<PAGE> 1
THIS PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO CHANGE,
COMPLETION OR AMENDMENT WITHOUT NOTICE. A REGISTRATION STATEMENT RELATING
TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE
ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
UNDER NO CIRCUMSTANCES SHALL THIS PROSPECTUS CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.
SUBJECT TO COMPLETION, DATED OCTOBER 4, 1996
PROSPECTUS
$150,000,000
OUTDOOR SYSTEMS
% SENIOR SUBORDINATED NOTES DUE 2006
------------------
The % Senior Subordinated Notes due 2006 (the "Notes") are being
offered (the "Offering") by Outdoor Systems, Inc. (the "Company"), in connection
with the consummation of the Transactions (as defined herein), including the
recent acquisition (the "Acquisition") of substantially all of the billboard
advertising operations of the outdoor advertising division ("Gannett Outdoor")
of Gannett Co., Inc. ("Gannett") by the Company. On August 22, 1996, the Company
completed an offering of 8,590,000 shares of its Common Stock for net proceeds
of approximately $284.2 million.
Interest on the Notes will be payable in cash semi-annually on each
and , commencing , 1997. The Notes will be redeemable at the
option of the Company, in whole or in part, on or after , 2001, at the
redemption prices set forth herein, plus accrued and unpaid interest thereon to
the date of redemption. In addition, the Company may redeem in the aggregate up
to 35% of the original principal amount of the Notes on or prior to ,
1999 at a redemption price equal to 110% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon to the redemption date, with
the net proceeds of one or more Public Equity Offerings (as defined herein),
provided that at least $97.5 million of the aggregate principal amount of the
Notes originally issued remain outstanding. Upon a Change of Control (as defined
herein), each holder of the Notes will be entitled to require the Company to
purchase such holder's Notes at 101% of the principal amount thereof, plus
accrued and unpaid interest thereon to the date of purchase.
The Notes will be general unsecured obligations of the Company subordinate
in right of payment to all existing and future Senior Indebtedness (as defined
herein) of the Company. The Notes will be unconditionally guaranteed, on an
unsecured senior subordinated basis, as to payment of principal, premium, if
any, and interest, jointly and severally, by all of the Company's domestic
subsidiaries (the "Guarantors"). As of June 30, 1996, after giving effect to the
Transactions and the Offering, the Company would have had approximately $455.9
million of Senior Indebtedness outstanding.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================
<S> <C> <C> <C>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) THE COMPANY(3)
- ---------------------------------------------------------------------------------------------------
Per Note............................... $ $ $
- ---------------------------------------------------------------------------------------------------
Total.................................. $ $ $
===================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company and the Guarantors have agreed to indemnify the Underwriters (as
defined herein) against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(3) Before deducting the expenses payable by the Company estimated to be
$ .
The Notes are offered by the Underwriters named herein, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to certain
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of the Notes will be made on or about , 1996
at the offices of CIBC Wood Gundy Securities Corp., New York, New York.
CIBC WOOD GUNDY SECURITIES CORP. ALEX. BROWN & SONS
INCORPORATED
------------------
The date of this Prospectus is , 1996.
<PAGE> 2
[INSIDE COVER PAGE CONTAINS PHOTOGRAPHS OF VARIOUS BILLBOARDS ADVERTISING
PRODUCTS FOR MCDONALD'S, CHEVROLET, HUDSON'S FINE JEWELRY AND ALTOIDS'.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including notes thereto,
appearing elsewhere in this Prospectus or incorporated herein by reference.
Unless otherwise indicated, all information in this Prospectus gives effect to a
three-for-two Common Stock split effected in the form of a stock dividend paid
on July 22, 1996. The "Transactions" consist of the acquisition (the
"Acquisition") of substantially all of the billboard and transit advertising
operations of the outdoor advertising division ("Gannett Outdoor") of Gannett
Co., Inc. ("Gannett"), including the acquisition of the Houston Option (as
defined herein) (but not the consummation of the transactions contemplated by
the Houston Option), the Denver Disposition (as defined herein), the Debt Tender
Offer (as defined herein), the Acquisition Financing (as defined herein), a
proposed amendment to the Senior Credit Facility (as defined herein) and the
Other Acquisitions (as defined herein). See "The Transactions." As used herein,
the "Company" or "Outdoor Systems" refers to Outdoor Systems, Inc. together with
its consolidated subsidiaries and, where the context requires, includes the
business of Gannett Outdoor, and "market" in the United States refers to the
geographic area constituting a Designated Market Area as defined by The A.C.
