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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 333-59137
TRI-STATE OUTDOOR MEDIA GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Kansas 481061763
(State or other jurisdiction I.R.S. Employer Identification No.)
of incorporation or organization
</TABLE>
3416 HIGHWAY 41 SOUTH, TIFTON GEORGIA 31793
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 732-8261
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934:
TITLE OF EACH CLASS
11% SENIOR NOTES DUE 2008
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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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Yes (X) No ( )
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 15, 2000: is $0.
The number of shares of the registrant's Common Stock outstanding as of
March 15, 2000: 200 shares.
Yes ( ) No (X)
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1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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<CAPTION>
PAGE
PART I
<S> <C> <C> <C>
Item 1 Business 1
General Development of Business 1
Business Strategy 3
Inventory 4
Markets 5
Customers 6
Contracts 7
Local Market Operations 7
Production 7
Competition 8
Government Regulations 9
Employees 10
Item 2 Properties 10
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 Market for Registrant's Common Stock and Related
Stock Holder Matters 11
Item 6 Selected Financial Data 12
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A Quantitative and Qualitative Disclosures About Market Risk 22
Item 8 Financial Statements 22
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
Item 10 Directors and Executive Officers of the Registrant 23
Item 11 Executive Compensation 24
Item 12 Security Ownership of Certain Beneficial Owners and Management 25
Item 13 Certain Relationships and Related Transactions 27
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 27
</TABLE>
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NOTE: REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K of Tri-State Outdoor Media Group, Inc.
("Tri-State" or the "Company") contains forward-looking statements concerning,
among other things, the Company's expected future revenues, operations and
expenditures, competitors or potential competitors, acquisition activity, and
the regulation of the outdoor advertising industry. These forward-looking
statements are identified by their use of terms and phrases such as
"anticipate," "believe," "could, " "estimate, " "expect, " "intent, " "may,"
"plan," "predict," "project," "will" and similar terms and phrases, including
references to assumptions. These statements are contained in each part of this
Annual Report and in the documents incorporated by reference herein. These
forward-looking statements represent the expectations of the Company's
management as of the filing date of this Form 10-K. The Company's actual results
could differ materially from those anticipated by the forward-looking statements
due to a number of factors, including (1) risks and uncertainties relating to
leverage; (ii) the need for additional funds; (iii) the integration of companies
acquired by the Company and the Company's ability to recognize cost savings or
operating efficiencies as a result of such acquisitions; (iv) the continued
popularity of outdoor advertising as an advertising medium; (v) the regulation
of the outdoor advertising industry and (vi) the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results" under
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The Company is a leading highway directional outdoor advertising
company. As of December 31, 1999, the Company operated over 13,707 outdoor
advertising displays, including 11,759 bulletins and 1,948 posters, in 29 states
in the United States. Essentially all of the Company's billboards are located
outside urban areas. The Company offers a full line of outdoor advertising
services to its customers, including creative design, production, installation
and maintenance of advertising displays. In 1999, over 95% of the Company's net
revenues was generated by local businesses, including local franchisees of
national chains, with no one customer accounting for as much as 2% of its net
revenues.
Highway directional billboards are usually located along interstate
highways and primary and secondary roads and are used by local businesses to
alert and direct motorists to the advertiser's place of business. Many of the
Company's principal customers, which include motels and hotels, restaurants and
gasoline retailers, depend on strategically located billboards as the only
effective, cost-efficient means to reach their target customers. As a result,
these advertisers will usually purchase a billboard display under long-term
contracts and leave the original advertising copy in place for the duration of
the contract. As of December 31, 1999, over 83% of our bulletin advertising
contracts had an original term of at least 18 months and 68% had an original
term of at least 36 months. The Company believes that its large number of
long-term contracts has generated more stable and predictable revenues, has
reduced production, installation and maintenance costs and has leverage its
sales force, resulting in higher cash flow margins.
Since 1993, the Company has continued to pursue an aggressive
acquisition strategy, completing over 32 asset acquisitions. During this period,
the Company completed both "new market" and "fill-in" acquisitions. New market
acquisitions are acquisitions of outdoor advertising assets not contiguous of
the Company's existing markets.
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Fill-in acquisitions are generally acquisitions in or adjacent to the Company's
existing markets that involve the purchase of outdoor advertising displays only,
resulting in the elimination of virtually all personnel and related costs of the
acquired businesses.
During 1998, the Company completed 2 significant acquisitions:
- Unisign Acquisition. On March 2, 1998, the Company acquired
virtually all of the outdoor advertising assets of Unisign
Corporation, Inc. and assumed certain capitalized leases for a
total acquisition cost of $22.0 million. As a result of this
new market acquisition, 1,421 display faces in Kentucky, West
Virginia and Ohio were added to the Company's portfolio.
- Western Acquisition. On September 18, 1998, the Company
acquired substantially all of the outdoor advertising assets
of Western Outdoor Advertising Co. for a total purchase price
of $ 26.8 million. In this fill-in acquisition, the Company
acquired 2,439 display faces in 19 states concentrated in
Iowa, Texas, Nebraska, Missouri, Oklahoma and Kansas. The
Company had existing operations in 11 of the 19 states served
by Western.
In addition to the 2 significant acquisitions discussed above, in 1999
the Company completed several smaller fill-in acquisitions totaling more than
$16.4 million in total purchase price whereby the Company added 1,149 display
faces to its inventory. Those in excess of $1 million are listed below.
<TABLE>
<CAPTION>
Purchase
Company Type Month Acquired Price States
- ------- ---- -------------- ----- ------
<S> <C> <C> <C> <C>
PNE Media Holdings, LLC Fill-In Oct, 1999 $9,925 NC, MN, MO,
SD, NE
PNE Media , LLC Fill-In Oct, 1999 $2,528 KS, TX
Pabian Outdoor/ Fill-In Oct, 1999 $1,925 GA
Aiken, Inc.
Southeast Outdoor Fill-In Oct, 1999 $1,405 GA
Advertising
</TABLE>
During 1999, the Company also acquired certain assets of one small
outdoor company for the aggregate purchase price of $.7 million.
On May 20, 1998, the Company sold $100,000,000 of 11% Notes due 2008 in
a Rule 144A private placement (the "Note Offering"). The Company used a total of
$67.4 million of the net proceeds to repay all borrowings under the Company's
then existing senior bank credit facility and a bridge note facility. The
Company originally incurred these borrowings in large part to finance the TSS
and Unisign acquisitions. On November 5, 1998, the Company made a registered
exchange offer ("Exchange Offer") to holders of the Notes sold in the Note
Offering for notes having the same terms (the "Notes"). The Exchange Offer was
completed on December 8, 1998.
The Company entered into an amended and restated loan agreement to the
original credit agreement (the "Credit Agreement") with The First National Bank
of Chicago (now know as Bank One, N.A.) originally dated
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September 20, 1998, amended on August 12, 1999 and further amended as of October
15, 1999. The Credit Agreement consists of a term loan for $10 million and a
revolving credit of $10 million of which $2 million is restricted for payment of
interest. The Credit Agreement provides for, among other items, a lien on all
the assets of the Company and principal payments beginning on January 1, 2001.
On October 15, 1999, SGH Holdings, Inc., the parent of the Company,
borrowed $19 million from an institutional lender and contributed the funds, net
of expenses, to the Company in the form of additional paid in capital. These
funds were used for acquisitions and related costs.
BUSINESS STRATEGY
The Company's strategy is to be a leading provider of highway
directional outdoor advertising to local advertisers in non-urban markets. The
Company entered this segment of the outdoor advertising business because it
believes that non-urban businesses have been under-served by the major outdoor
advertising companies. The Company's success depends upon its ability to
implement the following key elements of its strategy:
- Maximize Revenues through Rate and Occupancy Management. The
Company's lease expense, which is the rent paid to land owners
on which the Company's billboards are located, is generally
lower for non-urban highway directional billboards. For this
reason, when the Company seeks advertisers for its billboards,
it can often refuse to reduce advertising rates to keep the
billboards in use. The Company believes that by maintaining
its advertising rates, it can maximize its revenues over the
longer term.
- Emphasize 36-Month Advertising Contracts. The Company believes
that its large number of long-term contracts has generated
more stable and predictable revenues, has reduced production,
installation and maintenance costs over the term of the
contracts and has permitted it to more efficiently leverage
its sales personnel, resulting in higher cash flow margins.
- Pursue Growth through Acquisitions. The Company believes that
the non-urban highway directional market remains highly
fragmented, producing numerous acquisition opportunities that
fit its acquisition criteria. The Company believes that it can
more easily identify, acquire and successfully integrate
fill-in acquisitions because it is typically a major provider
of outdoor advertising services in the areas in which it
operates. With the addition of new market acquisitions, its
potential to identify and acquire new fill-in acquisitions
increases as its area of coverage expands.
- Capitalize on New Build Opportunities. The Company believes
that the economics of building new advertising structures and
faces compare favorably with the economics of purchasing
structures through fill-in acquisitions. To develop new build
opportunities, the Company actively monitors changes in local
zoning restrictions and the availability of new land lease
sites in each of its existing markets. Non-rural areas
generally offer greater new build opportunities due to the
higher rates of new development and changes in local zoning.
- Control Costs and Quality through Centralization of Production
and Vertical Integration. The Company seeks to control
production costs and maintain consistent, high quality
production standards by centralizing and vertically
integrating essentially all of its production services related
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to billboards leased under 36-month contracts, thereby
reducing its use of outside contractors. The Company also uses
Scotchlite, a highly reflective and long lasting vinyl on many
of its rural billboards leased under long-term contracts which
eliminates the need for electric lighting and reduces
maintenance on these billboards. Approximately 24% of the
Company's bulletins in service at December 31, 1999 used
Scotchlite on the advertising copy.
INVENTORY
The Company differentiates its inventory by the type of material used
on its display faces.
- The Company's Bulletins range in size from 4 feet high by 6
feet wide to 20 feet high by 80 feet wide, with the majority
ranging from 12 feet high by 24 feet wide to 10 feet high by
32 feet wide. To better serve its customers on a localized
basis, the Company may customize the size and pricing of its
bulletins to meet their budgets. As a result, many of the
Company's bulletins are smaller than the standard-sized
bulletins offered by its competitors, most of which are 10
-1/2 feet high by 36 feet wide or 14 feet high by 48 feet
wide. At December 31, 1999, approximately 59% of the Company's
bulletin advertising contracts provided for bulletins made
from Scotchlite or non-reflective self-adhesive vinyl attached
to pre-painted plywood panels. Substantially all of this vinyl
advertising copy is produced at the Company's Tifton,
Georgia-facility and shipped to the site. These vinyl display
faces generally last between three and five years without
replacement. Most of the Company's remaining billboards are
hand-painted, in most cases by outside contractors either at
the Company's divisional facilities or on-site. Hand-painted
signs generally last between 12 and 18 months. A small number
of the Company's bulletins are made from computer-generated
graphics on a single sheet of vinyl that is wrapped around the
billboard structure. These single sheet vinyl faces are
produced by outside contractors and are usually sold under
shorter-term contracts. Because of their greater impact and
higher cost, bulletins are usually located on major highways.
- 30-Sheet Posters, the most common type of billboard in the
outdoor advertising industry, are 12 feet high by 25 feet
wide. Advertising copy for 30-sheet posters usually consists
of lithographed or silk-screened paper sheets that are pasted
and applied like wallpaper to the face of the display. All of
the lithographed and silk-screened paper sheets are prepared
by outside parties, but in most cases are installed on
billboards by the Company's divisional personnel. Thirty-sheet
posters are primarily located on major traffic arteries. All
display faces originally constructed by the Company as
30-sheet posters are generally maintained as such. If a
bulletin display face is unoccupied, the Company may sell it
as one or two poster displays on a short-term basis, pending
the procurement of a long-term contract.
- Junior (8-Sheet) Posters are 6 feet wide by 12 feet. Displays
are typically prepared and mounted in the same manner as
30-sheet posters. The Company generally seeks to resell its
8-sheet posters as bulletins as soon as it procures a
long-term contract for the space.
Display faces generally are mounted on structures owned by the Company
and located on sites that are leased. The Company also owns a small number of
its sites. Billboard structures are made of wood, steel and other durable
materials built to withstand variable climates, have long useful lives and do
not require substantial maintenance. Virtually all of the Company's new
billboard structures are made of steel. The Company expects its billboard
structures to last at least 20 years without significant refurbishment.
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The following tables sets forth certain information on the Company's
operations in each of the states in its market areas.
<TABLE>
<CAPTION>
As of December 31, 1999
DISPLAY 30-SHEET 8-SHEET
STATE FACES BULLETINS (1) POSTERS (1) POSTERS (1)
- ----- ----- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Georgia 2554 2519 35
Missouri 1436 1436
Kentucky 1272 848 424
Oklahoma 1043 1043
Minnesota 941 499 403 39
Pennsylvania 760 499 258 3
Texas 721 721
New York 680 508 172
Arkansas 667 667
Iowa 662 662
S. Carolina 639 259 380
Kansas 489 489
N. Carolina 449 329 1 119
Nebraska 399 399
Florida 228 228
W. Virginia 200 135 65
Alabama 196 196
Tennessee 122 122
Illinois 63 63
Ohio 63 15 2 46
S. Dakota 48 48
Louisiana 32 32
Other 43 42 1
----- ----- -------- ----
TOTAL 13707 11759 1361 587
</TABLE>
(1) Each display face, including an unoccupied display face, is classified
either as a bulletin or poster based on the last sale to an advertiser.
MARKETS
The Company operates through five divisions covering particular
geographic regions. Certain of the Company's divisions operate in the same
states but their coverage areas do not overlap.
The following is a summary of the market and plants associated with
each division as of December 31, 1999.
Southeast Division. The Southeast division, based in Tifton, Georgia,
provides outdoor advertising services primarily in Georgia, Florida, North
Carolina, South Carolina, southern Tennessee and Alabama. As of December 31,
1999, the Company's Southeast division operated 3,586 painted bulletins with the
majority varying in size from 10 -1/2 feet by 36 feet to 14 feet by 48 feet,
except in North Carolina and South Carolina where the typical size is 6 feet by
12 feet, and 535 posters, including 499 8-sheet posters.
Midwest Division. The Midwest division, based in Baxter Springs,
Kansas, currently provides outdoor advertising services primarily in Arkansas,
Kansas, Louisiana, southern Missouri, Oklahoma, and Texas. As of December 31,
1999, the Company's Midwest division consisted of 3,668 bulletins varying in
size from 8 feet by 20 feet to 14 feet by 48 feet.
Northcentral Division. The Northcentral division, based in Rochester,
Minnesota, currently provides outdoor advertising services primarily in southern
Minnesota (including Rochester), Iowa , Nebraska, Northern Missouri,
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and South Dakota. As of December 31, 1999, the Company's Northcentral Division
operated 2,355 bulletins, varying in size with the majority being 12 feet by 50
feet, and 442 posters including 35 8-sheet posters.
Mid-Atlantic Division. The Mid-Atlantic division, based in Ivel,
Kentucky, primarily consists of the business acquired in the Unisign acquisition
on March 2, 1998 and provides outdoor advertising primarily in West Virginia,
eastern Kentucky, northern Tennessee, Illinois, and southern Ohio. As of
December 31, 1999, the Mid-Atlantic division operated 1,139 bulletins, with the
majority varying in size from 12 feet high by 24 feet wide to 20 feet high by 60
feet wide and 492 30-sheet posters.
Northeast Division. The Northeast division, based in Jamestown, New
York, provides outdoor advertising services in western New York, northwestern
Pennsylvania and Youngstown, Ohio. As of December 31, 1999, the Company's
Northeast division operated 1,011 bulletins, with the majority varying in size
from 6 feet wide by 12 feet high to 14 feet high by 48 feet wide, and 479
posters including 39 8-sheet posters in Youngstown, Ohio.
