
1995 Allowance for
Doubtful Accounts $436,497 237,114 --- (127,488) 546,123
</TABLE>
(a) Purchased through acquisitions during 1996
(b) Write-offs, net of recoveries
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ADAMS OUTDOOR ADVERTISING LIMITED
PARTNERSHIP
By: Adams Outdoor Advertising, Inc.,
its general partner
By: /s/ J. Kevin Gleason
--------------------------------
J. Kevin Gleason
President and Chief Executive Officer
ADAMS OUTDOOR ADVERTISING, INC.
By: /s/ J. Kevin Gleason
--------------------------------
J. Kevin Gleason
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Kevin Gleason President, Chief Executive Officer March 31, 1998
- ------------------------------------ and Director (Principal Executive Officer)
J. Kevin Gleason
/s/ Abe Levine Chief Financial Officer (Principal March 31, 1998
- ------------------------------------ Financial and Accounting Officer)
Abe Levine
* Chairman of the Board (Director) March 31, 1998
- ------------------------------------
Stephen Adams
* Director March 31, 1998
- ------------------------------------
Andris A. Baltins
* Director March 31, 1998
- ------------------------------------
David Frith-Smith
* Director March 31, 1998
- ------------------------------------
George Pransky
</TABLE>
32
<PAGE>
* By: /s/ J. Kevin Gleason
--------------------------
J. Kevin Gleason
(as attorney-in-fact)
J. Kevin Gleason, pursuant to powers of attorney, executed by each of the
officers and directors listed above whose name is marked by an "*" filed as
an exhibit hereto to this Report, by signing his name hereto, does hereby
sign and execute this report of Adams Outdoor Advertising, Inc. on behalf of
each such officers and directors in the capacities in which the names of
each appear.
33
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report....................................... 2
Financial Statements:
Consolidated Balance Sheets of as of December 31, 1997 and 1996... 3
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996, and 1995................................. 4
Consolidated Statements of Changes in Partners' Equity (Deficit)
for the Years ended December 31, 1997, 1996, and 1995............. 5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996, and 1995................................. 6
Notes to Consolidated Financial Statements........................ 7
<PAGE>
Independent Auditors' Report
The Partners
Adams Outdoor Advertising
Limited Partnership:
We have audited the accompanying consolidated balance sheets of Adams Outdoor
Advertising Limited Partnership and subsidiaries (the "Company") as of December
31, 1997 and 1996, and the related consolidated statements of operations,
changes in partners' equity (deficit), and cash flows for each of the years in
the three-year period ended December 31, 1997. 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 the Company as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
March 18, 1998
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets (Note 7) 1997 1996
--------------- ---- ----
Current assets:
Cash and cash equivalents $ 3,120,542 3,532,958
Investments (note 3) 1,280,765 348,303
Trade accounts receivable, less allowance for
doubtful accounts of $700,429 and $696,260,
respectively 7,576,375 6,729,251
Other accounts receivable (note 2) 316,485 233,938
Inventories 142,274 216,712
Prepaid rent 2,452,455 2,129,094
Prepaid expenses 794,911 951,956
------------ -----------
Total current assets 15,683,807 14,142,212
Property, plant, and equipment, net (note 4) 51,090,177 51,039,608
Intangible assets, net (note 5) 10,449,973 11,861,934
Other assets 250,203 70,254
------------ -----------
$ 77,474,160 77,114,008
============ ===========
Liabilities and Partners' Equity (Deficit)
------------------------------------------
Current liabilities:
Current installments of long-term debt (note 7) $ 4,000,000 --
Accounts payable 540,377 440,901
Interest payable 4,042,392 3,640,374
Accrued expenses and other liabilities (notes 2
and 6) 2,673,505 3,193,789
Deferred compensation (note 10) 1,331,713 1,898,404
------------ -----------
Total current liabilities 12,587,987 9,173,468
Long-term debt, less current installments (note 7) 131,033,750 133,189,383
Deferred compensation (note 10) 3,438,651 3,089,228
Other liabilities -- 106,407
------------ -----------
Total liabilities 147,060,388 145,558,486
------------ -----------
Partners' deficit (note 1(b)):
General partners' deficit (67,829,366) (67,829,366)
Limited partners' deficit (1,756,862) (615,112)
------------ -----------
Total partners' deficit (69,586,228) (68,444,478)
Commitments and contingencies (notes 8, 9, 10, and
11)
------------ -----------
$ 77,474,160 77,114,008
============ ===========
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross revenues $63,301,642 52,421,172 47,588,790
Less agency commissions (6,017,105) (5,161,376) (4,698,330)
---------- ---------- ----------
Net outdoor advertising revenue 57,284,537 47,259,796 42,890,460
---------- ---------- ----------
Operating expenses:
Direct advertising expenses 29,089,188 22,411,959 20,848,384
Corporate general and administrative
(note 2) 3,589,189 2,404,834 1,113,593
Depreciation and amortization 8,148,621 6,105,151 5,567,736
Deferred compensation (note 10) 900,876 1,451,031 2,427,160
---------- ---------- ----------
Total operating expenses 41,727,874 32,372,975 29,956,873
---------- ---------- ----------
Operating income 15,556,663 14,886,821 12,933,587
---------- ---------- ----------
Other expenses (income):