Nielsen Company and in Canada refers to Census Metro Area as defined by
Statistics Canada.
THE COMPANY
Outdoor Systems, Inc. is the largest outdoor advertising company in North
America, operating approximately 58,000 advertising display faces in 22
metropolitan markets in the United States and seven metropolitan markets in
Canada. The Company has operations in seven of the ten largest United States
markets, as well as six of the ten largest Canadian markets. Giving effect to
the Acquisition, as if it occurred at the beginning of the applicable period,
the Company had pro forma net revenues of $314.4 million and pro forma EBITDA of
$113.3 million for the year ended December 31, 1995 and pro forma net revenues
of $154.8 million and pro forma EBITDA of $54.6 million for the six months ended
June 30, 1996.
Through the Acquisition, the Company significantly increased its presence
in North America and diversified into additional major metropolitan markets. The
following table sets forth, as of June 30, 1996 or for the year ended December
31, 1995, certain information with respect to the Company's outdoor markets
after giving effect to the Acquisition and the Denver Disposition (dollars in
thousands):
<TABLE>
<CAPTION>
MALL TOTAL
MARKET 1995 PRO FORMA 30-SHEET 8-SHEET AND AIRPORT DISPLAY
MARKET RANK NET REVENUES BULLETINS POSTERS POSTERS POSTERS TRANSIT FACES
- ----------------------------------- ------ -------------- --------- -------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES:
New York/New Jersey(1)............. 1 $ 53,188 579 2,730 125 -- 3,507 6,941
Los Angeles........................ 2 41,739 785 2,962 -- -- 2,804 6,551
Chicago............................ 3 6,499 155 -- 638 -- -- 793
Philadelphia....................... 4 1,941 -- -- -- -- 690 690
San Francisco...................... 5 18,679 202 972 571 -- 1,346 3,091
Detroit............................ 9 20,264 438 1,340 104 -- 800 2,682
Houston(2)......................... 10 5,480 377 -- -- -- -- 377
Atlanta............................ 11 21,654 748 1,910 -- -- -- 2,658
Sacramento(3)...................... 17 -- 60 291 -- -- -- 351
Phoenix............................ 18 16,745 605 1,530 677 -- 1,418 4,230
St. Louis.......................... 19 8,010 268 852 -- -- -- 1,120
Denver............................. 21 7,975 163 775 -- -- 5,300 6,238
San Diego.......................... 22 5,349 114 540 -- -- 668 1,322
New Haven(4)....................... 26 5,496 149 835 -- -- -- 984
Kansas City........................ 33 6,988 198 849 -- -- -- 1,047
Grand Rapids....................... 38 4,339 110 550 -- -- 80 740
New Orleans........................ 40 9,532 346 1,053 481 -- 213 2,093
Louisville......................... 49 8,002 320 1,067 264 -- -- 1,651
Flint.............................. 59 2,705 93 450 20 -- -- 563
Rochester.......................... 72 308 -- -- -- -- 240 240
Tucson............................. 81 1,700 112 6 345 -- -- 463
Columbus, GA....................... 127 2,596 180 422 100 -- -- 702
</TABLE>
1
<PAGE> 4
<TABLE>
<CAPTION>
MALL TOTAL
MARKET 1995 PRO FORMA 30-SHEET 8-SHEET AND AIRPORT DISPLAY
MARKET RANK NET REVENUES BULLETINS POSTERS POSTERS POSTERS TRANSIT FACES
- ----------------------------------- ------ -------------- --------- -------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CANADA:
Toronto............................ 1 $ 39,280 303 1,834 -- 418 2,474 5,029
Montreal........................... 2 12,045 134 770 -- 322 1,794 3,020
Ottawa............................. 6 1,691 23 214 -- 68 -- 305
Winnipeg........................... 7 4,959 154 415 -- 77 406 1,052
Quebec City........................ 8 3,530 71 782 -- 194 296 1,343
Hamilton(5)........................ 9 -- 36 288 -- 80 576 980
Halifax............................ 14 1,612 11 122 -- 26 214 373
Other.............................. N/A 2,080 24 108 -- 108 94 334
-------------- --------- -------- ------- ----- ------- -------
Total.......................... $314,386 6,758 23,667 3,325 1,293 22,920 57,963
============== ======== ======== ======= ========== ====== =======
</TABLE>
- ---------------
(1) All of the Company's bulletins and posters are located in New Jersey.