CUSTOMERS
For the year ended December 31, 1999, over 95% of the Company's net
revenues was generated by local business, including local franchisees of
national chains. The Company believes that its customer base of local
advertisers offers several advantages over a more national customer base. In the
case of local advertisers, the Company is more likely to deal directly with the
customer without an advertising agency acting as an intermediary. The Company is
also more likely to develop a long-term working relationship with a local
advertiser, which, the Company believes, gives it greater influence over the
advertiser's purchasing decisions and helps it obtain contract renewals from the
advertiser.
The Company's customers are engaged in a wide range of businesses as
shown in the following table which sets forth an estimated breakdown of the
businesses in which the Company's customers were engaged for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF
NET
REVENUES FOR
YEAR
ENDED
DECEMBER 31, 1999
<S> <C>
Hotels & Motels 25.4%
Restaurants 22.3%
Retail 12.2%
Automotive 10.5%
Gasoline Retailers and Other Services 8.4%
Entertainment/Sports 3.3%
Hospitals 2.9%
Financial Institutions 2.0%
All other 13.0%
-----
Total 100%
-----
</TABLE>
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CONTRACTS
The Company emphasizes the use of advertising contracts with a term of
36 months. The Company believes that such contracts provide considerable
stability with respect to both occupancy and advertising rates. Long-term
contracts increase the predictability of net revenues and allow sales personnel
time to devote greater attention to servicing their accounts and generating new
customers. The Company believes that once its customers enter into 36-month
contracts they tend to view their outdoor advertising expenses as a routine cost
of doing business. As a result, the Company believes that such customers are
more likely to renew their contracts.
To encourage customers to sign 36-month contracts, the Company charges
advertisers a lower monthly rate for 36-month contracts than that for
shorter-term contracts. The Company also provides incentives to its sales force
to sell longer-term contracts by currently paying commissions applicable to
revenues for the entire term of the advertising contract.
As of December 31, 1999, the future contract revenue associated with
occupied bulletins was $31.9 million, of which $18.7 million is expected to be
billed in 2000. Since posters are sold under short-term contracts, net revenues
from poster contracts are not included in future contract revenue amounts.
LOCAL MARKET OPERATIONS
The Company conducts its sales, marketing and site leasing operations
through it's five regional offices consistent with management's belief that
decentralization of these operations is most responsive to local market demands
while providing greater incentive to its regional employees. Each division has a
general manager who oversees regional leasing and creative design, and a sales
manager. In addition, each division has limited facilities for the production of
outdoor advertising. (See"--Production"). Management believes that by relying on
regional personnel to study and assess local market conditions and to procure
new site leases, it is better able to respond to changes in advertiser demand.
The decentralized approach is complemented by the Company's centralized
administration and oversight that includes direct management of each division's
sales, accounting and strategic planning. Division general managers report
directly to the Chief Operating Officer. Division sales managers report directly
to the Chief Operating Officer.
Management encourages its sales force to maintain a hands-on-approach
to marketing within their local business communities. This mandates substantial
customer and business contact, evaluation of sites and potential site locations,
and an understanding of the prevailing business community. Since most small
communities lack exposure to sophisticated advertising agencies, the Company
satisfies this need with its design and production staff.
PRODUCTION
The Company has internal production facilities and staff to perform a
full range of activities required to construct and install outdoor advertising
structures and display faces, to develop, create and install outdoor advertising
and to maintain its outdoor advertising properties.
Production work for display faces includes creating the advertising
copy design and layout, painting the design or coordinating its printing, and
installing the designs on display faces.
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The Company produces substantially all advertising on its bulletin display
faces, especially since local advertisers generally are not represented by
advertising agencies.
The Company's bulletin display faces are panels to which advertising
copy is attached. Bulletin display faces will be one of three types depending
upon the length of the advertising contract; self-adhesive vinyl, hand-painted
or vinyl wrap.
Self-adhesive vinyl bulletins consist of vinyl letters and other
advertising copy that contain an adhesive backing placed on pre-painted,
roller-coated plywood sheets that are hung on the outdoor advertising structure.
Where no illumination source exists on a structure, the self-adhesive vinyl copy
may be coated with Scotchlite, which causes the advertising copy to be
illuminated brightly by the headlights of passing vehicles. Self-adhesive vinyl
bulletins are generally sold under contracts with a term of at least 36 months.
Hand-painted bulletins contain advertising copy hand-painted on plywood
sheets by an outside contractor either on-site or in-house at a Company
facility. Hand-painted bulletins are generally sold under contracts with a term
of 12 to 18 months.
Vinyl wraps consist of vinyl sheets painted with computer-generated
graphics or hand painted copy that are wrapped around rectangular plywood sheets
attached to the outdoor advertising structure. Vinyl wraps are produced by
outside contractors and are sold under short-term contracts.
The Company also utilizes poster faces which are lithographed or
silk-screened paper sheets produced by outside contractors pasted to the display
face.
The Company has facilities for the construction of new outdoor
advertising structures in Baxter Springs, Kansas and Tifton, Georgia. During
1998, the Company phased out the production of display faces at the Baxter
Springs, Kansas facility and consolidated its production facilities in Tifton,
Georgia. The Company's new billboard structures have generally been constructed
by outside contractors; however, the Company has increased its capability to
build these structures by adding construction personnel at its Tifton facility.
The Company believes it has adequate capacity to meet the needs of its
advertising production.
COMPETITION
In most cases, the Company is a leading provider of outdoor advertising
in the areas in which it operates. Most of the Company's customers are local
businesses purchasing highway directional billboards under long-term contracts.
The Company competes for these customers primarily with other outdoor
advertising companies in the area, highway logo sign operators and companies
that install commercial signs on an advertiser's own property. To a lesser
extent, the Company also competes with a number of other local competitors,
including local newspapers, direct mail and other print media, as well as radio
and television, especially in cases where the local advertiser is seeking to
attract local residents to its business. In competing for local highway
directional advertisers, price, location and availability are important factors,
as are service and customer relationships.
The Company competes for non-highway directional customers principally
through the sale of space on its posters. The Company competes for these
customers against a full range of competitors, primarily including other outdoor
advertisers, print media, radio and television, as well as a variety of other
"out-of-home" media, including advertising in shopping centers and malls,
airports, stadiums, movie theaters and supermarkets and on buses.
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Advertisers compare relative costs of available media and
cost-per-thousand impressions, particularly when delivering a message to
customers from particular geographic areas. In competing with other media,
outdoor advertising relies on its low cost-per-thousand impressions and its
ability to target a particular geographic area.
The outdoor advertising industry is highly fragmented, consisting of
several large outdoor advertising and media companies with operations in
multiple markets as well as small local companies operating a limited number of
structures in a single or a few local markets. In several of its markets, the
Company encounters direct competition from other major outdoor media companies,
including Outdoor Systems, Inc. and Lamar Advertising Company, each of which has
a larger national network and greater resources than the Company. The Company
believes that its emphasis on local highway directional advertisers and its
position as a major provider of advertising services in each of the areas in
which it operates enable it to compete effectively with the other outdoor media
operators, as well as other media. The Company also competes with other outdoor
advertising companies for sites on which to build new structures.
GOVERNMENT REGULATIONS
The outdoor advertising industry is subject to governmental regulation
at the federal, state and local levels. Federal law, principally the Highway
Beautification Act, encourages states, by the threat of withholding federal
appropriations for the construction and improvement of highways within such
states, to implement legislation to restrict billboards located within 660 feet
of, or visible from, interstate and primary highways except in commercial or
industrial areas. The Highway Beautification Act, and the various state statutes
implementing it, require the payment of just compensation whenever government
authorities require legally erected and maintained billboards to be removed from
federally-aided highways.
All the states in which the Company operates require the owner of a
billboard to obtain a state or local permit before erecting the structure. All
the states have implemented regulations at least as restrictive as the Highway
Beautification Act, including limitations on the construction of new billboards
adjacent to federally-aided highways and the removal at the owner's expense and
without any compensation of any illegal signs on such highways. In addition, a
number of states and localities, including all the principal states in which the
Company operates, have passed additional and more restrictive regulations, often
in the form of municipal building, sign or zoning ordinances, on the
construction, repair, upgrading, height, lighting, size and location of, and, in
some instances, content of, advertising copy being displayed on outdoor
advertising structures adjacent to federal-aided highways and other
thoroughfares. For instances, Maine, Vermont, Hawaii and Alaska ban billboards
on a state-wide basis. Common restrictions in the states in which the Company
operates generally include requirements that billboards be at least 500 feet
apart.
Most outdoor advertisers, including the Company, operate a significant
number of billboards that do not conform with current state or local regulations
governing the height, size or location of billboards. A non-conforming billboard
is one that was lawfully erected; but due to either a change in zoning laws or
the enactment of zoning laws where none previously existed, the billboard is no
longer in compliance. However, the owner of a non-conforming billboard is still
legally permitted to own, operate and maintain the billboard for the rest of its
life. Typically, most laws provide that in the event a non-conforming billboard
is damaged, including damage caused by natural events such as tornados or
hurricanes, the Company is not permitted to repair the structure if either the
cost of doing so exceeds 50% of the cost of building a new billboard structure
or the physical damage to the structure exceeds 50% of the structure. In recent
years, the number of non-conforming billboards lost by the Company in this
fashion has been nominal. An outdoor advertising company that holds a permit for
a non-conforming structure has the exclusive right to maintain and operate that
structure, and is free to transfer the permit to another owner.
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From time to time governmental authorities order the removal of
billboards by the exercise of eminent domain. Thus far, the Company has been
able to obtain satisfactory compensation for any of its structures removed at
the direction of governmental authorities, although there is no assurance that
it will be able to continue to do so in the future.
In various jurisdictions and more typically in some urban metropolitan
areas, ordinances authorizing the amortization of billboards have been adopted.
Amortization permits the billboard owner to operate its billboard as a
non-conforming use for a specified period of time until it has recouped its
investment, after which it must remove or otherwise conform its billboard to the
applicable regulations at its own cost without any compensation. Amortization
and other regulations requiring the removal of billboards without compensation
have been subject to vigorous litigation in state and federal courts and cases
have reached differing conclusions as to the constitutionality of these
regulations. Currently, none of the Company's existing inventory is subject to
any amortization ordinance.
The outdoor advertising industry is heavily regulated and, at various
times and in various markets, the Company can expect to be subject to varying
degrees of regulatory pressure affecting the operation of advertising displays.
Accordingly, although the Company's experience to date is that the regulatory
environment has not adversely impacted the Company's business, no assurance can
be given that existing or future laws or regulations will not materially
adversely affect the Company at some time in the future.
EMPLOYEES
At December 31, 1999, the Company employed 213 people, of whom 70
people were primarily engaged in sales and marketing, 101 people were engaged in
painting, bill posting and construction and maintenance of displays, and the
balance were employed in executive, financial, administrative and similar
capacities. The Company is not a party to any collective bargaining agreement.
ITEM 2. PROPERTIES
The Company conducts its operations at the facilities set forth below:
<TABLE>
<CAPTION>
SQUARE LEASED/
LOCATION USE FOOTAGE OWNED
<S> <C> <C> <C>
Tifton, Georgia Office; billboard structure 45,000 Owned
construction; full
display face production
Baxter Springs, Kansas Office; billboard structure 14,000 Owned
construction; limited display
face production
Jamestown, New York Office; limited display face 5,000 Leased
production
Rochester, Minnesota Office; limited display face 8,000 Leased
production
Ivel, Kentucky Office; limited display face 5,000 Leased
production
</TABLE>
10
<PAGE> 14
As part of the Western acquisition, the Company also acquired Western's
headquarters in Omaha, Nebraska, which Western used for offices and for
production of display faces. The Company has been able to integrate the Western
operations into its Midwest and Northcentral operations. The Company did not
utilize the acquired Omaha property and subsequently sold it on March 23, 1999.
In addition, as of December 31, 1999, the Company owned 32 parcels of
real property that serve or may serve as the sites for outdoor displays. The
Company's remaining 9,155 advertising display sites are leased. The Company's
site leases are for varying terms ranging from month-to-month, year-to-year, or
longer, and many provide for renewal options. Approximately 20% of these leases
will expire prior to the end of 2000. Historically, the Company has had no
difficulty renewing these leases. There is no significant concentration of
displays under any one lease or subject to negotiation with any one landlord.
The Company believes that an important part of its management activity is to
manage its lease portfolio and negotiate suitable lease renewals and extensions.
Through the use of double-sided structures and multiple displays on individual
structures or individual sites, the Company averages approximately 1.5 display
faces for every site it owns or leases.
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 and construction matters. The Company is also involved
in routine administrative and judicial proceedings regarding billboard permits,
fees and compensation for condemnations. The Company is not a party to any
lawsuit or proceeding which, in the opinion of management, is likely to have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
In May 1998, the Company issued the Senior Notes. The Company believes
the sale of the Senior Notes qualified as a transaction by an issuer not
involving a public offering within the meaning of Section 4 (2) of the
Securities Act of 1933, as amended (the "Securities Act"), based on the manner
of offering (a negotiated sale to a limited number of "qualified institutional
buyers" as defined in Rule 501 under the Securities Act) and a buyer's financial
status, investment experience and investment intent, as represented to the
Company. On December 8, 1998, the Company completed the Exchange Offer of Senior
Notes for a like amount of Exchange Notes which have been registered under the
Securities Act pursuant to a registration statement (the Senior Notes together
with the Exchange Notes are collectively referred to hereinafter as the "Senior
Notes").
As of December 31, 1999, no established public market exists for the
Company's common stock. There is one holder of the Company's common stock. The
Company's common stock has not been registered with the U.S. Securities Exchange
Commission or other regulatory authority.
The Company's Senior Notes and secured bank credit facility both
contain covenants restricting the payments of dividends in the future.
11
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for and as of the end of
each of the years in the five year period ended December 31, 1999 are derived
from the audited financial statements of the Company. The financial statements
of the Company as of and for the years ended December 31, 1997, 1998, and 1999
have been audited by McGladrey & Pullen, LLP, independent auditors, as stated in
their report which is included elsewhere herein. The financial statements of the
Company as of and for the years ended December 31, 1995 and 1996 have been
audited by McGrail Merkel Quinn & Associates, independent auditors, as stated in
their report not included herein. The data presented below should be read in
conjunction with the audited financial statements and notes related thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1995 1996 1997(1) 1998(1) 1999(1)
---- ---- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues $ 7,892 $ 8,021 $ 11,831 $ 20,958 $ 26,905
--------- --------- --------- --------- ---------
Operating expenses:
Direct operating expenses 2,315 2,427 3,817 7,405 9,514
General and administrative 1,934 2,345 2,417 3,389 4,264
Depreciation and
Amortization 2,713 2,648 4,699 9,958 11,730
--------- --------- --------- --------- ---------
Total operating expenses 6,962 7,420 10,933 20,752 25,508
--------- --------- --------- --------- ---------
Operating income 930 601 898 206 1,397
Gain (loss) on sale of assets 1,334 443 (143) -- --
Interest expense (2,094) (1,941) (4,200) (10,417) (13,006)
Other income (expense) (153) 2 -- 369 156
--------- --------- --------- --------- ---------
Income (loss) before income
tax benefit 17 (895) (3,445) (9,842) (11,453)
Income tax benefit 8 324 1,424 2,274 --
--------- --------- --------- --------- ---------
Income (loss) before
extraordinary item $ 25 $ (571) $ (2,021) $ (7,568) $ (11,453)
========= ========= ========= ========= =========
Basic income (loss) from
continuing operations per share $ 125 $ (2,855) $ (10,105) $ (37,840) $ (57,265)
========= ========= ========= ========= =========
</TABLE>
12
<PAGE> 16
<TABLE>
<S> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(2) $ 3,643 $ 3,249 $ 5,597 $ 10,164 $ 13,127
EBITDA margin (2) 46.2% 40.5% 47.3% 48.5% 48.8%
Cash flows from
Operating activities 1,245 1,476 1,810 (526) (3,058)
Cash flows from
Investing activities (2,343) 1,165 (37,305) (64,531) (15,821)
Cash flows from
Financing activities 1,132 (2,582) 35,494 64,998 18,961
Capital expenditures 1,083 1,655 2,334 8,093 7,166
Ratio of earnings to
Fixed charges(3) 1.0x -- -- -- --
Number of displays (4)
Bulletins 3,815 3,975 6,106 10,481 11,759
Posters 1,623 1,461 1,432 1,956 1,948
--------- --------- --------- --------- ---------
Total displays 5,438 5,436 7,538 12,437 13,707
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Cash and cash equivalents $ 74 $ 133 $ 132 $ 73 $ 155
Working capital (deficit) (2,057) (195) 2,733 4,180 3,557
Total Assets 19,214 17,128 54,106 121,496 132,125
Total debt (including current
maturities) 19,798 19,474 57,998 116,241 121,425
Stockholder's equity
(deficiency) (3,194) (2,863) (4,884) 1,600 7,822
</TABLE>
(1) The Company has made acquisitions in 1997, 1998, and 1999 which affect
the comparability of the information contained herein.