Interest expense 14,586,568 12,247,794 9,865,283
Interest expense - related party (note 2) 13,934 275,175 1,397,612
Other expenses (income), net 42,517 (31,362) 16,095
Loss on disposals of property
and equipment, net 122,287 860,706 92,611
---------- ---------- ----------
Total other expenses 14,765,306 13,352,313 11,371,601
---------- ---------- ----------
Net income $ 791,357 1,534,508 1,561,986
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Consolidated Statements of Changes in Partners' Equity (Deficit)
Years ended December 31, 1997, 1996, and 1995
Limited
General partners' Total
partners' equity partners'
deficit (deficit) deficit
------------- ----------- ------------
Balances at December 31, 1994 (69,391,352) 1,000,000 (68,391,352)
Net income 1,561,986 -- 1,561,986
----------- --------- ----------
Balances at December 31, 1995 $(67,829,366) 1,000,000 (66,829,366)
Net income -- 1,534,508 1,534,508
Distributions -- (3,149,620) (3,149,620)
------------ ----------- ------------
Balances at December 31, 1996 (67,829,366) (615,112) (68,444,478)
Net income -- 791,357 791,357
Distributions -- (1,933,107) (1,933,107)
------------ ----------- ------------
Balances at December 31, 1997 $(67,829,366) (1,756,862) (69,586,228)
------------ ----------- ------------
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 791,357 1,534,508 1,561,986
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation 7,294,989 5,811,083 5,333,841
Amortization of intangible assets 1,423,664 1,126,505 701,256
Deferred compensation expense 900,876 1,451,031 2,427,160
Payments for deferred
compensation (1,118,144) (1,226,579) (250,000)
Loss on disposals of property
and equipment, net 122,287 860,706 92,611
Change in unrealized gain on
investments (122,682) -- --
Barter (income) loss 42,692 86,729 114,154
Purchases of investments (2,545,125) (315,000) --
Proceeds from sale of investments 1,735,345 -- --
Changes in assets and
liabilities, net of effects
from acquisitions of businesses:
Accounts receivable (978,663) (1,171,643) (964,952)
Inventories 74,438 61,705 (52,553)
Prepaid rent, expenses, and
other assets (346,265) 339,399 (198,780)
Accounts payable, accrued
expenses, and other liabilities (420,808) 1,374,950 (179,970)
Interest payable 402,018 2,619,687 698,090
Other liabilities - long-term (106,407) (16,321) (132,060)
----------- ------------ -----------
Net cash provided by
operating activities 7,149,572 12,536,760 9,150,783
----------- ------------ -----------
Cash flows from investing activities:
Additions to property, plant,
and equipment (7,645,961) (4,419,452) (2,042,132)
Proceeds from sales of property,
plant, and
equipment 184,416 45,017 62,784
Acquisitions of businesses -- (24,300,464) --
----------- ------------ -----------
Net cash used in investing
activities (7,461,545) (28,674,899) (1,979,348)
----------- ------------ -----------
Cash flows from financing activities:
Debt financing costs (11,703) (5,288,384) (198,638)
Advances from long-term debt 12,037,500 145,725,354 8,150,394
Payments on long-term debt (10,193,133) (119,747,164) (14,714,447)
Distributions to partners (1,933,107) (3,149,620) --
----------- ------------ -----------
Net cash (used in)
provided by
financing activities (100,443) 17,540,186 (6,762,691)
----------- ------------ -----------
Net (decrease) increase in
cash and cash equivalents (412,416) 1,402,047 408,744
Cash and cash equivalents at
beginning of year 3,532,958 2,130,911 1,722,167
----------- ------------ -----------
Cash and cash equivalents at end
of year $ 3,120,542 3,532,958 2,130,911
=========== ============ ===========
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Presentation
---------------------
Adams Outdoor Advertising Limited Partnership ("the Company") owns and
operates outdoor advertising structures in eleven markets in the Midwest,
Southeast, and mid-Atlantic states. The consolidated financial statements
include the financial statements of the Company and its wholly owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities at the report date and
revenues and expenses during the period to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(b) The Company
-----------
The Company was organized under the Minnesota Uniform Limited
Partnership Act on December 12, 1985 and will terminate on December 31,
2025 unless terminated sooner under the provisions of the Partnership
Agreement. The Company was organized for the purpose of acquiring and
operating businesses engaged in the outdoor advertising industry. The
managing general partner is Adams Outdoor Advertising, Inc.
The Partnership Agreement was amended on March 31, 1995 to convert and
transfer 99% of the general partner's interest to limited partners'
interests. The Partnership Agreement was amended and restated on January
1, 1996 to, among other matters, eliminate classes of limited partner
interests resulting in general partner's interests of 0.71% and limited
partners' interests of 99.29%.
The Partnership Agreement provides that losses will be allocated 100% to
the general partners. Profits will be allocated to the general and limited
partners in the same proportion, based on their aggregate interest in the
Company, as they have received distributions of distributable cash
(defined as annual cash gross receipts, less cash expenses and any amount
set aside for reserves) for such calendar year. In the event there are
profits in a calendar year in which no distribution of distributable cash
has been made, profits will be allocated 100% to the general partners.