(2) Includes only Outdoor Systems' existing Houston operations. The Company has
the right to acquire Gannett Outdoor's Houston operations pursuant to the
Houston Option. See "The Transactions -- The Houston Option."
(3) Net revenues are included with San Francisco.
(4) Includes advertising display faces in New Haven, as well as other areas of
Connecticut.
(5) Net revenues are included with Toronto.
THE ACQUISITION
On August 22, 1996, the Company purchased substantially all of the assets
of Gannett Outdoor, including the stock of certain indirect subsidiaries of
Gannett, for approximately $640 million in cash, plus the net book value of
working capital and certain other specified assets of Gannett Outdoor (which net
book value increased the purchase price by approximately $60 million). See "The
Transactions -- The Acquisition."
The Company acquired from Gannett a total of approximately 40,000
advertising display faces consisting of bulletins, posters and transit
advertising display faces in 15 metropolitan markets in the United States and
seven metropolitan markets in Canada. As a result of the Acquisition, the
Company owns and operates approximately 58,000 advertising display faces located
in 22 metropolitan markets in the United States and seven metropolitan markets
in Canada. Management believes that upon the successful consolidation of Gannett
Outdoor with the existing business of Outdoor Systems, the Company's position as
a leading provider of outdoor advertising services will be significantly
enhanced.
The Company believes that there are significant opportunities for revenue
enhancement in its combined operations. The increased presence in North America
resulting from the Acquisition should allow the Company to expand its services
to national advertisers through direct sales efforts offering access to multiple
markets. In addition, the Company believes that its operating and sales
strategies will allow it to improve utilization of the Gannett Outdoor
advertising display faces.
The Company also believes that the consolidation of certain administrative,
sales management and leasing management functions in connection with the
Acquisition will result in certain cost savings, including the reduction and
consolidation of duplicative (i) production and sales overhead functions, (ii)
production and administrative support positions, (iii) national sales and
marketing support functions, and (iv) accounting and administrative functions.
The Company believes it will achieve additional cost savings by closing one of
Gannett Outdoor's production facilities in Canada and by consolidating the
Canadian accounting and administrative functions. In addition to these cost
savings, the Company believes that it may be able to achieve additional cost
savings arising from (i) reductions in facility costs arising from renegotiated
rents or reduced space and the reduction of expenses relating to terminated
employees, (ii) a reduction in labor costs arising from production efficiencies
and a reduced number of direct production and direct sales employees, and (iii)
increased sales efficiencies arising from a modification of the sales
compensation system. See "Risk Factors -- Challenges of Business Integration."
The Company financed the purchase price of the Acquisition and the related
refinancing of certain existing indebtedness of the Company and paid the fees
and expenses associated with the Acquisition and the acquisition financing
through (i) a revolving credit facility and term loans of up to $530.0 million
under a senior credit facility (the "Senior Credit Facility"), (ii) bridge loans
of $180.0 million (the "Bridge Financing") under a senior subordinated credit
facility (the "Subordinated Credit Facility"), and (iii) the
2
<PAGE> 5
offering of 8,590,000 shares of Common Stock for net proceeds to the Company of
approximately $284.2 million (the "Common Stock Offering"). The Company used
approximately $40.0 million of net proceeds received upon the exercise of the
Underwriters' over-allotment option in the Common Stock Offering to reduce
indebtedness incurred under the Subordinated Credit Facility. The Common Stock
Offering, the Bridge Financing and the financing obtained under the Senior
Credit Facility are hereinafter referred to as the "Acquisition Financing."
Concurrently with or shortly following the consummation of the Offering, it is
expected that the Senior Credit Facility will be amended to provide for a
revolving credit facility and term loans of up to an aggregate of $600.0 million
and to make certain other changes. See "Description of Senior Credit Facility."
OPERATING STRATEGY
The Company's primary objective is to be the leading provider of outdoor
advertising services in each of its markets. Outdoor Systems' successful
operating strategy, focusing on superior sales and service, optimal management
of its inventory, centralized administration and strategic acquisitions, has
enabled it to improve the historical operating results in each of its existing
markets. Management intends to apply this strategy to each of its newly-acquired
markets.