(2) "EBITDA" is defined as operating income before depreciation and
amortization. EBITDA represents a measure that management believes is
customarily used to evaluate the financial performance of companies in
the media industry. However, EBITDA is not a measure of financial
performance under generally accepted accounting principles and should
not be considered an alternative to operating income as an indicator of
the Company's operating performance or to net cash provided by (used
in) operating activities as a measure of its liquidity. EBITDA margin
is EBITDA stated as a percentage of net revenues.
13
<PAGE> 17
(3) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income before income taxes plus fixed charges.
Fixed charges consist of interest expense (including amortization of
deferred debt issuance costs) and the portion of rental expense that is
deemed representative of the interest factor. Earnings were
insufficient to cover fixed charges by $895,000 in 1996, $3.4 million
in 1997, and $9.8 million in 1998, and $11.5 million in 1999.
(4) All display faces, including unoccupied display faces, are classified
based on the last sale to an advertiser as either a bulletin or poster.
For 1995, the table does not reflect display faces located in and
around Watertown, New York that were acquired in November 1995 and
disposed of in January 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations of the Company
for the three years ended December 31, 1999 and financial condition at December
31, 1999 should be read in conjunction with the Financial Statements of the
Company and the related notes included elsewhere herein.
GENERAL
The Company was formed in 1986, and since then net revenues and EBITDA
have grown primarily through the acquisition of outdoor advertising businesses
and individual display faces in specific markets and the construction of new
display faces in existing markets.
Net revenues are a function of the number of display faces operated by
the Company, the occupancy levels of the Company's display faces and the rates
that the Company charges for their use. The Company focuses its sales efforts on
selling 36-month contracts to maximize both the occupancy of its display
inventory and its sales force efficiency. The Company believes that it has
opportunities to improve its occupancy levels and rates for a number of reasons,
including the recent expansion of the Company's sales force, benefits derived
from the application of the Company's existing incentive compensation-based
sales strategy in its newly acquired operations and general economic conditions
in its new markets. Operating results are affected by general economic
conditions, as well as trends in the advertising industry.
The Company's net revenues are gross revenues net of withheld
commissions retained by advertising agencies that contract for the use of
advertising displays on behalf of their advertisers and other miscellaneous
credits. Agency commissions are typically 15% of gross revenues per contract.
The Company enters into agreements with advertising agencies on a
customer-by-customer basis. Because of the Company's reliance on local
advertisers, many of which do not employ agencies, the Company believes that it
depends less on the placement of advertising through agencies than most other
major outdoor advertising companies and that its agency commission levels are
lower than industry averages. In 1999, direct sales to local advertisers
represented over 95% of the Company's net revenues.
Direct operating expenses consist of sales, production and lease
expense. Selling expense primarily consists of compensation to the Company's
sales force, travel and entertainment related to sales, and outside commissions
other than to advertising agencies. Commissions to the Company's sales force are
based on the total advertising contract value and are paid upon contract
receipt. The total advertising contract value is the monthly billing multiplied
by the number of months in the contract. Production expense mainly consists of
illumination expense,
14
<PAGE> 18
maintenance of billboard structures, the cost of purchasing and applying poster
advertisements and the cost of producing display faces for shorter term
contracts. The cost of producing advertising display faces for longer term
contracts is capitalized and depreciated over the life of the contract. The
Company believes that its illumination expense is generally lower than industry
averages because it produces a significant number of bulletins (24% of its
bulletins as of December 31, 1999 using Scotchlite) which requires no
illumination and many of the remaining displays are not illuminated. The
Company's illumination expense was 3.2% of net revenues in 1997, 3.7% in 1998
and 3.6% in 1999. Lease expense consists mainly of rental payments to owners of
the land underlying billboard structures. Lease costs are generally lower in the
non-urban segment of the outdoor advertising market because landlords in rural
areas generally have fewer alternative uses for their properties, many of which
are located in agricultural areas. The Company's site lease expense was 13.8% of
net revenues in 1997, 14.3% in 1998, and 13.6% in 1999.
General and administrative expenses include salaries, bonuses and other
compensation, permit fees, utilities, supplies, professional fees, rent for its
executive offices and facilities and travel.
ACQUISITIONS
The Company's display faces grew from 2,556 faces at December 31, 1993
to 13,707 faces at December 31, 1999, primarily as a result of acquisitions. The
Company's acquisitions can be classified into two categories: new market
acquisitions and fill-in acquisitions. New market acquisitions are acquisitions
outside of the Company's then existing markets, while fill-in acquisitions are
generally small acquisitions in the Company's existing markets that involve the
purchase of advertising displays only, resulting in the elimination of all
personnel and related costs. From January 1, 1996 to December 31, 1999, the
Company completed two new market acquisitions, TSS and Unisign, and fourteen
fill-in acquisitions, including Western. Western, although a significant
acquisition was treated as a fill-in with faces split into the Company's
existing Midwest and Northcentral Divisions.
The Company achieves operating leverage through both new market and
fill-in acquisitions by spreading acquired contract revenues over relatively
fixed general and administrative costs. With new market acquisitions, the
Company eliminates duplicative management personnel, thereby reducing
compensation expense, and generally integrates the art and accounting functions
into the Company's existing structure. The Company is able to capitalize on the
efficiencies resulting from its acquisitions. The Company's corporate office,
established in 1995, provides the billing and collection functions for all of
the Company's divisions, as well as cash management, payable functions and
strategic marketing directions.
In addition to growth through acquisitions, the Company seeks
opportunities for growth through the development of newly built outdoor
advertising structures. The Company actively monitors changes in local zoning
restrictions and the availability of new land lease sites in each of its
existing markets so as to develop new build opportunities. The Company added 93
structures and 262 display faces in 1999. The Company's decision to develop
these leases is driven by the economic impact of building new sites versus the
acquisition of existing outdoor advertising displays. If management believes
that there is excess inventory in a market, the Company will continue to acquire
structures and maximize rate and occupancy levels in order to bring up overall
rates in the market before developing its own site leases. Management will only
build new structures in markets where the economics of building a new structure
compares favorably to purchasing structures through fill-in acquisitions.
As the Company continues to penetrate local advertising markets, the
Company can enhance revenue growth rates through the control of a meaningful
amount of local inventory and the ability to offer advertisers an expanded
network buy. The Company's policy is to enter into asset purchase agreements
under which the Company will acquire the structures and faces of a company,
obtain a non-compete agreement from the sellers, and take on no
15
<PAGE> 19
additional operations. The Company is able to integrate the new billboards into
its infrastructure spreading its fixed cost base over a larger amount of
billboards and to further leverage its sales force within the local market.
PRODUCT MIX; REGIONAL OPERATIONS
The following table sets forth information on the bulletins and posters
operated by each of the Company's divisions at the dates indicated. The Company
did not acquire its Mid-Atlantic division until March 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998 1999
---- ---- ----
DIVISIONS BULLETINS POSTERS BULLETINS POSTERS BULLETINS POSTERS
- --------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Southeast 2,362 519 2,704 554 3,586 535
Midwest 2,308 -- 3,555 -- 3,668 --
Northcentral 513 463 2,191 456 2,355 442
Mid-Atlantic(1) -- -- 1,040 469 1,139 492
Northeast 923 450 991 477 1,011 479
----- ----- ------ ----- ------ -----
TOTAL 6,106 1,432 10,481 1,956 11,759 1,948
===== ===== ====== ===== ====== =====
</TABLE>
(1) Reflects the acquisition of Unisign.
The Company derived over 75%, 81% and 82% of its net revenues from the
sale of advertising on bulletins in 1997, 1998, and 1999, respectively, and the
majority of the balance primarily from the sale of advertising on posters.
Because of this large percentage of bulletin revenues and the long-term nature
of its bulletin contracts, the Company's net revenues have experienced little
seasonality, historically varying less than 2% per quarter. However, poster
revenues are typically lower during the first quarter, reflecting seasonal
patterns in advertising spending.
The Company emphasizes the sale of long-term (36-month) contracts for
its bulletins. In the Northeast and Midwest divisions, which have been operated
by current management for 5 years or more, over 83% of all bulletin advertising
contracts in effect on December 31, 1999 had an original term of at least 36
months. Because of the acquisition of the shorter-term contracts of TSS and
Unisign, at December 31, 1999 approximately 68% of the Company's bulletin
advertising contracts had an original term of 36 months of more. As the
advertising contracts assumed by the Company in the Unisign acquisition
expire, the Company is seeking to sell 36-month contracts for these bulletins.
As a result, the Company believes that the percentage of bulletins subject to
36-month contracts will increase over time in this market.
The average monthly rate per display varies in each region in which the
Company operates, primarily as a result of the average size and location of
displays in each division. In the Midwest and Northeast divisions, the majority
vary in size from 6 feet high by 12 feet wide to 14 feet high by 48 feet wide.
In addition, the Company's displays in these divisions are located primarily
along secondary roads, rather than along interstate highways or primary roads.
Both the smaller size and location of the signs result in lower rates. In the
Northcentral division, the Company's displays are substantially larger and are
located along primary roads and interstate highways. The average rates for
displays in this division are the highest of all the Company's divisions. In the
Southeast, the average display size increased as result of the TSS acquisition.
In addition, the TSS displays were located to a greater extent along interstate
highways. The TSS acquisition resulted in higher average rates in the Southeast
division.
RESULTS OF OPERATIONS
The following table sets forth the specified components of expense for
the Company expressed as a percentage of net revenues for the last three years.
16
<PAGE> 20
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Direct operating expenses 32.3 35.3 35.4
General and administrative 20.4 16.2 15.8
Depreciation and amortization 39.7 47.5 43.6
----- ----- -----
Total operating expenses 92.4 99.0 94.8
----- ----- -----
Operating income 7.6 1.0 5.2
----- ----- -----
Interest expense (35.5) (49.7) (48.3)
Other income (expense) (1.2) 1.8 .6
------- ----- -----
Total other income (expense) (36.7) (47.9) (47.7)
----- ----- ------
Income (loss) before income
tax benefit (29.1) (46.9) (42.5)
Income tax benefit 12.0 10.8 --
------ ----- ----
Net income (loss) before extraordinary loss (17.1)% (36.1)% (42.5)%
====== ===== =====
On early extinguishment of debt
OTHER DATA:
EBITDA 47.3% 48.5% 48.8%
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Net revenues. Net revenues increased 28.4% to $26.9 million for the
year ended December 31, 1999 from $21.0 million for the year ended December 31,
1998. Most of this increase was the result of the acquisition of Western,
completed September 18, 1998, and Unisign, completed in March 1998, and assets
acquired from PNE Media in October, 1999. These acquisitions accounted for
approximately $4.3 million of the period-to-period revenue growth.
Direct operating expenses. Direct operating expenses (which include
sales, lease and production expense) increased to $9.5 million for the year
ending December 31, 1999 from $7.4 for the comparable period in 1998. Most of
this increase was the result of the acquisition of Western, completed September
1998, and Unisign, completed in March 1998. Sales expense increased as a
percentage of net sales from 8.1% in the year ending December 31, 1998 to 9.0%
in 1999, due to an increase in the sales force from 33 at the end of 1998 to 50
by the end of 1999. Site lease expense decreased as a percentage of net revenues
from 14.3.% in the year ending December 31, 1998 to 13.6% in 1999, due to lower
lease cost assumed in the Western acquisition. Production expense decreased as a
percentage of net revenues from 12.2% in the year ending December 31, 1998 to
11.5% in 1999, due to increased penetration of longer term contracts.
General and administrative expenses. General and administrative
expenses increased by 25.8% to $4.3 million for the year ending December 31,
1999 from $3.4 million in 1998, but decreased as a percentage of net revenues to
15.8% from 16.2%, respectively. The decrease in general and administrative
expense as a percentage of net revenues was due to operating leverage provided
primarily by higher net revenues from the Western and Unisign acquisitions over
relatively fixed general and administrative expenses.
Depreciation and amortization expense. Depreciation and amortization
expense increased to $11.7 million for the year ending December 31, 1999 from
$10.0 million in 1998 due primarily to the Western and Unisign acquisitions and
costs of related financing.
17
<PAGE> 21
Interest expense. Interest expense, increased to $13.0 million for the
year ending December 31, 1999 from $10.4 million for the comparable period in
1998. This increase was primarily the result of additional debt incurred in
connection with the financing of the Western and Unisign acquisitions.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Net revenues. Net revenues increased 77.1% to $21.0 million for the
year ended December 31, 1998 from $11.8 million for the year ended December 31,
1997. Most of this increase was the result of the acquisition of Western,
completed in September 1998, Unisign, completed March 1998, and TSS, completed
in June 1997. These acquisitions accounted for approximately $8.6 million of the
period-to-period revenue growth.
Direct operating expenses. Direct operating expenses (which include
sales, lease and production expense) increased to $7.4 million for the year
ending December 31, 1998 from $3.8 for the comparable period in 1997. Most of
this increase was the result of the acquisition of Western, completed September
1998, Unisign, completed in March 1998, and TSS, completed in June 1997. Sales
expense decreased as a percentage of net sales from 8.2% in the year ending
December 31, 1997 to 8.1% in 1998, due to increased operating leverage in the
sales force. Lease expense increased as a percentage of net revenues from 13.8%
in the year ending December 31, 1997 to 14.3% in 1998, due to higher lease cost
assumed in the TSS acquisition, reflecting the higher costs of TSS's interstate
highway locations. Production expense increased as a percentage of net revenues
from 10.0% in the year ending December 31, 1997 to 12.2% in 1998, due to
production costs associated with the shorter-term contracts assumed in the TSS
and Unisign acquisitions.
General and administrative expenses. General and administrative
expenses increased by 40.2% to $3.4 million for the year ending December 31,
1998 from $2.4 million in 1997, but decreased as a percentage of net revenues to
16.2% from 20.4%, respectively. The decrease in general and administrative
expense as a percentage of net revenues was due to increased operating leverage
provided by higher net revenues from the Western, Unisign and TSS acquisitions
over relatively fixed general and administrative expenses. In addition, the
Company was able to reduce Unisign's and TSS's general and administrative
expenses through a reduction of executive compensation, and the elimination of
the general manager, art, and accounting personnel.
Depreciation and amortization expense. Depreciation and amortization
expense increased to $10.0 million for the year ending December 31, 1998 from
$4.7 million in 1997 due primarily to the Western, Unisign and TSS acquisitions.
Interest expense. Interest expense increased to $10.4 million for the
year ending December 31, 1998 from $4.2 million for the comparable period in
1997. This increase was primarily the result of additional debt incurred in
connection with the financing of the Western, Unisign and TSS acquisitions.
Income taxes. The Company recorded a $3.4 million income tax benefit
for the year ending December 31, 1998 resulting from the increase in interest
expense, depreciation, and amortization, and write-off of finance and loan costs
on early extinguishment of debt.