In the event of a sale, refinancing, or dissolution of the Partnership,
the proceeds available for distribution, after payment of all expenses and
previously outstanding debt of the Partnership, will be distributed first
to the partners up to an amount equal to the respective partners' adjusted
aggregate interest in the Partnership.
(Continued)
-7-
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
In April 1995, certain limited partners' interests were purchased by an
affiliate of the general partner. The purchase consideration of
$17,452,677 represented the aggregate outstanding principal balance on the
9% subordinated notes and convertible notes payable to certain limited
partners, including all accrued interest thereon, plus a $500,000 payment
for certain limited partners' interests. The affiliate of the general
partner held these notes and partners' interests at December 31, 1995. The
Company continued to make payments on these notes with the same terms as
were made to the previous holders of the notes until the notes were paid
in March 1996 (note 7).
(c) Cash Equivalents
----------------
The Company considers all short-term, highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
(d) Investments
-----------
Investments consist primarily of corporate and U.S. governmental
debt instruments and equity securities. Securities are classified in one
of three categories: trading, available-for-sale, or held-to-maturity.
Management of the Company determines the appropriate classification of its
investments at the time of acquisition and re-evaluates such determination
at each balance sheet date.
The Company has classified all securities purchased and held during 1997
and 1996 as trading securities, as they are intended to be sold in the
near term. Trading securities are carried at fair value, with realized and
unrealized gains and losses included in net income.
(e) Inventories
-----------
Inventories are valued at the lower of cost or market. Cost is
determined by using the first-in, first-out method. Market approximates
net realizable value.
(f) Property, Plant, and Equipment
------------------------------
Property, plant, and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the assets which are as follows:
Buildings and equipment 5 to 32 years
Outdoor advertising structures 12 to 15 years
Vehicles, machinery and equipment, and office equipment 3 to 5 years
(g) Intangible Assets
-----------------
Intangible assets include financing costs, noncompete agreements, and
goodwill. Goodwill is being amortized using the straight-line method over
periods of between 12 and 40 years. The remaining intangible assets are
recorded at cost and are amortized using the straight-line method over the
assets' estimated useful lives of two to five years for noncompete
agreements and the terms of the related debt for financing costs. The
Company assesses the recoverability value of intangible assets based upon
expected future cash flows.
(Continued)
-8-
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(h) Income Taxes
------------
The Company is not considered a taxable entity for Federal and state
income tax purposes. Any taxable income or loss, tax credits, and certain
other items are reported by the partners on their own tax returns in
accordance with the Partnership Agreement.
(i) Revenue Recognition
-------------------
Revenues represent outdoor advertising services provided by the Company.
The Company recognizes revenue when rendered, usually on a monthly basis
in accordance with contract terms, as advertising services are provided.
(j) Barter Transactions
-------------------
Barter transactions, which represent the exchange of advertising
for goods or services, are recorded at the estimated fair value of the
advertising provided and the products or services received. Barter
revenue is recognized when advertising services are rendered, and barter
expense is recognized when the related products or services are received.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
-----------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement resulted in the recognition of a loss
during the year ended December 31, 1996 related to impairment of long-
lived assets to be disposed of (note 14).
(2) Related Party Transactions
--------------------------
Certain partners and employees of the general partner have ownership in
HSP Graphics ("HSP"), a printing operation headquartered in Canada. The
Company pays the salary and expenses of HSP employees, and HSP reimburses
the Company for these expenses in cash or services. At December 31, 1997
and 1996, the Company had accounts receivable of $227,991 and $208,669,
respectively, outstanding related to this arrangement with HSP. The
Company expensed $84,000, $54,000, and $42,000 for printing services
provided by HSP during 1997, 1996, and 1995, respectively.
(Continued)
-9-
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
During 1997, the Company entered an aircraft lease with a related party to
the Company. The lease term is for seven years and has been classified as
an operating lease. Lease and operating expenses of $465,631 related to
this related party transaction has been included in corporate general and
administrative expense during the year ended December 31, 1997.
During 1996, the Company was billed $200,000 by a related party for
reimbursement of charter air service used during the year. This amount was
recorded as corporate general and administrative expenses and included in
accrued expenses and other liabilities at December 31, 1996.
Pursuant to the Refinancing discussed in note 7, notes payable of
$6,730,436 to Central Advertising Company and $1,900,293 to Illinois
Outdoor Advertising Company Limited Partnership were repaid in 1996,
except for $231,379 payable to an unlocated noteholder which remains
outstanding at December 31, 1997. Both entities are related to the Company
through common ownership.
Also pursuant to the Refinancing discussed in note 7, $11,389,165 in 9%
subordinated notes and convertible notes payable to an affiliate of the
general partner were repaid in 1996. Related party interest expense of
$275,175 and $1,397,612 was recorded during the years ended December 31,
1996 and 1995, respectively, related to these notes.