- - Superior Sales and Service. The Company seeks to gain market share in each of
its markets through an intensive focus on customer sales and service, quality
displays and competitive pricing. Outdoor Systems has recruited and trained a
skilled sales force that is motivated by a program of commission-based
compensation and supported by a network of experienced local managers who
operate under a centrally coordinated marketing plan. Each Outdoor Systems
market has a general manager who is actively engaged in sales. In addition,
the Company seeks to attract and retain advertisers through creative
advertising layouts, timely installation and rotation of displays and rapid
response to customer needs.
- - Optimal Inventory Management. The Company seeks to balance advertising rate
growth with optimal occupancy of its displays in order to maximize revenues.
The Company's variety of outdoor advertising and transit displays in its
geographically diverse markets permits flexibility in pricing and packaging
its display inventory.
- - Centralized Administration. Outdoor Systems has historically consolidated
substantially all of its administration, accounting, sales management and
leasing management functions at its Phoenix headquarters and plans to
consolidate a significant amount of these functions relating to the business
of Gannett Outdoor into its Phoenix headquarters and four regional offices.
This centralization allows the Company to focus local efforts on customer
service and sales and to exercise greater control over administrative costs
and expenditures.
- - Strategic Acquisitions. Although the Company's focus will be the
consolidation and integration of Gannett Outdoor and the promotion of internal
growth of both new and existing properties, the Company will also continue to
pursue strategic acquisitions in existing and new markets to achieve increased
operating efficiencies, greater geographic diversification and increased
market penetration. The Company is primarily interested in continued expansion
in the 50 largest United States markets, because these markets typically
generate greater outdoor market revenues, readily attract national
advertisers, provide a better basis for regional advertising, attract quality
management and offer opportunities to gain a larger market share from
competitive media.
The Company believes that its experienced and sales-oriented management
team is an important asset in the successful implementation of its operating
strategy. William S. Levine, Chairman, Arthur R. Moreno, President and Chief
Executive Officer, and Wally C. Kelly, Senior Vice President of Sales, together
possess over 56 years of sales and management experience in the outdoor
advertising industry. In addition, the Outdoor Systems' general managers in its
existing markets have an average of nearly 14 years of experience in the outdoor
advertising industry. The industry experience of Mr. Moreno and other members of
Outdoor Systems' management team includes significant prior experience with
Gannett Outdoor.
The Company was organized in 1980. The Company's executive offices are
located at 2502 N. Black Canyon Highway, Phoenix, Arizona 85009, and its
telephone number is (602) 246-9569.
3
<PAGE> 6
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Issuer............................. Outdoor Systems, Inc.
Securities Offered................. $150,000,000 principal amount of % Senior Subordinated
Notes due 2006 (the "Notes").
Maturity Date...................... , 2006.
Interest Rate...................... The Notes will bear interest at a rate of % per annum.
Interest Payment Dates............. Interest will accrue on the Notes from the date of
issuance (the "Issue Date") and will be payable
semi-annually on each and ,
commencing , 1997.
Ranking............................ The Notes will be general unsecured obligations of the
Company subordinate in right of payment to all existing
and future Senior Indebtedness (as defined herein) of
the Company, including indebtedness under the Senior
Credit Facility, and senior in right of payment to all
subordinated indebtedness of the Company. At June 30,
1996, after giving pro forma effect to the Transactions
and the Offering, the Company would have had
approximately $455.9 million of Senior Indebtedness
outstanding.
Guarantees......................... The Notes will be unconditionally guaranteed, on a
senior subordinated basis, as to the payment of
principal, premium, if any, and interest, jointly and
severally (the "Guarantees"), by all of the direct and
indirect domestic subsidiaries of the Company (the
"Guarantors"). The Guarantees will be subordinated to
all Senior Indebtedness of the respective Guarantors.
Optional Redemption................ The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
, 2001 at the redemption prices set forth
herein, together with accrued and unpaid interest
thereon to the date of redemption. In addition, the
Company, at its option, may redeem in the aggregate up
to 35% of the original principal amount of Notes at any
time prior to , 1999, at a redemption price
equal to 110% of the principal amount thereof plus
accrued and unpaid interest thereon to the redemption
date with the net proceeds of one or more Public Equity
Offerings; provided, however, that at least $97.5
million aggregate principal amount of Notes remain
outstanding and that such redemption occurs within 60
days following the closing of any such Public Equity
Offering.