Extraordinary loss. Effective May 20, 1998, the proceeds from the Notes
were used for the early extinguishment of the outstanding debt related to the
prior credit facility. Accordingly, the Company recorded an extraordinary loss
of $3.5 million related to the early retirement of debt ($2.1 million, net of
income taxes of $1.4 million). The extraordinary loss was comprised of deferred
financing fees of $3.1 million and a $400,000 unrealized loss resulting from the
early extinguishment of the interest rate swap agreements used to change the
fixed/variable interest rate mix of the debt portfolio to reduce the Company's
aggregate risk to movements in interest rates. The
18
<PAGE> 22
fair market value to the swap agreements were not previously recognized in the
financial statements since they were accounted for as a hedge. With the
extinguishment of the debt, the swap agreements were no longer hedge
transactions and therefore the related unrealized loss can no longer be
deferred. In September 1998, these agreements were settled in full.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its cash requirements with cash
from operations, revolving credit borrowings and other long-term debt financings
and sales of assets. Its acquisitions have been financed primarily with borrowed
funds.
The Company presently has outstanding $100,000,000 of Notes due on
March 15, 2008 that bear interest at 11% per annum, payable semi-annually. The
Notes are unsecured and were issued under an indenture which restricts and
limits the Company from, among other things (i) incurring indebtedness; (ii)
incurring liens or guaranteeing obligations; (iii) entering into mergers or
consolidations or liquidations or dissolving; (iv) selling or otherwise
disposing of property, business or assets; (v) with certain exceptions, making
loans or investments; (vi) limiting the ability of the company to create liens
upon its property, assets or revenues.
On September 18, 1998, the Company entered into a credit agreement with
its banks (the "Credit Agreement") and on August 12, 1999 and October 15, 1999,
the Credit Agreement was amended to revise certain payment dates and amounts,
financial reporting requirements, restrictions on sale and leaseback
transactions and certain financial covenants. The Credit Agreement consists of a
term loan for $10 million and a revolving credit of $10 million of which $2
million is restricted for payment of interest. The Credit Agreement provides
for, among other items, a lien on all the assets of the Company. The Company had
$17 million of borrowings outstanding under the Credit Agreement, as of December
31, 1999, with an aggregate effective interest rate at December 31, 1999 of
10.125%.
On October 15, 1999, SGH Holdings, the parent of the Company, borrowed
$19 million from an institutional lender and contributed substantially all of
the funds, net expenses, to the Company in the form of additional paid in
capital. Substantially all of these funds have been used for acquisitions and
related costs.
Net cash provided by operating activities decreased to ($3.1) million
for 1999 from ($.5) million for 1998 and decreased to ($.5) million for 1998
from $1.8 million for 1997. Net cash provided by operating activities reflects
the Company's net loss adjusted for non-cash items and net changes in working
capital components. The Company had working capital of $3.6 million as of
December 31, 1999, working capital of $4.2 million as of December 31, 1998 and a
working capital of $2.7 million as of December 31, 1997.
For the year ended December 31, 1999, the Company's net cash used in
investing activities of $15.8 million included $16.5 million used for
acquisitions, and $7.1 million of capital expenditures. The Company's net cash
used in investing activities of $64.5 million for the year ended December 31,
1998 included cash used for acquisitions of $52.6 million and capital
expenditures of $8.1 million.
For the year ended December 31, 1999, $19 million was provided by
financing activities, primarily as a result of additional paid in capital from
SGH Holdings, Inc. For the year ended December 31, 1998, $65 million was
provided by financing activities, primarily as a result of the offering of the
Senior Notes net of repayment under existing credit facilities. For the year
ended December 31, 1997, $35.5 million was provided by financing activities,
primarily as a result of additional borrowings under the Company's various
credit facilities and equity and debt investments in the Company by Holdings,
which proceeds were loaned to the Company.
19
<PAGE> 23
Capital expenditures are made to build new billboard structures and
display faces, to upgrade the Company's existing display faces, to produce
advertising display faces under contracts longer than 18 months and for other
capital items. Capital expenditures were $7.1 million in 1999.
The Company had funded one year of cash interest expense with the net
proceeds of the offering of the Senior Notes. All of the funds in the escrow
account were disbursed by May 1999,and now, a substantial portion of the
Company's cash flow will be devoted to interest payments on the Notes.
The Company's cash from operations historically has not been sufficient
to fund interest payments and capital expenditures and the Company has funded
this shortfall through incurring additional debt or raising equity. While the
Company believes that its cash from operations together with anticipated
borrowings from sale and leaseback transactions should be sufficient to satisfy
its cash requirements, including anticipated maintenance capital expenditures
for the next twelve months. In the event these cash sources are insufficient to
satisfy its cash requirements, the Company may require additional debt or
equity. The Company would need to raise additional equity if it were to make
acquisitions or add significant number of new built signs in 2000. There can be
no assurance that additional debt or equity financing will be available on terms
satisfactory to the Company, if at all, or that the Company will be able to
incur such additional debt under the terms of the Notes.
INFLATION
In the last three years, inflation has not had a significant impact on
the Company or its predecessors.
INCOME TAXES
At December 31, 1999, the Company had net operating loss carry forwards
of approximately $34.6 for federal and state income tax purposes, which expire
in varying amounts from 2009 through 2019.
During the years ended December 31, 1998 and 1999, the Company recorded
a valuation allowance of $1,460,000 and $3,960,000, respectively, on the
deferred tax assets to reduce the total to an amount that management believes
will ultimately be realized. Realization of deferred tax assets is dependent
upon sufficient future taxable income during the period that deductible
temporary differences and carryforwards are expected to be available to reduce
taxable income. If the Company is unable to generate sufficient taxable income
in the future, increases in the valuation allowance may be required through a
charge to expense. There was no other activity in the valuation allowance
account during 1998 or 1999. There was no activity in the valuation during 1997.
FACTORS AFFECTING FUTURE OPERATING RESULTS
DEPENDENCE ON SENIOR MANAGEMENT.
The Company's success depends upon the continued employment of its
senior management. If the Company loses the services of any member of senior
management and does not find a suitable replacement, the Company business could
be materially adversely affected.
ECONOMIC CONDITIONS; ADVERTISING TRENDS.
The Company relies on sales of advertising space for its revenues. The
Company's operating results, therefore, are affected by general economic
conditions as well as trends in the advertising industry. A reduction in
advertising expenditures available for the Company's displays could result from
a general decline in economic conditions, a decline in economic conditions in
the Company's markets or from significant users of the Company's displays
reallocating their advertising expenditures to other available media.
COMPETITION.
20
<PAGE> 24
The Company faces competition for advertising revenues from other
outdoor advertising companies, highway logo sign operators and companies that
install commercial signs on an advertiser's own property, as well as from other
media such as radio, television, print and direct mail marketing. The Company
also competes with a wide variety of other out-of-home advertising media, the
range and diversity of which have increased substantially over the past several
years, including advertising displays in shopping centers, malls, airports,
stadiums, movie theaters, supermarkets and on buses. Some of the Company's
competitors are substantially larger, better capitalized and have greater access
to resources. The Company can give no assurance that the outdoor advertising
medium will be able to compete with other types of media or that it will be able
to compete either within the outdoor advertising industry or with other media.
REGULATION OF OUTDOOR ADVERTISING.
Outdoor advertising displays are subject to governmental regulation at
the federal, state and local levels. These regulations limit the size and
location of billboards and, in limited circumstances, regulate the content of
the advertising copy. Some governmental regulations restrict the construction of
new billboards or the replacement, relocation, enlargement or upgrading of
existing structures. Such regulations limit the Company's ability to expand its
operations in the affected markets. If the Company is unable to expand its
operations in such areas or replace lost structures, then the Company's growth
opportunities and potential results of operations could be affected. In
addition, some jurisdictions have adopted "amortization" ordinances under which,
after the expiration of a specified period of time, billboards must be removed
at the owner's expense and without the payment of compensation. Ordinances
requiring the removal of a billboard without compensation, whether through
amortization or otherwise, are being challenged in various state and federal
courts with conflicting results. Currently, none of the Company's existing
inventory is subject to any amortization ordinance. The Company can give no
assurance as to how additional laws and regulations that may be adopted in the
future may affect it.
HISTORY OF NET LOSSES.
The Company reported net losses for the years ended December 31, 1997,
1998, and 1999, $2.0 million, $ 9.7 million, and $11.5 million respectively, the
Company has reported a accumulated deficit for each of the past three years. The
net losses primarily reflect high levels of depreciation and amortization
charges relating to the depreciation of assets obtained in acquisitions, as well
as high levels of interest expense relating to debt incurred to finance these
acquisitions. Interest expense and depreciation and amortization charges will
continue at high levels throughout 2000 and future years as a result of
previously completed acquisitions. The Company expects to continue incurring
substantial losses for at least the next two years, and it can give no assurance
if or when it will have net income.
POTENTIAL LOSSES FROM NATURAL DISASTERS.
A significant portion of the Company's structures are located in
geographic regions of the United States that may experience floods, tornadoes
and/or hurricanes during the year. The Company has determined that it is not
economically feasible at this time to obtain insurance against losses from
hurricanes or other weather-related casualties. The Company has not incurred any
material losses in the past due to weather-related incidents. However, the
Company can give no assurance that it will not suffer such losses in the future
or that, in pursuing its acquisition strategy, we will not acquire companies or
properties that are particularly susceptible to weather-related incidents.
ENVIRONMENTAL MATTERS.
21
<PAGE> 25
The Company is subject to various federal, state and local
environmental laws and regulations as an owner, lessee or operator of various
real properties and facilities.
RESTRICTIONS IN INDENTURE ON OUR OPERATIONS.
The indenture for the Senior Notes contains certain financial covenants
that may adversely affect the Company's ability to respond to changing economic
and business conditions. These covenants could prohibit additional needed
financing or prevent the Company from engaging in certain transactions that
might further the Company's growth strategy or would otherwise be beneficial. A
breach of any of these covenants could cause a default under the indenture or
any future debt that the Company may incur. A significant portion of our debt
then may become immediately due and payable. It is unlikely that the Company
could obtain sufficient funds to make these accelerated payments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company carries certain floating rate debt and thus is exposed to
the impact of interest rate changes. The information below summarizes the
Company's market risk associated with debt obligations as of December 31, 1999.
The information presented below should be read in conjunction with Note 5 of the
Financial Statements.
At December 31, 1999, the Company's indebtedness under its Credit
Facility, representing approximately 14.0% of the Company's long-term debt,
bears interest at variable rates. Accordingly, the Company's net loss and after
tax cash flow are affected by changes in interest rates. A two percentage point
change in interest rate would affect the Company's net loss by approximately
$340,000.
In the event of an adverse change in interest rates, management would
likely take certain actions to further mitigate its exposure. However, due to
the uncertainty of the actions that would be taken and their possible effects,
this analysis assumes no such actions. Further this analysis does not consider
the effects of the change in the level of overall economic activity that could
exist in such an environment.
Fluctuations in interest rates may also adversely affect the fair value
of the Company's fixed rate borrowings. The fair value of debt with a fixed
interest rate will increase as interest rates fall and the fair value will
decrease as interest rates rise. The Company's fixed rate borrowings consist of
$100 million aggregate amount of Senior Notes which bear interest at 11% per
annum.
ITEM 8. FINANCIAL STATEMENTS
The response to this item 8 is submitted as a separate item of the
Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
22
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages (at December 31, 1998)
and positions of the executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sheldon G. Hurst 51 President, Chief Executive Officer and Director
Anthony LaMarca 45 Executive Vice President and Director
A. Wayne Lamm 45 Chief Operating Officer
William G. McLendon 44 Chief Financial Officer, Secretary and Director
John D'Ottavio 52 Director
Sean E. Callahan 31 Director
William P. Sutter, Jr. 42 Director
</TABLE>
Sheldon G. Hurst founded and has served as President and Chief
Executive Officer of the Company since 1986. Prior to founding the Company from
1972 to 1986, Mr. Hurst was vice president of Hurst Sign Company, a billboard
construction company in Scranton, Pennsylvania owned by his father. During this
period, he was responsible for designing and managing the construction of over
1,000 advertising displays for outdoor advertising companies.
Anthony LaMarca, a co-founder of the Company, has served as the
Company's Executive Vice President since 1986, with primary responsibilities in
the sales and marketing of bulletins.
A. Wayne Lamm has been Chief Operating Officer since July 1999. He had
served as Director of Marketing of the Company since September 1997. From
September 1989 to July 1997, Mr. Lamm was the president and chief operating
officer of Penn Advertising, one of the largest outdoor advertising companies in
the Northeast. From November 1986 to September 1989, Mr. Lamm was the regional
supervisor of the Buffalo, New York plant of Penn Advertising. From June 1984 to
September 1986, he was the general manager and national director of sales at
Naegele Outdoor Advertising.
William G. McLendon joined the Company in October 1994 as Chief
Financial Officer. From December 1993 to October 1994, Mr. McLendon was the
chief financial officer of Naegele Outdoor Advertising. From 1991 to December
1993, he was a partner at Brush & Associates, an investment banking boutique
specializing in outdoor advertising. From 1986 to 1990, Mr. McLendon was
employed at Heller Financial and, from 1978 to 1986, Mr. McLendon worked at
General Electric Capital Corp.
John D'Ottavio has been a director of the company since December 1998.
From 1984 to 1992 Mr. D'Ottavio was the President and Chief Executive Officer of
Voice-Gram, Inc., a national voice mail service bureau. From 1993 to 1995 Mr.
D'Ottavio was a consultant to small businesses specializing in helping companies
grow from start up status. From 1995 to present Mr. D'Ottavio is a Retirement
Planning Specialist at Morgan Stanley Dean Witter.
23
<PAGE> 27
Sean E. Callahan has been a director of the Company since August 1998.
Mr. Callahan has been associated with affiliates of Mesirow Financial Holdings,
Inc. since May 1997. He is a Vice President of Mesirow Private Equity
Investments, Inc. From September 1991 to May 1997, Mr. Callahan was employed by
Cushman & Wakefield, Inc., a national commercial real estate services firm.
William P. Sutter, Jr. has been a director of the Company since October
1994. Since 1984, Mr. Sutter has been associated with affiliates of Mesirow
Financial Holdings, Inc., a Chicago-based financial services firm. Mr. Sutter is
a Senior Managing Director of Mesirow Private Equity Investments, Inc. and a
vice president of Mesirow Financial Services, Inc. Mr. Sutter is a director of
Regent Communication, a radio broadcast concern, and a number of privatly held
companies. Mesirow Financial Services, Inc. is the general partner of Mesirow, a
holder of warrants in Holdings. See "Principal Stockholders".
Pursuant to the Second Amended and Restated Stockholders Agreement
dated as of February 27, 1998, the Company's Board of Directors (and each of its
subsidiaries) shall be comprised of seven individuals, four of whom are
designated by the executive employees of the Company owning a majority of the
common stock held by such executives, and three of whom are designated by
Mesirow, as of the date of this report, Mesirow has only designated two such
individuals, William P. Sutter, Jr. and Sean E.
Callahan). See "Certain Relationships and Related Transactions".
Executive officers are appointed annually and serve at the discretion
of the Board of Directors.
COMMITTEES
The Board of Directors is also comprised of the following committees: a
Compensation/Executive Committee whose members are Sheldon G. Hurst, William G.
McLendon and William Sutter; and the Audit Committee whose members are Sheldon
G. Hurst, John D'Ottavio, and William Sutter.
DIRECTOR COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation: The following table provides certain summary
information concerning the compensation incurred by the Company for its Chief
Executive Officer and the other four most highly compensated executive officers
for the year ended December 31, 1999, 1998 and 1997 (collectively, the "Named
Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
<S> <C> <C> <C>
Sheldon G. Hurst 1999 $183,500 $ 50,000
President and Chief 1998 $157,775 $ 77,000
Executive Officer 1997 $142,000 $ 52,000
William G. McLendon 1999 $154,633 $ 35,000
Chief Financial Officer 1998 $150,000 $ 50,000
And Secretary 1997 $119,000 $ 52,000
</TABLE>
24
<PAGE> 28
<TABLE>
<S> <C> <C> <C>
A. Wayne Lamm 1999 $124,003 $ 0
Vice President 1998 $112,666 $ 4,226
Of Marketing and 1997 $ 36,000 $ 0
Director
</TABLE>
COMPENSATION OF DIRECTORS
Directors of the Company receive no remuneration for their services as
Directors. The Company reimburses directors for travel and lodging expenses, if
any, occurred in connection with attendance at Board meetings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the Company's common stock is owned by SGH Holdings, Inc.