(3) Investments
-----------
The carrying and estimated fair values of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------
Gross Gross
unrealized unrealized Estimated
holding holding Fair
Type of each issue Cost gains losses value
------------------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
Trading securities:
Overnight investments $ 132,032 -- 132,032
U.S. Treasury obligations 73,139 -- 73,139
Equity securities 793,543 150,147 (24,967) 918,723
Fixed income debt
securities 136,403 3,128 (956) 138,575
Other 15,174 3,122 -- 18,296
---------- ------- ------- ---------
$1,150,291 156,397 (25,923) 1,280,765
========== ======= ======== =========
</TABLE>
(Continued)
-10-
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
December 31, 1996
---------------------------------------------
Gross Gross
unrealized unrealized Estimated
holding holding Fair
Type of each issue Cost gains losses value
------------------ -------- ---------- ---------- ---------
Trading securities:
Equity securities $130,044 10,635 (6,418) 134,261
Fixed income debt
securities 95,138 1,297 (410) 96,025
Mutual funds 112,685 2,773 (84) 115,374
Other 2,643 -- -- 2,643
-------- -------- --------- --------
$340,510 14,705 (6,912) 348,303
======== ======== ========= ========
(4) Property, Plant, and Equipment
------------------------------
Property, plant, and equipment consists of the following at December 31,
1997 and 1996:
1997 1996
---- ----
Land $ 2,673,295 1,945,015
Buildings and improvements 3,929,319 3,321,251
Outdoor advertising
structures 95,018,461 91,247,074
Vehicles 2,931,049 2,555,767
Machinery and equipment 724,939 659,537
Office equipment 2,895,530 2,344,631
Construction in progress 824,196 357,107
------------ ------------
108,996,789 102,430,382
Less accumulated
depreciation 57,906,612 51,390,774
------------ ------------
$ 51,090,177 51,039,608
============ ============
(5) Intangible Assets
-----------------
Intangible assets consist of the following at December 31, 1997 and 1996:
1997 1996
------------ ----------
Goodwill $ 7,582,597 7,582,597
Noncompete agreements 2,425,500 2,415,000
Financing costs 5,304,128 5,302,925
------------ ----------
15,312,225 15,300,522
Less accumulated
amortization 4,862,252 3,438,588
------------ ----------
$ 10,449,973 11,861,934
============ ==========
(Continued)
-11-
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(6) Accrued Expenses and Other Liabilities
--------------------------------------
Accrued expenses and other consist of the following at December 31, 1997 and
1996:
1997 1996
---- ----
Accrued insurance $ 432,141 486,789
Accrued payroll 690,619 489,229
Other 1,550,745 2,217,771
------------ ---------
$ 2,673,505 3,193,789
============ =========
(7) Long-Term Debt
--------------
Long-term debt at December 31, 1997 and 1996 consists of the following:
1997 1996
---- ----
10.75% senior notes due March 12, 2006,
interest payable semiannually; unsecured $105,000,000 105,000,000
Revolving note payable due December 31, 2001 30,033,750 28,189,383
------------ -----------
135,033,750 133,189,383
Less current installments 4,000,000 --
------------ -----------
Long-term debt, less current installments $131,033,750 133,189,383
============ ===========
On March 12, 1996, the Company completed a refinancing (the "Refinancing")
of its outstanding debt. Pursuant to the Refinancing, substantially all of
the Partnership's existing debt was repaid, $105 million of 10.75% senior
notes due 2006 (the "Notes") were issued, and a credit agreement (the
"Credit Agreement") was executed which provided for a revolving line of
credit with total availability of $15 million. On December 2, 1996, the
Credit Agreement was amended and restated to increase the availability on
the revolving line of credit from $15 million to $35 million, for a fee of
$387,500.
The aggregate available commitment under the Credit Agreement will be
reduced incrementally on a quarterly basis, beginning March 31, 1998. The
Credit Agreement matures on December 31, 2001 unless previously terminated.
Prior to making any advance under the Credit Agreement, the Company will be
required to be in compliance with all financial and operating covenants. The
lenders under the Credit Agreement are paid a commitment fee at the rate of
0.5% per annum on unused commitments, payable quarterly.
Borrowings under the Credit Agreement bear interest at a rate equal to, at
the option of the Company, either (i) the base rate (which is defined as the
higher of the prime rate or the federal funds rate plus .5%) or (ii) LIBOR,
in each case plus an applicable margin determined by reference to the ratio
of total debt to cash flow of the Company. At December 31, 1997 and 1996,
the weighted-average interest rate was 10.4% on outstanding borrowings.
(Continued)
- 12 -
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
The obligations of the Company under the Credit Agreement are secured
primarily by a first priority pledge of the stock of Adams Outdoor
Advertising, Inc., the corporate general partner, a first priority pledge of
the Company interests, and a first priority lien on all the assets of the
Company, with the exception of certain real estate assets, which are subject
to a negative pledge.
The Credit Agreement contains, among other things, covenants restricting the
ability of the Company to dispose of assets, make distributions to its
partners, create liens, make capital expenditures, make certain investments
or acquisitions, enter into transactions with affiliates, and otherwise
restrict certain activities. The Credit Agreement also contains financial
covenants related to minimum interest coverage, maximum leverage ratio, and
a minimum fixed charge coverage ratio.
The 10.75% senior notes due 2006 were issued under an indenture dated March
12, 1996 (the "Indenture") among the Company and the trustee of the Notes
(the "Trustee").