Change of Control.................. In the event of a Change of Control (as defined herein),
the Company will be required to make an offer to
purchase all outstanding Notes at a price equal to 101%
of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase. See "Description of
the Notes -- Change of Control Offer." There can be no
assurance that the Company will have sufficient funds or
will be contractually permitted by outstanding Senior
Indebtedness to pay the required purchase price for all
Notes tendered by holders upon a Change of Control.
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
<S> <C>
Certain Covenants.................. The Indenture governing the Notes (the "Indenture") will
contain covenants for the benefit of the holders of the
Notes that, among other things, restrict the ability of
the Company and its Restricted Subsidiaries (as defined
herein) to: (i) incur additional Indebtedness (as
defined herein); (ii) pay dividends and make
distributions; (iii) make certain investments; (iv)
create liens; (v) enter into transactions with
affiliates; (vi) issue stock of a Restricted Subsidiary;
(vii) enter into sale and leaseback transactions; (viii)
merge or consolidate the Company or the Guarantors; and
(ix) transfer or sell assets. These covenants are
subject to a number of important exceptions. See
"Description of the Notes -- Certain Covenants."
Use of Proceeds.................... The net proceeds from the sale of the Notes will be used
to repay borrowings under the Subordinated Credit
Facility and to pay related fees and expenses. The
remaining net proceeds, if any, will be used to pay a
portion of the outstanding borrowings under the Senior
Credit Facility.
</TABLE>
For more complete information regarding the Notes, including the
definitions of certain capitalized terms used above, see "Description of the
Notes."
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the
information set forth under the caption "Risk Factors," and all other
information set forth in this Prospectus, in evaluating an investment in the
Notes.
5
<PAGE> 8
SUMMARY PRO FORMA FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
The following sets forth summary unaudited pro forma consolidated financial
information derived from the Unaudited Consolidated Pro Forma Financial
Information included elsewhere in this Prospectus. The summary unaudited pro
forma consolidated statement of operations for the year ended December 31, 1995
and for the latest twelve month period ended June 30, 1996 give effect to (i)
the Transactions, (ii) the net reduction in operating expenses of Gannett
Outdoor, (iii) the effect of conforming the capitalization of property and
equipment accounting policy of Gannett Outdoor to that of Outdoor Systems, and
(iv) the Offering and the application of the net proceeds therefrom as if each
had occurred at the beginning of the respective periods. The summary unaudited
pro forma balance sheet as of June 30, 1996 has been prepared as if the
Transactions and the Offering had occurred on June 30, 1996.
The summary unaudited pro forma consolidated financial information does not
purport to present the actual financial position or results of operations of the
Company had the transactions and events assumed therein in fact occurred on the
dates specified, nor are they necessarily indicative of the results of
operations that may be achieved in the future. The summary unaudited pro forma
consolidated financial information is based on certain assumptions and
adjustments described in the notes to the Unaudited Consolidated Pro Forma
Financial Information and should be read in conjunction therewith. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," the Consolidated Financial Statements and the Notes thereto of
Outdoor Systems and the Combined Financial Statements and Notes thereto of
Gannett Outdoor, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
LATEST
TWELVE
PRO FORMA MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, 1995 1996
----------------- ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $ 314,386 $322,248
Direct advertising expenses................................. 174,353 176,389
General and administrative expenses......................... 26,723 26,672
Depreciation and amortization............................... 51,585 51,723
-------- --------
Operating income............................................ 61,725 67,464
Interest expense............................................ 54,139 54,139
Net income.................................................. 5,468 8,404
OTHER DATA:
EBITDA(1)................................................... $ 113,310 $119,187
EBITDA margin(2)............................................ 36.0% 37.0%
Capital expenditures........................................ $ 21,661 $ 21,368
Number of advertising displays.............................. 53,000 58,000
Ratio of EBITDA to interest expense(3)...................... 2.20x
Ratio of total debt to EBITDA(3)............................ 5.08x
PRO FORMA
ACTUAL AS OF
AS OF JUNE 30,
JUNE 30, 1996 1996
----------------- ------------
BALANCE SHEET DATA:
Working capital............................................. $ 7,882 $ 64,795
Total assets................................................ 160,545 954,236
Total debt.................................................. 138,633 605,937
Stockholders' equity........................................ 10,424 277,177
</TABLE>
- ---------------
(1) "EBITDA" is defined as operating income (loss) before depreciation and
amortization expense. While EBITDA should not be considered in isolation or
as a substitute for net income, cash flows from operating activities and
other income or cash flow statement data prepared in accordance with
generally accepted accounting principles, or as a measure of profitability
or liquidity, management understands that it is widely used by certain
investors as one measure to evaluate the financial performance of companies
in the outdoor advertising industry.