("Holdings"), a corporation incorporated in Delaware in 1994, under the name SGH
Holdings, Inc., which became the sole owner of Tri-State Outdoor Media Group,
Inc., a highway directional outdoor advertising business originally incorporated
in 1984. Holdings adopted its current name in October 1998. The following table
sets forth certain information with respect to the beneficial ownership of
Holdings' common stock, par value $.0001 per share (the "Common Stock"), and
Holdings' preferred stock, par value $.0001 per share (the "Preferred Stock"),
as of December 31, 1999, (I) by each person who is known by the Company to own
beneficially 5% percent or more of the outstanding shares of common stock, (ii)
by each of the Company's directors, (iii) by each of the named executives, (iv)
by all current directors and officers of the Company as a group. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------ ---------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME AND ADDRESS SHARES CLASS(1) SHARES CLASS(2)
- ---------------- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Sheldon G. Hurst (3) 844.1(4) 81%
c/o 3416 Highway 41 South
Tifton, GA 31794
Hurst Enterprises, L.P. (3) 844.1(4) 81
c/o 3416 Highway 41 South
Tifton, GA 31794
William G. McLendon 110.0(4) 10.6
c/o 3416 Highway 41 South
Tifton, GA 31794
A. Wayne Lamm 66.7(4) 6.4
c/o 3416 Highway 41South
Tifton, GA 31794
Anthony LaMarca 20.4(4) 2.0
c/o 3416 Highway 41 South
Tifton, GA 31794
Mesirow Capital Partners VI (5) 716.0 40.8 7,308.0 46.7%
350 N. Clark St
Chicago, IL 60610
</TABLE>
25
<PAGE> 29
<TABLE>
<S> <C> <C> <C> <C>
Mesirow Capital Partners VII (6) 383.0 26.9 8,331.0 53.3%
350 N. Clark St
Chicago, IL 60610
William P. Sutter, Jr. (7) -- --
350 N. Clark St
Chicago, IL 60610
Sean E. Callahan (7) -- --
350 N. Clark St
Chicago, IL 60610
All directors and executive
officers as a group
(6 persons) (8) 1,041.2 100.0
</TABLE>
- -------------------
(1) Mesirow VI in 1994 was granted warrants to purchase 640 shares of
Common Stock (the "1994 Warrants"), and in 1997 was granted warrants to
purchase 76 shares of Common Stock (the "Mesirow VI 1997 Warrants").
Mesirow VII in 1997 was granted warrants to purchase 383 shares of
Common Stock (the "Mesirow VII 1997 Warrants") (the Mesirow VI 1997
Warrants and the Mesirow VII 1997 Warrant are collectively referred to
as the "1997 Warrants"). The 1994 Warrants and the 1997 Warrants are
currently exercisable. Total outstanding Common Stock (on a fully
diluted basis) consists of 1,020.4 shares rounded to the nearest tenth
prior to any exercise of the 1994 Warrants the 1997 Warrants or Mr.
Lamm's options.
(2) Total outstanding Preferred Stock consists of 15, 639 shares.
(3) All shares are owned by Hurst Enterprises, L.P., a Georgia limited
partnership in which Mr. Hurst holds a 2% general partnership interest
and a 96% limited partnership interest, and Sharon Hurst (the wife of
Mr. Hurst) owns a 2% general partnership interest.
(4) In the event of the exercise by Mesirow of the 1994 Warrants and/or the
1997 Warrants (the "Mesirow Exercise"), Holdings has agreed to issue
certain Common Stock to A. Wayne Lamm to maintain the 2% of the Common
Stock of Holdings purchased by A. Wayne Lamm from Holdings in 1997.
Messrs. Hurst, McLendon, Lamm and LaMarca have agreed to transfer
Common Stock among themselves in the event of the Mesirow Exercise
and/or the exercise of the Lamm options in order to provide certain
percentage ownership anti-dilution protection for Messrs. McLendon,
Lamm and LaMarca.
(5) Includes 640 shares of Common Stock subject to outstanding warrants to
purchase Common Stock granted pursuant to the 1994 Warrants and 76
shares of Common Stock subject to outstanding warrants to purchase
granted pursuant to the Mesirow VI 1997 Warrants.
(6) Includes 383 shares of Common Stock subject to outstanding warrants to
purchase granted pursuant to the Mesirow VII 1997 Warrants.
(7) Mr. Sutter, a director of the Company, is a vice president of Mesirow
Financial Services, Inc., which is the general partner of Mesirow VI
and Mesirow VII. Mr. Sutter disclaims beneficial ownership of shares
26
<PAGE> 30
beneficially owned by Mesirow VI and Mesirow VII. Mr. Callahan, a
director of the Company, has been associated with affiliates of
Mesirow Financial Services, Inc. which is a general partner of Mesirow
VI and Mesirow VII. Mr. Callahan disclaims beneficial ownership of
shares beneficially owned by Mesirow VI and Mesirow VII.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Pursuant to the Company's Stockholders Agreement, the board of
directors of the Company (and each of its subsidiaries, including the Company)
is required to be comprised of seven individuals, four of whom are designated by
the executive employees of the Company owning a majority of the common stock
held by such executives, and three of whom are designated by Mesirow (as of
March 15, 2000, Mesirow has designated two individuals, William P. Sutter, Jr.,
and Sean E. Callahan). The Company's Stockholders Agreement provides that upon
the occurrence of certain events (including the failure of the Company to
purchase from Mesirow the 1994 Warrant and/or 1997 Warrants pursuant to such
agreements, or to redeem Mesirow's preferred stock pursuant to the certificate
of incorporation of the Company), Mesirow can cause the re-constitution of the
board of directors of the Company (and each of its subsidiaries, including the
Company) to be comprised of five individuals, four of whom are designated by
Mesirow and one of whom is designated by the executive employees of the Company
owning a majority of the common stock held by such executives, in order to
pursue the sale of the Company and its subsidiaries (or any assets or properties
thereof).
Sheldon G. Hurst and William G. McLendon jointly own 13 parcels of real
property which are leased to the Company and on which the Company maintains
billboards. The aggregate rent paid by the Company for these sites for 1999 was
$17,875. The aggregate rent to be paid to Messrs. Hurst and McLendon over the
life of these leases is $72,250. The leases are all for a term of at least five
years. In addition, Mr. Hurst owns 29 parcels of real property which are leased
to the Company principally on a one year basis (four leases are for terms of
five years) and on which the Company maintains billboards. The aggregate rent
paid by the Company for these sites for 1999 was $9,600. The Company believes
the terms of these lease arrangements are no less favorable to the Company than
similar arm's-length arrangements with unrelated parties would be.
Sheldon G. Hurst owns a six-seat, single engine airplane which is
leased to the Company. The Company pays Mr. Hurst monthly lease payments equal
to the total amount paid by Mr. Hurst monthly under the financing he obtained to
acquire the airplane. Mr. Hurst borrowed $274,850 bearing interest at a rate per
annum equal to .25% in excess of the prime rate. The borrowing is to be repaid
in monthly installments over a ten-year period ending in 2009. The Company also
pays all insurance (currently $5,799 per year) and maintenance costs for the
airplane.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS
The financial statements are listed under PART II, Item 8 of this
Report.
27
<PAGE> 31
(B) EXHIBITS
The exhibits are listed below under Part IV, Item 14(c) of this Report.
(C) REPORTS ON FORM 8-K
Reports on form 8-K filed during the quarter ended December 31, 1999.
(1) Form 8-K dated October 27, 1999. This Form 8-K reported
information under Item 5 (other events).
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
*3.1 Restate Certificate of Incorporation of the Company by the
Secretary of state of Kansas
*3.2 By-Laws of the Company
*4.1 Indenture dated as of May 15, 1998 relating to the Company's
Senior Notes due 2008 and the 11% Senior Services B Notes due 2008
*4.2 Form of Global Note
*10.1 Asset Purchase Agreement, dated as of May 6, 1997, between the
Company and Tri-State Systems, Inc.
*10.2 Asset Purchase Agreement, dated as of February 13, 1998, between
the Company and Unisign Corporation, Inc.
*10.3 Registration Rights Agreement dated as of May 13, 1998 relating
to the Company's 11% Senior Notes due 2008
*10.4 Pledge Agreement dated as of May 15, 1998 relating to the
Company's 11% Senior Notes due 2008
*10.5 Tax Sharing Agreement dated as of May 20, 1998 relating to SGH
Holdings, Inc. and the Company
28
<PAGE> 32
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
(CONT'D)
*10.6 Second Amended and restated Stockholders Agreement, dated as of
February 27, 1998
*10.7 Anti-Dilution Agreement, dated as of February 19, 1998
*10.8 Credit Agreement dated as of May 20, 1998 between the Company
and The First National Bank of Chicago
*10.9 Asset Purchase Agreement dated as of September 4, 1998, by and
between Tri-State Outdoor Media Group, Inc. and Western
Outdoor Advertising Co.
*10.10 Credit Agreement among Tri-State Outdoor Media Group, Inc.,
the Lending Institutions Party Thereto, as Lenders and The
First National Bank of Chicago, as Agent, dated as of September
18, 1998
**10.11 Asset Purchase Agreement dated as of June 12, 1998 by and
between Tri-State Outdoor Media Group, Inc. and John R. Leslie,
Sr., Trading as Leslie Outdoor Advertising, Filed herewith
**10.12 Asset Purchase Agreement dated as of July 23, 1998 by and
between Tri-State Outdoor Media Group, Inc. and Boon Company,
Inc. Filed herewith
**10.13 First Amendment to Credit Agreement dated as of March 1, 1999.
***10.14 Amended and Restated Credit Agreement dated as of August 12,
1999.
10.15 Amendment to the Credit Agreement dated as of October 15, 1999.
Filed herewith
12.0 Computation of Ratio of Earnings to Fixed Charges. Filed
herewith
*25.1 Statement of Eligibility of Trustee on Form T-1 of IBJ Schroder
Bank & Trust Company
27.1 Financial Data Schedule. Filed herewith
- -------------
* Incorporated herein by reference to the Exhibits to the Company's
registration statement on Form S-4 (Registration Number 333-59137).
** Incorporated herein by reference to Exhibits to the Company's Form
10-K for the year ended December 31, 1999.
*** Incorporated herein by referenced to the Exhibits to the Company's
From 10-Q for the quarter ended September 30, 1999.
29
<PAGE> 33
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.
TRI-STATE OUTDOOR MEDIA GROUP, INC.
By: /s/Sheldon G. Hurst
Sheldon G. Hurst
President and Chief Executive Officer
Date: March 30, 2000
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/Sheldon G. Hurst Chief Executive Officer and Director March 30, 2000
- ------------------------
Sheldon G. Hurst
/s/William G. McLendon Chief Financial Officer, Secretary,
- ------------------------ Director and Principal Accounting Officer March 30, 2000
William G. McLendon
/s/Anthony LaMarca Executive Vice President and Director March 30, 2000
- ------------------------
Anthony LaMarca
/s/A. Wayne Lamm Vice President of Marketing and Director March 30, 2000
- ------------------------
Wayne A. Lamm
</TABLE>
30
<PAGE> 34
<TABLE>
<S> <C> <C>
/ /William P. Sutter, Jr. Director March 30, 2000
- ------------------------
William P. Sutter, Jr.
/s/Sean E. Callahan Director March 30, 2000
- ------------------------
Sean E. Callahan
/s/John D'Ottavio Director March 30, 2000
- ------------------------
John D'Ottavio
</TABLE>
31
<PAGE> 35
INDEX TO FINANCIAL STATEMENTS
Independent Auditor's Report................................................F-1
Balance sheets..............................................................F-2
Statement of operations.....................................................F-3
Statement of stockholder's equity (deficiency)..............................F-4
Statements of cash flows....................................................F-5
Notes to financial statements...............................................F-7
32
<PAGE> 36
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Tri-State Outdoor Media Group, Inc.
Tifton, Georgia
We have audited the accompanying balance sheets of Tri-State Outdoor
Media Group, Inc. as of December 31, 1998 and 1999, and the related statements
of operations, stockholder's equity, and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Tri-State Outdoor
Media Group, Inc. as of December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
MCGLADREY & PULLEN, LLP
West Palm Beach, FL
February 25, 2000
F-1
<PAGE> 37
TRI-STATE OUTDOOR MEDIA GROUP, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
ASSETS (NOTE 5)
Current Assets
Cash $ 73 $ 155
Restricted securities 5,401 --
Accounts receivable, net of allowance for doubtful
accounts 1998 $342; 1999 $533 2,710 4,020
Supplies 465 644
Prepaid production costs 717 557
Prepaid site leases, current portion 1,044 1,677
Prepaid commissions, current portion 662 641
Other current assets 165 342
--------- ---------
Total current assets 11,237 8,036
--------- ---------
Property and Equipment, net (Note 2) 60,614 70,486
--------- ---------
Other Assets
Intangible assets, net (Note 3) 42,690 46,348
Prepaid site leases and commissions, long-term portion 459 691
Deferred taxes (Note 7) 6,200 6,200
Other 296 364
--------- ---------
49,645 53,603
--------- ---------
$ 121,496 $ 132,125
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current portion of long-term debt (Note 5) $ 3,402 $ 1,601
Accounts payable 1,535 540
Accrued interest 1,510 1,534
Accrued expenses 268 282
Deferred revenue 317 310
Due to SGH Holdings, Inc. 25 212
--------- ---------
Total current liabilities 7,057 4,479
Long-Term Debt,
net of current portion (Note 5) 112,839 119,824
--------- ---------
Total liabilities 119,896 124,303
--------- ---------
Commitments and Contingencies (Note 8)
Stockholder's Equity
Common stock, par value, $10 per share; authorized 10,000
shares; issued and outstanding 1998 and 1999; 200 shares 2 2
Paid-in capital (Note 11) 16,166 33,841
Accumulated deficit (14,568) (26,021)
--------- ---------
1,600 7,822
--------- ---------
$ 121,496 $ 132,125
========= =========
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE> 38
TRI-STATE OUTDOOR MEDIA GROUP, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues $ 11,831 $ 20,958 $ 26,905
-------- -------- --------
Operating expenses:
Direct operating expenses 3,817 7,405 9,514
General and administrative 2,417 3,389 4,264
Depreciation and amortization 4,699 9,958 11,730
-------- -------- --------
10,933 20,752 25,508
-------- -------- --------
Operating income 898 206 1,397
-------- -------- --------
Other income (expense):
Loss on sale of assets (143) -- --
Interest expense (4,200) (10,417) (13,006)
Other income -- 369 156
-------- -------- --------
Total other income (expense) (4,343) (10,048) (12,850)
-------- -------- --------
Loss before income tax benefit and extraordinary
loss on early extinguishment of debt (3,445) (9,842) (11,453)
Income tax benefit (Note 7) 1,424 2,274 --
-------- -------- --------
Loss before extraordinary loss on early extinguishment of debt (2,021) (7,568) (11,453)
Extraordinary loss on early extinguishment of debt,
net of income taxes of $1,393 -- 2,089 --
-------- -------- --------
Net loss $ (2,021) $ (9,657) $(11,453)
======== ======== ========
Basic loss per common share:
Loss before extraordinary loss on early extinguishment of debt $(10,105) $(37,840) $(57,265)
Extraordinary loss on early extinguishment of debt -- (10,445) --
-------- -------- --------
Net loss $(10,105) $(48,285) $(57,265)
======== ======== ========
Weighted common shares outstanding 200 200 200
======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 39
TRI-STATE OUTDOOR MEDIA GROUP, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Paid-in Accumulated
Stock Capital Deficit Total
----- ------- ------- -----
<S> <C> <C> <C> <C>
Balance (deficit), January 1, 1997 $ 2 $ 25 $ (2,890) $ (2,863)
Net loss -- -- (2,021) (2,021)
-------- -------- -------- --------
Balance (deficit), December 31, 1997 2 25 (4,911) (4,884)
Net loss -- -- (9,657) (9,657)
Conversion of subordinated debt
to paid-in capital -- 16,141 -- 16,141
-------- -------- -------- --------
Balance (deficit), December 31, 1998 2 16,166 (14,568) 1,600
Net loss -- -- (11,453) (11,453)
Paid-in capital (Note 11) -- 17,675 -- 17,675
-------- -------- -------- --------
Balance (deficit), December 31, 1999 $ 2 $ 33,841 $(26,021) $ 7,822
======== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 40
TRI-STATE OUTDOOR MEDIA GROUP, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,021) $ (9,657) $ (11,453)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 4,699 9,958 11,730
Deferred income tax benefit (1,424) (3,667) --
Loss on early extinguishment of debt -- 2,089 --
Loss on sale of assets 143 -- --
Accrued interest added to principal 1,265 834 --
Accrued interest added to pledged securities -- (145) --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (461) (882) (1,310)
Supplies and prepaid production costs 29 (434) (19)
Prepaid site leases (568) 152 (586)
Prepaid commissions (20) (651) (211)
Other assets 219 (148) (245)
Increase (decrease) in:
Accounts payable (154) 1,289 (995)
Accrued expenses 366 (316) 24
Accrued interest -- 1,006 14
Deferred revenue (263) 46 (7)
--------- --------- ---------
Net cash provided by (used in) operating
activities 1,810 (526) (3,058)
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment (2,334) (8,093) (7,166)
Proceeds from sale-and-leaseback transactions -- 1,389 2,540
Acquisitions (Note 4) (34,835) (52,571) (16,503)
Purchase of short-term investments -- (28,654) --
Proceeds from sale/maturities of short-term investments -- 28,654 --
Purchase of pledged securities -- (10,484) --
Proceeds from pledged securities -- 5,228 5,401
Other (136) -- (93)
--------- --------- ---------
Net cash used in
investing activities (37,305) (64,531) (15,821)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of senior notes -- 100,000 --
Borrowings under long-term debt agreement 35,925 46,421 --
Proceeds from revolver borrowings 8,395 2,200 12,177
Payments on revolver borrowings (6,433) (6,900) (5,406)
Principal payments on long-term debt (881) (70,288) (4,402)
Increase (decrease) in due to SGH Holdings, Inc. 125 (100) 187
Proceeds from paid-in capital -- -- 17,675
Debt issuance costs (1,637) (6,335) (1,270)
--------- --------- ---------
Net cash provided by
financing activities 35,494 64,998 18,961
--------- --------- ---------
Net increase (decrease) in cash (1) (59) 82
CASH:
Beginning 133 132 73
--------- --------- ---------
Ending $ 132 $ 73 $ 155
========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 41
TRI-STATE OUTDOOR MEDIA GROUP, INC.