The Notes are limited in aggregate principal amount to $105 million. The
Notes are senior unsecured obligations of the Company ranking pari passu in
right of payment with all existing and future senior indebtedness of the
Company and senior in right of payment to all existing and future
subordinated indebtedness of the Company that by its terms is subordinated
in right of payment to the Notes. The Notes are effectively subordinated to
all secured indebtedness of the Company to the extent of the value of the
assets securing such indebtedness.
The Notes mature on March 15, 2006 and bear interest at an annual rate of
10.75% from the date of issuance until maturity. Interest is payable
semiannually in arrears on March 15 and September 15 to holders of record of
the Notes.
The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after March 15, 2001 at the following redemption prices
(expressed as a percentage of principal amount), together, in each case,
with accrued and unpaid interest to the redemption date, if redeemed during
the twelve-month period beginning on March 15 of each year as listed below:
Year Percentage
---- ----------
2001 105.375%
2002 103.583
2003 101.792
2004 and thereafter 100.000
Also, up to 25% of the Notes are redeemable at the option of the Company in
the event of a public equity offering.
The Indenture contains, among other things, covenants restricting the
ability of the Company to incur additional indebtedness, make certain
distributions, make certain investments, change the status of Company
subsidiaries, create liens, enter into transactions with affiliates, dispose
of assets, enter into sale and lease-back transactions, make payments
(Continued)
- 13 -
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
for consents, enter into any additional lines of business, and otherwise
restrict certain activities.
Annual minimum maturities of long-term debt based upon amounts outstanding
at December 31, 1997 are as follows:
1998 $ 4,000,000
1999 8,000,000
2000 10,000,000
2001 8,033,750
2002 --
Thereafter 105,000,000
------------
$135,033,750
============
(8) Lease Commitments
-----------------
The Company leases real estate to erect signs in commercial and industrial
areas along traffic routes in cities or close to populated urban areas. The
Partnership also leases certain vehicles used in its operations. These
leases have terms ranging from one to 10 years.
Approximate future minimum lease payments under noncancelable operating
leases with terms in excess of one year at December 31, 1997 are as follows:
Years ending December 31:
1998 $ 4,509,000
1999 3,498,000
2000 2,805,000
2001 2,106,000
2002 1,513,000
Thereafter 4,769,000
-----------
$19,200,000
===========
Rent expense incurred under operating leases aggregated approximately
$7,735,000, $6,042,000, and $5,406,000 for the years ended December 31,
1997, 1996, and 1995, respectively.
(9) Employee Benefit Plan
---------------------
The Company has a 401(k) deferred savings and profit sharing plan. Employees
must be at least age 21 and have completed one year of service to
participate in the plan. Employees may contribute up to 10% of their
salaries, and the Company matches employee contributions at the rate of 50%
up to 6% of the employee's salary. The Company's contributions to the plan
were approximately $188,000, $166,000, and $158,000 in the years ended
December 31, 1997, 1996, and 1995, respectively.
(Continued)
- 14 -
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(10) Deferred Compensation Benefits
------------------------------
(a) Phantom Stock Agreements
------------------------
The Company has deferred compensation benefits referred to as phantom
stock agreements with certain management personnel. The compensation is
calculated using a multiple of the operating profit of a division or
the Company for the year ending immediately prior to the determination
date over the base cost, which is the assigned value of the division or
the Company, at the date of the agreement's execution. The agreements
provide for three equal annual payments to the participants upon the
determination date, which is defined as termination, death, disability,
the sale of the Company, or the fifth anniversary of the agreement's
execution. The Company incurred deferred compensation expense related
to these agreements of $698,378, $1,136,031, and $2,427,160 for the
years ended December 31, 1997, 1996, and 1995, respectively.
In 1995, the Chief Executive Officer and the Company mutually
terminated his participation in deferred compensation benefits under
his phantom stock agreement by agreeing to pay him $2,000,000 upon the
Refinancing of all of the Company's outstanding debt obligations.
$1,000,000 of this obligation remained outstanding as of December 31,
1996, which was paid in 1997.
(b) Nonqualified Retirement Plans
-----------------------------
The Company also maintains certain nonqualified retirement plans (the
"Plans") to provide deferred compensation benefits for certain members
of management. The Company has established trusts for contributions to
provide sources of funds for liabilities under the Plans. The trusts
are revocable and constitute unfunded arrangements as their assets are
subject to the claims of the Company's creditors in the event of
insolvency, until such time as the obligations have been paid to plan
participants in accordance with the Plans. Earnings of the trusts are
allocated proportionately to participant accounts. During the years
ended December 31, 1997 and 1996, the Company recorded deferred
compensation expense of $202,500 and $315,000, respectively, related to
these Plans.