(2) "EBITDA margin" is EBITDA stated as a percentage of net revenues.
(3) If the Senior Credit Facility is not amended as proposed, the ratio of
EBITDA to interest expense and the ratio of total debt to EBITDA would be
2.04x and 5.06x, respectively.
6
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
The following table sets forth summary historical financial data for
Outdoor Systems and Gannett Outdoor for the periods indicated. The information
presented below is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Results of Operations
and Financial Condition," "Selected Historical Financial and Other Data" and the
Consolidated Financial Statements and Notes thereto of Outdoor Systems and the
Combined Financial Statements and Notes thereto of Gannett Outdoor.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- -------------------------
OUTDOOR SYSTEMS(1) 1993 1994 1995 1995 1996
- ---------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues(2)....................... $ 49,151 $ 52,077 $ 64,813 $ 29,738 $ 36,527
Operating expenses:
Direct advertising expenses......... 23,721 24,433 30,462 14,596 16,151
General and administrative
expenses.......................... 2,777 3,357 4,096 2,007 2,213
Depreciation and amortization....... 10,421 9,165 9,970 4,958 5,259
Gain on 1994 Disposal................. -- 4,325 -- -- --
Operating income...................... 12,232 19,447 20,285 8,177 12,904
Interest expense...................... 11,894 16,393 17,199 9,017 7,929
Net income (loss)(3).................. (3,176) 1,333 2,768 (840) 2,141
OTHER DATA:
EBITDA(4)............................. $ 22,653 $ 24,287 $ 30,255 $ 13,135 $ 18,163
EBITDA margin(5)...................... 46.1% 46.6% 46.7% 44.2% 49.7%
Capital expenditures.................. $ 4,387 $ 4,924 $ 7,070 $ 4,251 $ 2,891
Number of advertising displays........ 10,800 11,900 12,700 12,000 18,000
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- -------------------------
GANNETT OUTDOOR 1993 1994 1995 1995 1996
- ---------------------------------------- ----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Net revenues.......................... $ 225,165 $ 235,236 $ 247,271 $ 115,888 $ 117,733
Other income (loss)................... 25 (67) 193 266 201
----------- ----------- ----------- ----------- -----------
Total revenues................. 225,190 235,169 247,464 116,154 117,934
----------- ----------- ----------- ----------- -----------
Direct expenses:
Direct advertising.................. 159,927 163,362 171,091 82,955 82,410
General and administrative.......... 30,572 33,866 33,101 16,123 17,169
Depreciation and amortization....... 19,669 19,692 17,262 8,743 8,822
----------- ----------- ----------- ----------- -----------
Excess of revenues over direct
expenses............................ $ 15,022 $ 18,249 $ 26,010 $ 8,333 $ 9,533
=========== =========== =========== =========== ===========
</TABLE>
(see footnotes on the following page)
7
<PAGE> 10
NOTES TO SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(1) In December 1994, the Company acquired substantially all of the assets and
business of Capitol Outdoor Advertising, Inc. in Atlanta (the "1994
Acquisition"), and in connection with the 1994 Acquisition simultaneously
sold its then-existing outdoor advertising displays in Atlanta (the "1994
Disposal") (the 1994 Acquisition and the 1994 Disposal are collectively
referred to as the "Atlanta Transaction"). In addition, in 1993 the Company
refinanced a substantial portion of its indebtedness with 10.75% Senior
Notes due 2003. Accordingly, operating results are not necessarily
comparable on a year-to-year basis. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
(2) Net revenues are gross revenues minus agency commissions, plus other income
of $1.0 million and $0.4 million for the years ended December 31, 1994 and
1995, respectively, and $0.3 million for the six months ended June 30, 1996.
(3) Deferred financing costs of $3.3 million and $0.8 million associated with
borrowings which were retired or redeemed were charged as an extraordinary
loss during 1993 and the six months ended June 30, 1996, respectively.