STATEMENTS OF CASH FLOWS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest $ 3,815 $ 9,411 $12,982
======== ========== =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired under capital leases $ -- $ 1,389 $ 2,540
======== ========== =======
Property and equipment acquired under long-term debt $ -- $ -- $ 275
======== ========== =======
Conversion of subordinated debentures to
paid-in capital $ -- $ 16,141 $ --
======== ========== =======
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 42
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: The Company is an outdoor advertising company,
operating advertising displays in the eastern and central regions of the United
States. Most of the Company's advertising displays are located along interstate
highways and primary and secondary roads outside of urban areas. The Company
offers a full line of outdoor advertising services to its customers, including
creative design, production, installation and maintenance of the displays. The
Company primarily provides services to advertisers who wish to alert motorists
and provide directions to that business.
The Company is a 100%-owned subsidiary of SGH Holdings, Inc.
("Holdings").
Significant accounting policies
Accounting estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and concentration of credit risk: The Company maintains cash with
various financial institutions in accounts which, at times, may be in excess of
the FDIC insurance limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit risk
on cash.
Restricted securities: The restricted securities were primarily
invested in U.S. treasuries which matured and were principally used as security
for the May 15, 1999 interest payment on the Senior Notes. The Company
designated the restricted securities as held-to-maturity securities in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Supplies: Supplies consist primarily of materials used in the
construction of the signs.
Prepaid production costs: The cost of producing display faces for
shorter term contracts are recorded as prepaid production costs and are charged
to production expense over the term of the related contracts on a straight line
basis.
F-7
<PAGE> 43
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
Prepaid expenses: The Company prepays certain costs for land leases and sales
commissions at the inception of the advertising contracts. These costs are
deferred and charged to direct operating expenses on a straight-line basis over
the period that coincides with the recognition of income. The portion of these
costs associated with advertising revenue to be earned beyond one year of the
balance sheet date has been classified as long-term assets.
Property and equipment: Property and equipment is recorded at cost and
depreciated on a straight-line basis over the estimated useful lives of the
respective assets. The estimated useful lives of assets are as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Building and improvements.............. 15-30
Advertising structures................. 20
Advertising display faces.............. 3
Vehicles and equipment................. 5
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1998 and
1999, amounted to $2,343,000, $3,964,000 and $5,977,000, respectively.
Intangible assets and deferred costs: Intangible assets result from
several acquisitions and include noncompete agreements, goodwill and the value
of purchased contracts. Goodwill and noncompete agreements are being amortized
on the straight line basis. The value of purchased contracts are being amortized
over the life of the contracts purchased. Intangible assets are being amortized
over the following lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Goodwill............................... 15
Value of purchased contracts........... 1-3
Noncompete agreements.................. 5
</TABLE>
Costs incurred by the Company in securing financing agreements have
been deferred and are being amortized over the term of the agreements using the
effective interest method.
Amortization expense for the years ended December 31, 1997, 1998 and
1999, amounted to $2,356,000, $5,994,000 and $5,753,000, respectively.
Financial instruments: The Company utilizes derivative financial
instruments to change the fixed/variable interest rate mix of the debt portfolio
to reduce the Company's aggregate risk to movements in interest rates. The
derivative instruments consist of interest rate swap agreements with banks.
Gains and
F-8
<PAGE> 44
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
losses relating to qualified hedges are deferred and included in the measurement
of the related transaction, when the hedged transaction occurs. The Company's
policy is not to hold or issue derivative financial instruments for trading
purposes. In September 1998, the Company settled all derivative financial
instruments in full.
Net revenues: Revenues from outdoor advertising contracts are recognized on a
straight-line basis over the term of the contract and are net of agency
commissions. Bulletin contracts are primarily 36-month terms whereas poster
contracts are primarily 12 months or less.
Impairment of long-lived assets: The Company continually evaluates
whether events and circumstances have occurred that indicate the estimated
useful life of long-lived assets may warrant revision or the remaining balance
of long-lived assets may not be recoverable. In accordance with FASB Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, the Company records impairment losses on long-lived
assets used in operations when events and circumstances indicated that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
Loss per common share: Loss per common share amounts are computed using
the weighted average number of common shares outstanding.
Income taxes: Deferred income taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
The Company files a consolidated income tax return with Holdings. The
consolidated group uses the separate return method for allocating the
consolidated amount of current and deferred tax expense (benefit) to members of
the group.
F-9
<PAGE> 45
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1998 and 1999
(in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Land .............................. $ 288 $ 733
Buildings and improvements ........ 1,120 1,050
Structures and faces .............. 70,044 85,237
Vehicles and equipment ............ 1,831 2,112
------- -------
73,283 89,132
Less accumulated depreciation ..... 12,669 18,646
------- -------
$60,614 $70,486
======= =======
</TABLE>
NOTE 3. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Goodwill .......................... $36,327 $43,125
Debt issuance costs ............... 5,347 6,592
Value of purchased contracts ...... 9,368 10,513
Noncompete agreements ............. 1,018 1,269
------- -------
52,060 61,499
Less accumulated amortization ..... 9,370 15,151
------- -------
$42,690 $46,348
======= =======
</TABLE>
NOTE 4. ACQUISITIONS
1999
The PNE Media Holdings, LLC Acquisition: Effective October 15, 1999,
the Company acquired certain outdoor advertising assets of PNE Media Holdings,
LLC ("PNE Holdings") for a total acquisition cost of approximately $9.9
million. As a result of this acquisition, the Company acquired display faces in
Iowa, Missouri, Minnesota, Nebraska, South Dakota, and North Carolina.
The PNE Media, LLC Acquisition: Effective October 15, 1999,
the Company acquired certain outdoor advertising assets of PNE Media, LLC
("PNE") for a total acquisition cost of $2.5 million. As a result of this
acquisition, the Company acquired display faces in Kansas and Texas.
F-10
<PAGE> 46
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Other: On October 15, 1999, the Company purchased certain assets of an outdoor
advertising company with display faces in Georgia. The total acquisition cost
was $1.4 million. Also on October 15, 1999, the Company purchased certain assets
of an outdoor advertising company with display faces in Georgia. The acquisition
cost was $1.9 million.
During 1999, the Company also acquired certain assets of a small
outdoor company for the acquisition cost of $720,000.
The assets acquired during 1999 in conjunction with the above acquisition were
as follows (in thousands):
<TABLE>
<CAPTION>
PNE
Holdings PNE Others Total
-------- --- ------ -----
<S> <C> <C> <C> <C>
Current assets .................... $ 34 $ 2 $ 11 $ 47
Property and equipment and other
long term assets ................ 5,527 955 3,321 9,803
Goodwill .......................... 4,167 1,526 659 6,352
Other intangible assets ........... 197 45 59 301
------- ------- ------- -------
$ 9,925 $ 2,528 $ 4,050 $16,503
======= ======= ======= =======
</TABLE>
1998
The Unisign Acquisition: Effective March 2, 1998, the Company acquired
substantially all the outdoor advertising assets of Unisign Corporation, Inc.
("Unisign") for a total acquisition cost of approximately $22.0 million,
including the assumption of certain capital leases aggregating approximately
$727,000. Cash consideration paid was $21.1 million. As a result of this
acquisition, the Company acquired display faces in Kentucky, West Virginia and
Ohio.
The Company entered into a purchase commitment with Unisign on March 2,
1998 for the construction of outdoor advertising structures for $1,250,000. At
that time, the Company also provided a standby letter of credit agreement in the
amount of $1,250,000 with Unisign originally expiring April 6, 2000. On March 1,
1999, the Company entered into an amendment to the original credit agreement
("Credit Agreement") with Bank One, N.A. (formerly The First National Bank of
Chicago) and canceled the standby letter of credit agreement in the amount of
$1,250,000. (See Note 5.)
The Western acquisition: Effective September 18, 1998, the Company
acquired substantially all the outdoor advertising assets of Western Outdoor
Advertising ("Western") for a total acquisition price of approximately $26.8
million. As a result of this acquisition, the Company acquired display faces in
19 states. The Company entered into a Credit Facility and borrowed $16 million
to finance this acquisition. (See Note 5.)
F-11
<PAGE> 47
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Others: The Company purchased on June 26, 1998 certain assets of an outdoor
advertising company with advertising display faces located in Georgia. The
purchase price was $3.0 million. On July 23, 1998, the Company purchased certain
assets of an outdoor advertising company with advertising display faces located
in Georgia. The acquisition cost was $1.2 million.
The Company entered into various other purchase agreements during the
year aggregating $1.1 million.
The assets acquired and liabilities assumed during 1998 in conjunction with the
above acquisition were as follows (in thousands):
<TABLE>
<CAPTION>
Unisign Western Others Total
------- ------- ------ -----
<S> <C> <C> <C> <C>
Current assets ................. $ 220 $ 360 $ 38 $ 618
Property and equipment and other
long term assets .......... 9,105 11,657 2,639 23,401
Goodwill ....................... 10,185 12,194 2,210 24,589
Other intangible assets ........ 2,490 2,539 399 5,428
Assumed liabilities ............ (727) (163) (9) (899)
Acquisition costs .............. (200) (189) (177) (566)
-------- -------- -------- --------
$ 21,073 $ 26,398 $ 5,100 $ 52,571
======== ======== ======== ========
</TABLE>
1997
The Tri-State Systems Acquisition: In June 1997, the Company acquired
substantially all the assets of Tri-State Systems, Inc. ("TSS") for a total
acquisition cost of $32.0 million. As a result of the acquisition of TSS, the
Company acquired display faces in Georgia, Alabama, Florida, Kentucky,
Mississippi, South Carolina and Tennessee. Through this acquisition, the Company
also acquired the bench advertising business of TSS, which involves the sale of
advertising copy on benches located at bus stops and other locations. The bench
advertising business of the Company is operated primarily in Georgia and
Alabama, as well as Florida, Kentucky, Mississippi, South Carolina and
Tennessee. Subsequent to the acquisition of TSS by the Company, the Company's
Chief Financial Officer received $161,000 for his ownership interest in TSS.
Sunbelt Outdoor Systems, Inc.: In September 1997, the Company acquired
substantially all of the assets of Sunbelt Outdoor Systems, Inc. for a total
acquisition cost of approximately $2.8 million.
Others: The Company acquired assets from Supreme Outdoor, Inc. and
Mid-American Advertising Company for a total acquisition cost of $333,000 and
$400,000, respectively during 1997.
F-12
<PAGE> 48
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The assets acquired and liabilities assumed during 1997 in conjunction with the
above acquisitions were as follows (in thousands):
<TABLE>
<CAPTION>
TSS Sunbelt Others Total
--- ------- ------ -----
<S> <C> <C> <C> <C>
Current assets ........ $ 1,060 $ 21 $ 13 $ 1,094
Property and equipment 19,562 1,734 613 21,909
Goodwill .............. 8,997 922 84 10,003
Other intangible assets 2,345 104 33 2,482
Assumed liabilities ... (616) (27) (10) (653)
-------- -------- -------- --------
$ 31,348 $ 2,754 $ 733 $ 34,835
======== ======== ======== ========
</TABLE>
All of the foregoing acquisitions were accounted for as purchases, and
the operations are included in the accompanying financial statements subsequent
to the acquisitions.
Unaudited pro forma results of operations for the years ended December
31, 1997, 1998 and 1999 as though these businesses had been acquired as of the
prior year follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue $ 22,579 $ 27,681 $ 28,977
Loss before extraordinary item (10,469) (14,213) (14,343)
Net loss (10,469) (16,302) (14,343)
Loss per common share (52,345) (81,510) (71,715)
</TABLE>
NOTE 5. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1999 consists of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
(in thousands)
<S> <C> <C>
Senior Notes ..................................... $100,000 $100,000
Credit Facility:
Term loan ................................. 14,000 10,000
Revolving note ............................ 250 7,020
Promissory note payable ......................... -- 273
Obligations under capital leases ................. 1,991 4,132
-------- --------
116,241 121,425
Less current portion of long-term debt ........... 3,402 1,601
-------- --------
Long-term debt, less current portion ............. $112,839 $119,824
======== ========
</TABLE>
- ---------------
Senior Notes
F-13
<PAGE> 49
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On May 20, 1998, the Company issued a $100 million aggregate principal
amount of 11% Notes (the "Notes"). The Notes mature on March 15, 2008 and are
unsecured obligations of the Company ranking pari passu with all present and
future indebtedness of the Company that by its terms is not subordinated to the
obligations represented by the Notes. Interest is payable semi-annually on each
May 15 and November 15. The Company was required to purchase approximately $10.6
million of U.S. government securities and pledge them as security for the first
two interest payments on the Notes.
The Company may at its option redeem the Notes with the net proceeds of
one or more equity offerings at a redemption price equal to 111% of the
principal amount thereof, together with accrued interest, if any, to the date of
redemption (subject to the rights of holders of record on the relevant record
date to receive interest due on an Interest Payment Date); provided that,
immediately after giving effect to any such redemption, at least 75% of the
aggregate principal amount of the Securities issued under this Indenture remains
outstanding. Any such redemption must be made within 90 days of the related
equity offering.
The Notes may be redeemed at the option of the Company on or after May
15, 2003 at the redemption prices declining ratably from 105.5% of the principal
amount on May 15, 2003 to 100.0% on and after May 15, 2006, plus in each case
accrued and unpaid interest to the applicable redemption date.