-15-
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(11) Commitments and Contingencies
-----------------------------
(a) Zoning Regulations
------------------
In 1988, the city of Charlotte, North Carolina adopted a comprehensive
sign ordinance prohibiting the construction of all virtually new off-
premise outdoor advertising signs within the city limits and mandating
that all nonconforming signs either be brought into compliance or be
removed by February 1, 1998, at the owner's expense without payment of
compensation. Through March 1998, the Company had received a total of
307 NOVs (notice of violation). The Company does not anticipate any
additional NOVs at this time. As a result of the ordinance and the
NOV's, the Company could be forced to remove approximately 250
nonconforming signs at its expense, with a resulting material adverse
impact on the gross revenues and cash flow attributable to the
Charlotte market, but, in the opinion of management, not on the
financial condition of the Company as a whole. In 1988, the Company
filed a lawsuit in the Superior Court of Mecklenburg County, N.C.,
challenging the constitutionality of the Charlotte sign ordinance. The
litigation was stayed by mutual agreement of the parties until November
1997. The stay has expired. The parties are now engaged in discovery
and preparation for trial. The Company has been advised that it will be
approximately five years before there is a final resolution of the
litigation and that no signs will have to be removed until a final
judgment has been entered against the Company. Accordingly, the Company
believes it is unlikely that any nonconforming signs will have to be
removed until 2003 or later, if at all.
In other localities in which the Company operates, outdoor advertising
is subject to restrictive and, in some cases, prohibitive, zoning
regulations. Management expects Federal, state, and local regulations
to continue to be a significant factor in the operation of the
Company's business.
(b) Litigation
----------
The Company is a party to a number of lawsuits and claims which it is
vigorously defending. Such matters arise out of the normal course of
business and relate to government regulations and other issues. Certain
of these actions seek damages in significant amounts. While the results
of litigation cannot be predicted with certainty, management believes,
based on advice of Company counsel, the final outcome of such
litigation will not have a material adverse effect on the consolidated
financial statements of the Company.
(c) Concentrations of Risks
-----------------------
Approximately 10.5%, 12.5%, and 12.6% of the Company's net revenues for
the years ended December 31, 1997, 1996 and 1995, respectively, were
attributable to the tobacco products industry. It has been reported
that certain cigarette manufacturers who are defendants in numerous
class-action suits throughout the United States have reached agreement
with the Attorneys General of various states for an out of court
settlement with respect to such suits that would, among other things,
prohibit outdoor advertising by the tobacco industry. The settlement is
subject to various conditions including approval and implementing
legislation by the United States Congress. There can be no assurance as
to the effect of this settlement agreement and potential legislation
on the Company's business and on its net revenues and financial
position. A reduction in outdoor advertising by the tobacco industry
would cause an immediate reduction in the Company's direct revenues
from such advertisers, increase the available space on the existing
inventory of billboards in the outdoor advertising industry, and result
in a reduction of outdoor advertising rates in each of the Company's
outdoor advertising markets or limit the ability of the industry
participants to increase rates for some period of time. Accordingly,
there can be no assurance that the Company will immediately replace
tobacco advertising on outdoor billboards and signs in the event of a
total ban on tobacco advertising on outdoor billboards and signs and
the consequences of such ban could have a material adverse effect on
the Company.
16
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
(12) Supplemental Cash Flow Information
----------------------------------
The following summarizes supplemental cash paid and noncash activities for
the years ended December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosure of cash
paid during the year for interest 13,639,516 9,095,866 9,668,563
---------- --------- ---------
Supplemental disclosure of noncash
activities:
Accrued interest payable capitalized
in long-term debt (note 7) $ -- -- 745,357
---------- --------- ---------
Property, plant, and equipment
acquired for accounts receivable $ 6,300 211,273 111,049
---------- --------- ---------
</TABLE>
(13) Acquisitions
------------
During 1996, the Company completed acquisitions of two outdoor advertising
operations. Both acquisitions were accounted for using the purchase method
of accounting and, accordingly, the purchase price was allocated to the
assets purchased and the liabilities assumed based upon their fair values
at the dates of acquisition. Both acquisitions were funded through
borrowings.
On October 25, 1996, the Company executed a purchase agreement for the
Northeast Pennsylvania division ("NEPA") by acquiring all of the
outstanding shares of PA Outdoor, Inc. for $6,765,000 in cash, and by
acquiring selected assets and liabilities of Matthew Outdoor Advertising
Acquisition Co., L.P. for $1,450,000 in cash. The Company also paid
$100,000 for noncompete agreements which are being amortized over two
years, and incurred $243,000 in transaction costs.
On November 18, 1996, the Company acquired selected assets and liabilities
of Morgan Newsome Monroe, Inc. ("MNM") for $14,029,000 in cash. The
Company also paid $1,650,000 for noncompete agreements which are being
amortized over three years, and incurred $64,000 in transaction costs.
The net purchase price of the acquisitions was allocated as follows:
<TABLE>
<CAPTION>
NEPA MNM
------ ------
(in thousands)
<S> <C> <C>
Working capital $ 158 629
Property, plant, and equipment 8,300 13,464
Other assets 100 1,650
------ ------
Purchase price $8,558 15,743
====== ======
</TABLE>
17
<PAGE>
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
The following unaudited pro forma information presents a summary of the
results of operations of the Company, NEPA, and MNM as if the acquisitions
had occurred at the beginning of 1995, with pro forma adjustments to give
effect to additional depreciation based on the fair market value of the
property, plant, and equipment acquired; interest expense on acquisition
debt; and the amortization of intangibles arising from the transactions.