(4) "EBITDA" is defined as operating income (loss) before depreciation and
amortization expense and, in 1994, before the gain on the 1994 Disposal.
While EBITDA should not be considered in isolation or as a substitute for
net income, cash flows from operating activities and other income or cash
flow statement data prepared in accordance with generally accepted
accounting principles, or as a measure of profitability or liquidity,
management understands that it is widely used by certain investors as one
measure to evaluate the financial performance of companies in the outdoor
advertising industry.
(5) "EBITDA margin" is EBITDA stated as a percentage of net revenues.
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THE TRANSACTIONS
THE ACQUISITION
On August 22, 1996, the Company purchased substantially all of the assets
of Gannett Outdoor, including the stock of certain indirect subsidiaries of
Gannett, for approximately $640 million in cash, plus the net book value of
working capital and certain other specified assets of Gannett Outdoor (which net
book value increased the purchase price by approximately $60 million). As a
result of the Acquisition, the Company acquired from Gannett a total of
approximately 40,000 advertising display faces consisting of bulletins, posters
and transit advertising displays in and around New York, Los Angeles, Chicago,
Philadelphia, San Francisco, Detroit, Sacramento, St. Louis, Denver, San Diego,
New Haven, Kansas City, Grand Rapids, Flint and Rochester and in various
locations in New Jersey and Canada.
THE ACQUISITION FINANCING
The Company financed the purchase price of the Acquisition and the related
refinancing of certain existing indebtedness of the Company and paid the fees
and expenses associated with the Acquisition and the Acquisition Financing
through (i) a revolving credit facility and term loans of up to $530 million
under the Senior Credit Facility, (ii) bridge loans of $180 million under the
Subordinated Credit Facility, and (iii) the Common Stock Offering. The Company
used approximately $40 million of net proceeds received upon the exercise of the
Underwriters' over-allotment option in the Common Stock Offering to reduce
indebtedness incurred under the Subordinated Credit Facility. Concurrently with
or shortly following the consummation of the Offering, it is expected that the
Senior Credit Facility will be amended to provide for a revolving credit
facility and term loans of up to an aggregate of $575 million and to make
certain other changes. See "Description of Senior Credit Facility."
THE DEBT TENDER OFFER
In connection with the Acquisition, the Company purchased, pursuant to a
tender offer and consent solicitation (the "Debt Tender Offer"), all but $15,000
aggregate principal amount of its outstanding 10 3/4% Senior Notes due 2003 (the
"Existing Notes") and obtained the consent of the holders of the Existing Notes
to modify or eliminate certain provisions of the indenture governing the
Existing Notes to permit, among other things, the consummation of the
Acquisition Financing. The aggregate consideration paid by the Company in the
Debt Tender Offer was $1,116.25 per $1,000 principal amount of Existing Notes
plus accrued and unpaid interest. The Company executed a supplemental indenture
reflecting the amendments.
THE HOUSTON OPTION
In connection with the Acquisition, Gannett agreed to cause Gannett Outdoor
Co. of Texas, Inc. ("Gannett of Texas") to grant to the Company an option (the
"Houston Option") to purchase, within 120 days after the closing of the
Acquisition, Gannett of Texas' outdoor operations in Houston, Texas, for a
purchase price of $10 million in cash, plus the net book value of working
capital and certain other specified assets of Gannett of Texas. The Company
exercised the Houston Option and intends to complete the acquisition
contemplated thereby as soon as practicable following the expiration or early
termination of the applicable waiting period under the Hart-Scott-Rodino Act.
The acquisition of the Houston assets could require the sale or other
disposition of part or all of Outdoor Systems' existing operations in Houston.
THE DENVER DISPOSITION
On August 8, 1996, the Company sold substantially all of its existing
billboard assets in Denver (the "Denver Disposition") to an unrelated party for
$9.2 million consisting of $2.8 million in cash paid at closing and a ten-year
promissory note for the balance of the purchase price. The promissory note bears
interest at a rate of 9% per annum and is payable in installments of $162,500
(including interest) per quarter with a final payment of the remaining principal
and unpaid interest upon maturity. The promissory note is secured by a first
lien on the assets sold. The promissory note and all security instruments in
connection therewith have been pledged to secure the Company's obligations under
the Senior Credit Facility.