The Indenture restricts the Company from, among other things (i)
incurring indebtedness; (ii) incurring liens or guaranteeing obligations; (iii)
entering into mergers or consolidations or liquidating or dissolving; (iv)
selling or otherwise disposing of property, business or assets; (v) with certain
exceptions, making loans or investments; (vi) making optional payments or
prepayments of indebtedness; (vii) limiting the ability of the Company to create
liens upon its property, assets or revenues.
Upon a change of control of the Company, each holder of Notes may
require the Company to repurchase all or a portion of such holder's Notes at a
purchase price equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase.
Credit Facility:
The Company entered into an amendment to the original credit agreement
("Credit Agreement") with Bank One, N.A. (formerly The First National Bank of
Chicago) originally dated September 20, 1998 on March 1, 1999. The amended
Credit Agreement consisted of a Term Loan A Facility for $14 million and a
Revolving Note B Facility for $4 million ("Revolver") with Bank One, N.A.
Proceeds from the Credit Agreement were used to finance the acquisition of
Western. The Company was required to pay a fee of
F-14
<PAGE> 50
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$385,000 at the loan closing date and an additional fee of $180,000 on June 30,
1999. The loans are collateralized by a first perfected security interest in all
of the assets of the Company as well as by a pledge from Holdings of its stock
in the Company. In addition, the Company must maintain keyman life insurance on
the President of the Company in the aggregate amount of $2,500,000. The
insurance policies are assigned to Bank One, N.A.
On August 12, 1999, the Company entered into a second amendment to the
original credit agreement with Bank One, N.A. originally dated September 20,
1998. The amended credit agreement consists of a Term Loan A Facility for $10
million and a Revolving Note B Facility for $10 million. The Company was
required to pay a fee of $500,000 at the loan closing date.
Under the amended and restated terms of the Term Loan A Facility on
December 31, 2000, the principal amount outstanding under Facility A and the
aggregate principal amount of advances then outstanding under Facility B became
advances deemed to have been made under Facility A as of such date and
thereafter not included as advances under Facility B. The principal amount of
advances outstanding under Facility A on January 1, 2001 are payable in 20
quarterly installments on each payment date, commencing March 31, 2001. Each
quarterly installment due on a payment date occurring in a calendar year set
forth below will be in the percentage of such aggregate principal amount set
forth opposite such calendar year. The outstanding balance of advances made
under Facility A shall be payable in full on December 31, 2005.
<TABLE>
<CAPTION>
Percentage of Advances
Year Ending December 31, Outstanding on January 1, 2001
------------------------ ------------------------------
<S> <C>
2001 10%
2002 15%
2003 20%
2004 25%
2005 30%
----
100%
====
</TABLE>
Under the amended and restated terms of the Term Loan B Facility, on December
31, 2000, advances under Facility B can not exceed $8 million unless the
proceeds of such advances are applied to the payment of interest, and cash and
cash equivalents on hand of the Company do not exceed $250,000. On December 31,
2000, the Facility B commitment is reduced to $6 million, and is further
reduced, on a annual basis, as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2002 $1,000,000
2003 1,000,000
2004 1,000,000
2005 3,000,000
</TABLE>
F-15
<PAGE> 51
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The agreement terminates on December 31, 2005. The effective interest
rate on these borrowings was 10.125% at December 31, 1999. The interest rate is
a floating rate which increases based on leverage ratio of the Company. Facility
A and B are required to be repaid in full in the event of an initial public
offering of capital stock by the Company or Holdings.
The Credit Agreement contains certain affirmative covenants that must
be complied with on a continuing basis. In addition, the Credit Agreement
contains certain restrictive covenants which, among other things, restrict the
Company from incurring additional debt and liens on assets, limits the amount of
capital expenditures during any fiscal year, and prohibits the consolidation,
merger or sale of assets, or issuance of common stock except as permitted by the
Credit Agreement. The Credit Agreement also requires the Company to maintain
certain financial ratios.
Promissory Note Payable:
On July 2, 1999 the Company entered into a promissory note which
provides for borrowings of $275,000 at an interest rate of 8.25%. Commencing on
August 2, 1999, monthly principal and interest payments of $2,343 are payable in
accordance with the agreement through July 2, 2004 at which time the remaining
principal balance and accrued interest is due and payable.
As a result of the early extinguishment of debt in May 1998, the
Company was required to record an extraordinary loss of $3.5 million, including
the estimated fair value of the interest rate swap agreements described below
because they no longer met the criteria to be accounted for as a hedge. The
Company recorded the related liability of $400,000 in May 1998. In September
1998, the Company settled the interest rate swap agreements for approximately
$600,000. The change in fair value since May 1998 has been recorded as other
expense in the accompanying statement of operations for the year ended December
31, 1998.
Maturities of long-term debt as of December 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
2000 ........................ $ 1,601
2001 ........................ 1,893
2002 ........................ 3,102
2003 ........................ 4,026
2004 ........................ 4,803
Thereafter .................. 106,000
--------
$121,425
========
</TABLE>
Obligations Under Capital Leases:
F-16
<PAGE> 52
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases certain outdoor advertising structures and equipment
accounted for as capital leases. The leases provide for the lessee to pay
insurance, taxes, maintenance and certain other operating costs of the leased
property. These lease agreements contain renewal provisions.
The following is a summary of future minimum payments under capitalized
leases (in thousands of dollars):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000 $ 1,297
2001 1,334
2002 939
2003 1,265
2004 1,145
-------
Total minimum lease payments 5,980
Less amount representing
interest (effective rates ranging
from 14% to 18%) (1,848)
-------
Present value of minimum
lease payments under capital lease $ 4,132
=======
</TABLE>
Assets recorded under capital leases are included in property and equipment as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Structures $ 2,049 $ 4,589
Equipment 79 79
------- -------
2,128 4,668
Accumulated amortization (59) (206)
------- -------
$ 2,069 $ 4,462
======= =======
</TABLE>
Interim Financing:
In conjunction with the Unisign acquisition, the Company borrowed $10
million from Holdings. This borrowing was subordinate to the Company's senior
debt and bore interest at LIBOR plus 4.75% (10.4% at March 2, 1998). The note
was due on demand and was repaid with a portion of the proceeds from the Senior
Notes.
Interest Swaps Agreements:
The Company used interest rate swap agreements to change the
fixed/variable interest rate mix of the debt portfolio to reduce the Company's
aggregate risk to movements in interest rates. Amounts paid or received under
interest rate swap agreements were accrued as interest rates changed and were
recognized
F-17
<PAGE> 53
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
over the life of the swap agreements as an adjustment to interest expense. The
related amounts payable to, or receivable from, the counterparties were included
in accrued interest expense. The fair value of the swap agreements noted below
were not recognized in the financial statements since they are accounted for as
a hedge. The criteria required to be met for hedge accounting is that, first,
the item to be hedged exposes the Company to interest rate risk and, second, the
interest rate swap agreements reduces that exposure and is designated a hedge. A
summary of interest rate swaps is as follows:
The first interest rate swap had a notional amount of $15,000,000,
matured May 17, 1999 (with an additional one year option at the Bank's
discretion) and had a fixed rate of 9.13%.
The second interest rate swap had a notional amount of $15,000,000, and
was to mature on May 16, 2000 and had a fixed rate of 9.13%.
Also, the swaps had an interest rate collar with a notional amount of
$10,000,000, a term of one year commencing November 20, 1997 and would
have provided a cap of 10.625% and a floor of 8.975%.
As mentioned above, these agreements were settled in September 1998.
NOTE 6. RELATED PARTY TRANSACTIONS
The Company leases certain assets from the President and Chief Financial
Officer. The rent expense paid to related parties for the years ended December
31, 1997, 1998 and 1999 in the aggregate totaled approximately $60,000, $41,000
and $57,000, respectively.
NOTE 7. INCOME TAXES
The income tax benefit consists of the following for the years ended
December 31, 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ........................... $ -- $ -- $--
State ............................. -- -- --
Deferred benefit:
Federal ........................... 1,218 1,949 --
State ............................. 206 325 --
------ ------ -----
$1,424 $2,274 $--
====== ====== =====
</TABLE>
A reconciliation of income tax benefit at statutory rates to the income
tax benefit reported in the statements of operations is as follows (in
thousands):
F-18
<PAGE> 54
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Tax benefit at statutory rate .............. $ 1,171 $ 3,311 $ 3,894
State tax benefit, net of federal taxes .... 206 325 344
Nondeductible expenses ..................... (11) (25) (27)
Increase in valuation allowance ............ -- (1,460) (3,960)
Other ...................................... 58 123 (251)
------- ------- -------
Income tax benefit ......................... $ 1,424 $ 2,274 $ --
======= ======= =======
</TABLE>
At December 31, 1999, the Company has net operating loss carryforwards
of approximately $34,629,000 for federal and state income tax purposes, which
expire in varying amounts during the years ending 2009 through 2019.
The Company is required to record a valuation allowance when it is
"more likely than not that some portion or all of the deferred tax assets will
not be realized." The Company has assessed its earnings history and anticipated
earnings, the expiration dates of carryforwards and other factors and has
determined that valuation allowances reflected above should be established
against the deferred tax assets as of December 31, 1999. During the years ended
December 31, 1998 and 1999, the Company recorded a valuation allowance of
$1,460,000 and $3,960,000, respectively, on the deferred tax assets to reduce
the total to an amount that management believes will ultimately be realized.
Realization of deferred tax assets is dependent upon sufficient future taxable
income during the period that deductible temporary differences and carryforwards
are expected to be available to reduce taxable income. If the Company is unable
to generate sufficient taxable income in the future, increases in the valuation
allowance may be required through a charge to expense. There was no other
activity in the valuation allowance account during 1998 or 1999.
Temporary differences between the financial statement carrying amounts
and tax bases of assets that give rise to significant portions of the deferred
tax assets relate to the following as of December 31, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ...... $ 7,925 $ 13,505
Amortization .......................... 893 795
Allowance for uncollectible accounts .. 133 70
-------- --------
8,951 14,370
Less valuation allowance .............. 1,460 5,420
-------- --------
7,491 8,950
Deferred tax liabilities:
Property and equipment ................ (1,291) (2,750)
-------- --------
$ 6,200 $ 6,200
======== ========
</TABLE>
F-19
<PAGE> 55
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8. COMMITMENTS
Operating leases: Noncancelable operating leases for display sites
expire in various years through 2041. These leases generally contain renewal
options for a period of years equal to the initial term of the leases.
Thereafter, the leases generally are renewable on a year to year basis unless
terminated by either party at least 30 days prior to the anniversary date.
Rental expenses for all site leases were $1,632,000, $3,146,000 and
$3,667,000 for the years ended December 31, 1997, 1998, and 1999, respectively.
Future minimum rentals for site leases at December 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Amounts
---- -------
<S> <C>
2000 ................................... $ 2,702
2001 ................................... 1,942
2002 ................................... 1,732
2003 ................................... 1,460
2004 ................................... 1,346
Thereafter ............................. 8,630
-------
Total minimum lease payments required .. $17,812
=======
</TABLE>
Zoning regulations: In some of the localities in which the Company
operates, outdoor advertising is subject to restrictive zoning regulations.
Although the Company believes the existence of those regulations continue to be
a factor in the operation of the Company's business such regulations have not
had a significant effect on the results of operations.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
The carrying amounts approximate fair values as of December 31, 1998
and 1999 for cash, restricted securities, accounts receivable, due to SGH
Holdings, Inc., accrued expenses and accounts payable because of the short-term
maturities of those instruments.
The Company does not believe it is practical to estimate the fair value
of the letter of credit (Note 4) and does not believe exposure to loss is
likely.
The carrying amount of variable rate long-term debt instruments is
estimated to approximate fair values as the underlying agreements have been
recently negotiated and rates are tied to short-term indices. The fair values of
the Senior Notes equal their carrying value based on quoted market prices.
NOTE 10. SALE-LEASEBACK TRANSACTION
During 1998 and 1999, the Company entered into several sale-leaseback
transactions aggregating $1.3 and $2.5 million, respectively, whereby the
Company sold advertising displays in the Southeast. There was no significant
gains (losses) resulting from these transactions.
F-20
<PAGE> 56
TRI-STATE OUTDOOR MEDIA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The related leases are being accounted for as capital leases. The assets were
leased back from the purchaser for a period of 5 years. The leases contains
renewal options at lease termination. The minimum lease payments required by the
leases over the next five years are included in Note 5.
The sale-leaseback agreements contain financial penalties which would
be triggered if the Company were to terminate any of the leases early.
NOTE 11. CAPITAL CONTRIBUTION
Holdings contributed $17,675,000 to the Company, in the form of
additional paid in capital, in order to fund certain acquisitions during the
year.
NOTE 12. CONTRIBUTION AGREEMENT
In January 2000, Holdings entered into a definitive agreement whereby
it will acquire substantially all the interests in PNE Media Holdings, Inc.
("PNE"). The agreement has certain conditions precedent that must be met for the
transaction to close. There can be no assurances that these conditions will be
met and that the transaction will close. PNE owns and operates approximately
7,700 outdoor advertising billboard faces primarily in metropolitan markets in
14 states. PNE will be operated as a stand alone subsidiary of Holdings.
Holdings will continue to operate the Company as a stand alone subsidiary. This
transaction will not result in a "change of control" under the public debt
indenture governing the $100 million, 11% senior notes due 2008 (Note 5) and
such existing debt of the Company will remain outstanding.
F-21
<PAGE> 1
FIRST AMENDMENT
TO
AMENDED AND RESTATED
CREDIT AGREEMENT
This Amendment (this "Amendment") is entered into as of October 15,
1999 by and between Tri-State Outdoor Media Group, Inc., a Kansas corporation
(the "Borrower"), and Bank One, NA (f/k/a The First National Bank of Chicago)
("Bank One"), individually and as agent (in such capacity, the "Agent").
RECITALS
A. The Borrower, Bank One as the sole Lender (the "Lender") and the
Agent are parties to that certain Amended and Restated Credit Agreement dated as
of August 12, 1999 (the "Credit Agreement"). Unless otherwise specified herein,
capitalized terms used in this Amendment shall have the meanings ascribed to
them in the Credit Agreement.
B. SGH Holdings, Inc. ("Holdings"), a Delaware corporation and owner of
all of the outstanding shares of capital stock of the Borrower, intends to issue
a Senior Increasing Rate Note in the principal amount of $19,000,000 (the "Bear
Stearns Note") to Bear Stearns Investment Products Inc. and to contribute the
net proceeds thereof as equity to the Borrower.
C. The Borrower intends to apply the proceeds of such equity
contribution to finance (i) the acquisition of certain assets of PNE Media
Holdings, LLC, PNE Media, LLC and other Persons and related fees and expenses,
and (ii) other Capital Expenditures.
D. The Borrower, the Lender and the Agent wish to amend the Credit
Agreement to permit the above-described acquisitions and to make certain other
revisions thereto on the terms and conditions set forth below.
Now, therefore, in consideration of the mutual execution hereof and
other good and valuable consideration, the parties hereto agree as follows:
1. Article I of the Credit Agreement is hereby amended by
inserting the following definitions of the terms "Bear Stearns Equity
Contribution", "Bear Stearns Note" and "Bear Stearns Note and Warrants Purchase
Agreement" after the definition of the term "Authorized Officer" and before the
definition of the term "Borrower":
"'Bear Stearns Equity Contribution' means the equity
contribution in the amount of approximately $18,051,000 made by Holdings to the
Borrower with the net proceeds of the Bear Stearns Note.
'Bear Stearns Note' means that certain Senior Increasing Rate
Note, dated October 15, 1999, in the principal amount of $19,000,000 issued by
Holdings to Bear Stearns Investment Products Inc. due May 15, 2008.
<PAGE> 2
'Bear Stearns Note and Warrants Purchase Agreement' means that
certain Note and Warrants Purchase Agreement dated as of October 15, 1999
between Holdings and Bear Stearns Investment Products Inc."