The pro forma financial information is not necessarily indicative of the
results of operations as they would have resulted if the transactions had
been effected on the assumed dates.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1996 1995
---- ----
(in thousands - unaudited)
<S> <C> <C>
Net outdoor advertising revenue $ 53,342 48,870
------ ------
Operating income $ 14,843 12,740
------ ------
Net loss $ (462) (691)
------ ------
</TABLE>
(14) Disposal of Equipment
---------------------
In June 1996, the Company invested $662,098 in assets to provide in-store
advertising equipment. These assets were utilized from June through
December 1996, resulting in $179,864 in operating expenses in excess of
revenue. In December 1996, management determined that the asset value had
been impaired and approved a plan of disposal to be completed in January
1997. A loss equal to the carrying value of the assets of $662,098 was
recognized in 1996 and has been included in the consolidated statement of
operations as loss on disposals of property and equipment, net.
18
<PAGE>
ADAMS OUTDOOR ADVERTISING, INC.
Financial Statements
December 31, 1997 and 1996
With Independent Auditors' Report Thereon
<PAGE>
Independent Auditors' Report
The Board of Directors
Adams Outdoor Advertising, Inc.:
We have audited the accompanying balance sheets of Adams Outdoor Advertising,
Inc. ("AOAI") as of December 31, 1997 and 1996, and the related statements of
operations, stockholder's equity, and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the management of AOAI. 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 AOAI as of December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Atlanta, Georgia
March 18, 1998
<PAGE>
ADAMS OUTDOOR ADVERTISING, INC.
Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
------ ---- ----
Investment (note 2) $ 40 40
---- ----
Stockholder's Equity
--------------------
Shareholder's equity:
Preferred stock, $0.001 par value. Authorized 800,000
shares; no shares issued or outstanding $ - -
Common stock, $0.001 par value. Authorized 200,000
shares; 10,000 shares issued and outstanding 100 100
Additional paid-in capital 900 900
Common stock subscribed (960) (960)
Commitment (note 3)
---- ----
$ 40 40
---- ----
See accompanying notes to financial statements.
- 2 -
<PAGE>
ADAMS OUTDOOR ADVERTISING, INC.
Statements of Operations
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Revenues $ - - -
= = =
Expenses
Net income (loss) $
= = =
See accompanying notes to financial statements.
- 3 -
<PAGE>
ADAMS OUTDOOR ADVERTISING, INC.
Statements of Stockholder's Equity
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Additional Common Total
Preferred Common paid-in stock stockholder's
stock stock capital subscribed equity
----- ----- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $ - 100 900 (960) 40
Net income (loss) - - - - -
--- --- --- --
Balances at December 31, 1995 - 100 900 (960) 40
Net income (loss) - - - - -
--- --- --- --
Balances at December 31, 1996 - 100 900 (960) 40
Net income (loss) - - - - -
--- --- --- --
Balances at December 31, 1997 $ - 100 900 (960) 40
--- --- --- --
</TABLE>
See accompanying notes to financial statements.
- 4 -
<PAGE>
ADAMS OUTDOOR ADVERTISING, INC.
Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities $ - - -
Cash flows from investing activities - - -
Cash flows from financing activities - - -
- - -
Net change in cash - - -
Cash at beginning of year - - -
- - -
Cash at end of year $ - - -
- - -
See accompanying notes to financial statements.
- 5 -
<PAGE>
ADAMS OUTDOOR ADVERTISING, INC.
Notes to Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) The Company
-----------
Adams Outdoor Advertising, Inc. ("AOAI") was organized as a corporation
under the Minnesota Statutes on December 12, 1985. AOAI is the managing
general partner of Adams Outdoor Advertising Limited Partnership (the
"Company"). AOAI is wholly owned by the individual general partner of
the Company, who is also a limited partner in the Company. AOAI has
nominal assets and does not conduct any operations, except for its
activities as managing general partner of the Company.
AOAI and its sole stockholder have agreed that all profits or losses
allocable to the general partners will be allocated to the individual
general partner, and none will be allocated to AOAI.
(b) Investment
----------
The investment balance consists of a general and limited partnership
interest which are carried at cost, since the partnership interest is
not readily marketable.
(c) Income Taxes
------------
Income taxes are accounted for 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
enacted 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.
(d) Use of Estimates
----------------
Management of AOAI has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
- 6 -
<PAGE>
ADAMS OUTDOOR ADVERTISING, INC.
Notes to Financial Statements
(2) Investment in Affiliated Partnership
------------------------------------
AOAI has a 1.00% aggregate partnership interest in the Company which
consists of 0.01% general partnership interest and 0.99% limited partnership
interest. Summary audited financial information for the investee Company as
of and for the years ended December 31, 1997 and 1996 is presented as
follows (in thousands of dollars):
1997 1996
---- ----
Balance sheet information:
Current assets $ 15,684 14,142
Current liabilities (12,588) (9,173)
-------- --------
Working capital 3,096 4,969
Property, plant, and equipment 51,090 51,040
Intangible assets, net 10,450 11,862
Other assets 250 70
Long-term debt, less current installments (131,034) (133,189)
Deferred compensation, less current
installments (3,438) (3,089)
Other liabilities -- (107)
-------- --------
Partners' deficit $ (69,586) (68,444)
-------- --------
Income statement information:
Net outdoor advertising revenues $ 57,285 47,260
-------- --------
Operating income $ 15,557 14,887
-------- --------
Net income $ 791 1,535
-------- --------
(3) Employment Agreement with Sole Stockholder
------------------------------------------
Effective January 1, 1996, AOAI entered into an employment agreement with
the sole stockholder as an executive, which provides a base salary and
benefits, subject to increases based on the Consumer Price Index annually,
plus reimbursement of business expenses. The agreement expires December 31,
2001 unless terminated by AOAI or the sole stockholder and provides one year
of severance pay, if terminated by AOAI under certain circumstances.
- 7 -
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
3.1* Articles of Incorporation of Adams Outdoor Advertising, Inc. ("AOAI")
3.2* By-laws of AOAI
3.3* Limited Partnership Agreement of Adams Outdoor Advertising Limited Partnership
(the "Company")
4.1* Indenture dated as of March 12, 1996 among the Company, AOAI and United States
Trust Company, as Trustee (the "Indenture")
4.2* Form of Original Note
4.3* Form of New Note
4.4* Registration Rights Agreement dated as of March 12, 1996 among the Company,
AOAI and the Initial Purchaser referred to therein
10.1* Securities Purchase Agreement dated as of March 12, 1996 by and among the Company,
AOAI and the Initial Purchaser referred to therein
10.2* Employment Agreement between AOAI and Stephen Adams
10.3* Agreement between Kevin Gleason and the Company
10.4* Phantom Stock Agreement between the Company and Abe Levine
10.5* Nonqualified Retirement Plan for Key Employees
10.6* Amended and Restated Credit Agreement dated December 2, 1996
24.1** Powers of Attorney
27.1 Financial Data Schedule
</TABLE>
*Previously filed.
**Filed herewith.
34
<PAGE>
POWER OF ATTORNEY
- -----------------
(FORM 10-K)
KNOW ALL MEN BY THESE PRESENTS, that ADAMS OUTDOOR ADVERTISING, INC., a
Minnesota corporation (the "Company"), and each of the undersigned directors of
the Company, hereby constitutes and appoints J. Kevin Gleason and Abe Levine and
each of them (with full power to each of them to act alone) its/his/her true and
lawful attorney-in-fact and agent, for it/him/her and on its/him/her and in
its/his/her name, place and stead, in any and all capacities to sign, execute,
affix its/his/her seal thereto and file the Annual Report on Form 10-K of the
Company and Adams Outdoor Advertising Limited Partnership for the year ended
December 31, 1997 under the Securities Exchange Act of 1933, as amended, with
any amendment or amendments thereto, with all exhibits and any and all documents
required to be filed with respect thereto with any regulatory authority.
There is hereby granted to said attorneys, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in respect of the foregoing as fully as it/he/she or
itself/himself/herself might or could do if personally present, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in any number of counterparts,
each of which shall be an original, but all of which taken together shall
constitute one and the same instrument and any of the undersigned directors may
execute this Power of Attorney by signing any such counterpart.
Adams Outdoor Advertising, Inc. has caused this Power of Attorney to be
executed in its name by its Chief Executive Officer on the 31st day of March,
1998
ADAMS OUTDOOR ADVERTISING, INC.
By /s/ J. Kevin Gleason
--------------------------
J. Kevin Gleason
Chief Executive Officer
and President
35
<PAGE>
The undersigned, directors of ADAMS OUTDOOR ADVERTISING, INC., have hereunto set
their hands as of the 31st day of March, 1998.
/s/ Stephen Adams /s/ J. Kevin Gleason
- ------------------------------------ ---------------------------------
Stephen Adams J. Kevin Gleason
/s/ David Frith-Smith /s/ George Pransky
- ------------------------------------ ---------------------------------
David Frith-Smith George Pransky
/s/ Andris A. Baltins
- ------------------------------------
Andris A. Baltins
D I R E C T O R S
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet of Adams Outdoor Advertising Limited Partnership as of December 31, 1997
and the related Statements of Operations and Cash Flows and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001011977
<NAME> ADAMS OUTDOOR ADVERTISING, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,121
<SECURITIES> 1,281
<RECEIVABLES> 8,593
<ALLOWANCES> (700)
<INVENTORY> 142
<CURRENT-ASSETS> 15,684
<PP&E> 108,997
<DEPRECIATION> (57,907)
<TOTAL-ASSETS> 77,474
<CURRENT-LIABILITIES> 12,588
<BONDS> 131,034
0
0
<COMMON> 0
<OTHER-SE> (69,596)
<TOTAL-LIABILITY-AND-EQUITY> 77,474
<SALES> 57,285
<TOTAL-REVENUES> 57,285
<CGS> 0
<TOTAL-COSTS> 33,579
<OTHER-EXPENSES> 8,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,601
<INCOME-PRETAX> 791
<INCOME-TAX> 0
<INCOME-CONTINUING> 791
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 791
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet of Adams Outdoor Advertising, Inc. as of December 31, 1997 and the related
Statements of Operations and Cash Flows and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001011976
<NAME> ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 40
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 40
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> (60)
<TOTAL-LIABILITY-AND-EQUITY> 40
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