2. Article I of the Credit Agreement is hereby amended by
restating in its entirety clause (iv) of the definition of the term "Change in
Control" to read as follows:
"(iv) a 'Change of Control', as defined in the Senior Note
Indenture or the Bear Stearns Note and Warrants Purchase Agreement, shall
occur."
3. Article I of the Credit Agreement is hereby amended by
restating in its entirety the definition of the term "Permitted Acquisition"
therein to read as follows:
"'Permitted Acquisition' means any Acquisition by the Borrower
with respect to which each of the following requirements is satisfied:
(a) The assets to be acquired are useful in, or the Person
whose equity interests are to be acquired is engaged in, the business of leasing
outdoor advertising space.
(b) Such Acquisition has been approved or consented to by (i)
the board of directors or equivalent governing body of the Person whose assets
or equity interests are to be acquired and (ii) unless such Acquisition
constitutes a Qualified Acquisition or the aggregate consideration for such
Acquisition (or for such Acquisition and related Acquisitions) is less than
$250,000, the Required Lenders.
(c) After giving effect to such Acquisition, no Default or
Unmatured Default will exist.
(d) The Borrower has delivered to the Agent with sufficient
copies for the Lenders:
(i) Copies, certified by the Secretary or Assistant
Secretary of the Borrower, of the agreements, instruments and documents
governing such Acquisition, which, in the case of each Acquisition that
is not a Qualified Acquisition, shall be in form and substance
satisfactory to the Agent.
(ii) Evidence satisfactory to the Agent that the
respective directors and shareholders (if necessary) of the Borrower
and the seller or sellers (with respect to such Acquisition) shall have
approved such Acquisition, that all regulatory and legal approvals for
such Acquisition have been obtained, and that all conditions to the
consummation of such Acquisition have been satisfied.
(iii) In the case of a Qualified Acquisition, if so
requested by the Agent, a certificate signed by the Borrower's Chief
Financial Officer stating that such Acquisition has been financed with
proceeds of the Bear Stearns Equity Contribution and listing all other
Qualified Acquisitions and Capital Expenditures so financed, with an
itemization of the amounts expended.
2
<PAGE> 3
(iv) A certificate signed by the Borrower's Chief
Financial Officer stating that on the date of such Acquisition and
after giving effect thereto, (i) no Default or Unmatured Default will
exist, (ii) the representations and warranties contained in Article V
of the Credit Agreement are true and correct, except to the extent that
any such representation or warranty is stated to relate solely to an
earlier date, and (iii) the representations and warranties contained in
Article III of the Security Agreement are true and correct, after
giving effect to any revised Exhibits thereto which are attached to
such certificate.
(v) UCC financing statements and any other documents,
agreements or instruments that the Agent deems necessary to maintain
the priority and perfection of the Agent's security interest in the
Collateral after giving effect to the consummation of such Acquisition.
(vi) Such other documents related to such Acquisition
as any Lender or its counsel may have reasonably requested."
4. Article I of the Credit Agreement is hereby amended by
inserting the following definition of the term "Qualified Acquisition" after the
definition of the term "Purchasers" and before the definition of the term "Rate
Hedging Agreement":
"'Qualified Acquisition' means an Acquisition by the Borrower
of certain assets of PNE Media Holdings, LLC, PNE Media, LLC or any other Person
financed with the proceeds of the Bear Stearns Equity Contribution for an
aggregate consideration (including related fees and expenses) for all such
Acquisitions not to exceed the amount of the Bear Stearns Equity Contribution,
less the aggregate amount of Capital Expenditures financed with the proceeds of
the Bear Stearns Equity Contribution."
5. Section 4.2 of the Credit Agreement is hereby amended by
restating it in its entirety to read as follows:
"4.2 Certain Advances. Prior to January 1, 2001, the Lenders
shall not be required to make any Advance under Facility B that would cause the
Facility B Principal Obligations Amount to exceed $8,000,000 (other than an
Advance that, after giving effect thereto and to the application of the proceeds
thereof, does not increase the aggregate amount of outstanding Advances under
such Facility) unless, in addition to satisfying the conditions set forth in
Section 4.3, the Borrower shall furnish to the Agent, at the time of the
Borrower's request for such Advance, a certificate of an Authorized Officer
stating that (i) the proceeds of such Advance shall be applied by the Borrower
to the payment of interest on Indebtedness, and (ii) cash and cash equivalents
on hand of the Borrower (excluding (A) prior to April 30, 2000, the amount of
the Bear Stearns Equity Contribution not theretofore expended for Permitted
Acquisitions and related fees and expenses and Capital Expenditures, and (B) on
and after April 30, 2000, any amounts held back by the Borrower during the
applicable hold-back period from the purchase price for Permitted Acquisitions
referred to in clause (A) above) will not exceed $250,000, after giving effect
to the application of such Advance to such payment of interest."
3
<PAGE> 4
6. Section 6.1(iv) and 6.1(v) of the Credit Agreement are
hereby restated in their entirety to read as follows:
"(iv) (a) Together with the financial statements required
under Sections 6.1(i) and (iii), commencing with the financial statements of the
Borrower for the fiscal year ending December 31, 1999, a Compliance Certificate
showing the calculations necessary to determine compliance with this Agreement,
and (b) together with the financial statements of the Borrower for the fiscal
period ending September 30, 1999, a Compliance Certificate showing the
calculations necessary to determine compliance with Sections 6.19.4 and 6.19.5.
(v) (a) Within 35 days after the end of each month, other than
any month on the last day of which a fiscal quarter ends, commencing with the
month ending July 31, 1999 for the Borrower and its Subsidiaries, a consolidated
profit and loss statement and statement of cash flows for the period from the
beginning of the then-current fiscal year to the end of such month, each
certified by the Chief Financial Officer of the Borrower, and (b) within 15 days
after the end of each month, commencing with the month ending July 31, 1999 (x)
a statement of the Total Revenues of the Borrower and its Subsidiaries for such
month and for the period from the beginning of the then-current fiscal year to
the end of such month, in each case broken down by division and certified by the
Chief Financial Officer of the Borrower, and (y) a breakdown of the amount of
the Bear Stearns Equity Contribution expended for Qualified Acquisitions (and
related fees and expenses) and Capital Expenditures, certified by the Chief
Financial Officer of the Borrower."
7. Section 6.19.4 of the Credit Agreement is hereby restated
in its entirety to read as follows:
"6.19.4 Total Revenues. The Borrower will maintain Total
Revenues of the Borrower and the Subsidiaries for each three-month period ending
on the last day of each month in the calendar year 1999 set forth below equal to
or greater than 93% of the amount set forth opposite such month.
Quarterly
Total Revenues
June $6,750,000
September $6,878,000
December $7,059,000"
8. Section 6.19.5 of the Credit Agreement is hereby restated
in its entirety to read as follows:
"6.19.5 Net Operating Cash Flow. The Borrower will maintain
Net Operating Cash Flow for each three-month period ending on the last day of
each month in the calendar year 1999 set forth below equal to or greater than
95% of the amount set forth opposite such month.
4
<PAGE> 5
<TABLE>
<CAPTION>
Quarterly
Net Operating Cash Flow
<S> <C>
June $3,276,000
September $3,290,000
December $3,587,000"
</TABLE>
9. Section 6.19.6 of the Credit Agreement is hereby amended by
restating in its entirety the last sentence thereof to read as follows:
"For purposes of determining compliance with the covenant set
forth in this Section 6.19.6, there shall be excluded from the calculation of
the amount of Capital Expenditures: (a) proceeds of Sale and Leaseback
Transactions permitted by Section 6.15(ii) to the extent that such proceeds are
expended for Capital Expenditures, and (b) proceeds of the Bear Stearns Equity
Contribution expended for Capital Expenditures prior to April 30, 2000."
10. Section 7.18 of the Credit Agreement is hereby restated in
its entirety to read as follows:
"7.18 Holdings shall: (a) transact any business other than (i)
the ownership of the stock of the Borrower, (ii) the servicing of the Converted
Mesirow Equity (including the payment of permitted dividends thereon) or any
Indebtedness into which the Converted Mesirow Equity may be converted pursuant
to the terms thereof, and (iii) the issuance of the Bear Stearns Note and the
warrants and capital stock contemplated by the Bear Stearns Note and Warrants
Purchase Agreement, (b) have incurred any Indebtedness other than (i) any
Indebtedness into which the converted Mesirow Equity may be converted pursuant
to the terms thereof, or (ii) the Bear Stearns Note, (c) have amended or
modified the Mesirow 94 Documents or the Mesirow 97 Documents, other than to
permit the execution, delivery and performance by Holdings and the Borrower of
the Transaction Documents to which each is a party and by Holdings of the Bear
Stearns Note and Warrants Purchase Agreement, or (d) have voluntarily prepaid,
defeased or in substance defeased, purchased, redeemed, retired or otherwise
acquired, any Converted Mesirow Equity, any Indebtedness into which the
converted Mesirow Equity may be converted pursuant to the terms thereof, all or
any portion of the Bear Stearns Note or any warrant or capital stock issued
pursuant to the Bear Stearns Note and Warrants Purchase Agreement."
11. Schedule I to the form of Compliance Certificate attached
as Exhibit C to the Credit Agreement is hereby amended by deleting Sections
6.19.4 (Monthly Total Revenues) and 6.19.5 (Monthly Net Operating Cash Flow) and
restating in their entirety Sections 6.19.4 (Rolling three-month Total
Revenues), 6.19.5 (Rolling three-month Net Operating Cash Flow) and 6.19.6
(Capital Expenditures) to read as follows:
"6.19.4. Quarterly Total Revenues
a. Total Revenues for three-month period
ended ______, 1999
5
<PAGE> 6
b. Amount set forth in the "Quarterly Total Revenues"
column opposite the month referred to in a. in the
table in Section 6.19.4
c. 93% of b.
Covenant: a. may not be less than c.
Compliance ("Yes" or "No")
6.19.5. Quarterly Net Operating Cash Flow
a. Net Operating Cash Flow for three-month period
ended ______, 1999
b. Amount set forth in the "Quarterly Net Operating
Cash Flow" column opposite the month referred to in
a. in the table in Section 6.19.5
c. 95% of b.
Covenant: a. may not be less than c.
Compliance ("Yes" or "No")
6.19.6. Capital Expenditures
a. Capital Expenditures (7)
b. Proceeds of permitted Sale and Leaseback Transactions
expended on Capital Expenditures
c. Proceeds of Bear Stearns Equity Contribution expended
on Capital Expenditures prior to April 30, 2000
d. Sum of b. plus c.
e. a. minus d.
MAXIMUM PERMITTED:
<TABLE>
<CAPTION>
Period/Year Amount
Effective Date to 12/31/99
<S> <C>
$1,800,000
2000 $2,500,000
2001 $2,700,000
2002 $2,800,000
2003 $2,900,000
2004 $3,100,000
2005 $3,200,000
</TABLE>
Covenant: e. may not exceed applicable amount set forth above
plus unexpended amount from prior year if no Default or
Unmatured
6
<PAGE> 7
Default exists.
Compliance ("Yes" or "No") "
12. The Borrower represents and warrants to the Lender and the
Agent that:
(a) The execution, delivery and performance by the
Borrower of this Amendment have been duly authorized by all necessary
corporate action and do not and will not contravene or conflict with
any provision of law applicable to the Borrower, its articles of
incorporation or by-laws, or any order, judgment or decree of any court
or other agency of government or any contractual obligation binding
upon the Borrower; and the Credit Agreement, as amended by this
Amendment, is a legal, valid and binding obligation of the Borrower,
enforceable against the Borrower in accordance with its terms, except
as enforceability may be limited by bankruptcy, insolvency or similar
laws affecting creditors' rights generally.
(b) The representations and warranties of the
Borrower contained in Article V of the Credit Agreement, as amended by
this Amendment, are true and correct on and as the date hereof except
to the extent any such representation or warranty is stated to relate
solely to an earlier date, in which case such representation or
warranty was true on and as of such earlier date.
(c) Before and after giving effect to this Amendment,
there exists no Default or Unmatured Default.
13. This Amendment shall become effective as of the date
hereof upon the execution and delivery hereof by the Borrower, the Lender and
the Agent, and the Agent's receipt of the following:
(a) A counterpart of this Amendment executed by the
Borrower;
(b) Copies, certified by the Secretary or Assistant
Secretary of Holdings, of (i) the agreements, instruments and documents
governing the issuance of the Bear Stearns Note, and (ii) the Amendment
Agreement among Holdings, Mesirow Capital Partners VI and Mesirow
Capital Partners VII amending certain provisions of the Mesirow 94
Documents, the Mesirow 97 Documents and the Exchange Agreement dated
February 27, 1998 among Holdings, Mesirow Capital Partners VI and
Mesirow Capital Partners VII, which shall in each case be in form and
substance satisfactory to the Agent; and
(c) Evidence satisfactory to the Agent that the Bear
Stearns Note has been issued in accordance with the agreements,
instruments and documents referred to in clause (b) above and the net
proceeds thereof contributed as equity by Holdings to the Borrower.
14. The Borrower, the Lender and the Agent hereby acknowledge
and agree that, upon the issuance of the Bear Stearns Note and the contribution
of the net proceeds thereof
7
<PAGE> 8
as equity by Holdings to the Borrower, the Equity Infusion Date will have
occurred and the Borrower shall not be required to apply such net proceeds to a
prepayment under the Facilities pursuant to Section 2.2.4 of the Credit
Agreement.
15. Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed. The execution, delivery and
effectiveness of this Amendment shall not operate as a waiver of any right,
power or remedy of the Agent or any Lender under the Credit Agreement or any
Loan Document, nor constitute a waiver of any provision of the Credit Agreement
or any Loan Document, except as specifically set forth herein. Upon the
effectiveness of this Amendment, each reference in the Credit Agreement to "this
Agreement", "hereunder", "hereof", "herein" or words of similar import shall
mean and be a reference to the Credit Agreement as amended hereby.
16. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
17. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed an original, but all such counterparts
shall constitute one and the same instrument.
[signature page follows]
8
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date and year first above written.
TRI-STATE OUTDOOR MEDIA GROUP, INC.
By:
William G. McLendon
Chief Financial Officer
BANK ONE, NA (F/K/A THE FIRST NATIONAL BANK OF
CHICAGO), INDIVIDUALLY AND AS AGENT
By:
Laurie W. Blazek
Authorized Agent
<PAGE> 1
Exhibit 12.0
TRI-STATE OUTDOOR MEDIA GROUP, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Loss before income taxes $ (3,445) $ (9,739) $ (11,453)
Add
Portion of rent expenses representative of the
interest factor 571 1,049 1,222
Interest on indebtedness 4,200 10,417 13,006
---------- -------- ---------
Income as adjusted $ 1,326 $ 1,727 $ 2,775
========== ======== =========
Fixed charges
Interest on indebtedness (1) $ 4,200 $ 10,417 $ 13,006
---------- -------- ---------
Rent: 1,713 3,146 3,667
---------- -------- ---------
Portion or rent expenses representative
of interest factor (2) 571 1,049 1,222
---------- -------- ---------
Fixed charges (1)+(2) $ 4,771 $ 11,466 $ 14,228
========== ======== =========
Ratio of earnings to fixed charges - - -
========== ======== =========
</TABLE>
55
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 155
<SECURITIES> 0
<RECEIVABLES> 4,020
<ALLOWANCES> 533
<INVENTORY> 0
<CURRENT-ASSETS> 8,036
<PP&E> 89,132
<DEPRECIATION> 18,646
<TOTAL-ASSETS> 132,125
<CURRENT-LIABILITIES> 4,479
<BONDS> 119,824
0
0
<COMMON> 2
<OTHER-SE> 7,822
<TOTAL-LIABILITY-AND-EQUITY> 132,125
<SALES> 26,771
<TOTAL-REVENUES> 26,905
<CGS> 0
<TOTAL-COSTS> 25,508
<OTHER-EXPENSES> (156)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,006
<INCOME-PRETAX> (11,453)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,453)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,453)
<EPS-BASIC> (57.3)
<EPS-DILUTED> (57.3)
</TABLE>