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OTHER ACQUISITIONS
In May 1996, Outdoor Systems acquired control over perpetual easements for
1,360 plots of land in 17 eastern states for $21.8 million (plus future
consideration estimated to be payable beginning in 2006) from CSX Realty
Development Corporation (the "CSX Assets Acquisition"). Currently, 130 different
outdoor advertising companies have licenses to operate approximately 2,240
advertising displays on these plots of land. As a result of this purchase, the
Company has the right to collect the proceeds from these licenses. The Company
believes that the plots of land subject to the easements acquired in the CSX
Assets Acquisition (i) are located in attractive locations because of their
proximity to major highways, and (ii) provide a long-term, consistent revenue
stream due to their high occupancy license fees and renewal rates. The Company
is in the process of consolidating the operations acquired in the CSX Assets
Acquisition into its Atlanta market operations.
In April 1996, the Company acquired all of the stock of Decade
Communications Group, Inc. (the "Bench Ad Acquisition"), which owned
approximately 5,300 bus benches in the Denver metropolitan area for a purchase
price of approximately $1.8 million.
The CSX Assets Acquisition and the Bench Ad Acquisition are hereinafter
referred to as the "Other Acquisitions."
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Notes
offered by this Prospectus.
Leverage and Liquidity. Upon completion of the Offering and the proposed
amendment to the Senior Credit Facility, the Company's total indebtedness will
be approximately $605.9 million, representing approximately 69% of total
capitalization. There can be no assurance that the Company will have adequate
cash available to make required principal and interest payments. In addition,
the terms of the Senior Credit Facility include, and the Indenture will include,
significant operating and financial restrictions, such as limits on the
Company's ability to incur indebtedness, create liens, sell assets, engage in
mergers or consolidations, make investments and pay dividends.
The Company's high degree of leverage may have important consequences for
the Company: (i) the ability of the Company to obtain additional financing for
acquisitions, working capital, capital expenditures or other purposes, if
necessary, may be impaired or such financing may not be on terms favorable to
the Company; (ii) a substantial portion of the Company's cash flow will be used
to pay the Company's interest expense and under certain conditions to repay
indebtedness, which will reduce the funds that would otherwise be available to
the Company for its operations and future business opportunities; (iii) a
substantial decrease in net operating cash flows or an increase in expenses of
the Company could make it difficult for the Company to meet its debt service
requirements and force it to modify its operations; (iv) the Company may be more
highly leveraged than its competitors which may place it at a competitive
disadvantage; and (v) the Company's high degree of leverage may make it more
vulnerable to a downturn in its business or the economy generally. Any inability
of the Company to service its indebtedness or obtain additional financing, as
needed, would have a material adverse effect on the Company.
The Company's ability to pay interest and principal on the Notes and to
satisfy its other debt obligations will depend upon its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond its control.
The Company anticipates that its operating cash flow, together with borrowings
under the Senior Credit Facility, will be sufficient to meet its operating
expenses and to service its debt requirements as they become due. However, if
the Company is unable to service its indebtedness, whether upon acceleration of
such indebtedness or in the ordinary course of business, the Company will be
forced to pursue one or more alternative strategies such as selling assets,
restructuring or refinancing its indebtedness, or seeking additional equity
capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms, if at all. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources."
Subordination. The Notes will be unsecured and subordinated to the prior
payment in full of all Senior Indebtedness (as defined herein) whether existing
at the time of issuance of the Notes or thereafter incurred. As of June 30,
1996, on a pro forma basis, after giving effect to the Transactions and the
Offering, the aggregate outstanding principal amount of all Senior Indebtedness
would have been approximately $455.9 million. The indebtedness under the Senior
Credit Facility is secured by a first priority lien on substantially all of the
assets of the Company now owned or hereafter acquired and is guaranteed by the
Guarantors. The guarantees of the Senior Credit Facility are secured by a first
priority lien on substantially all of the assets of the respective Guarantors
now owned or acquired later. In the event of a bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations on the Notes only after all Senior Indebtedness has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on any
or all of the Notes. In addition, the Company may not pay principal or premium,
if any, or interest on the Notes if any Senior Indebtedness is not paid when due
or any other default on any Senior Indebtedness occurs and the maturity of such
Senior Indebtedness is accelerated in accordance with its terms, unless in
either case, such amount has been paid in full or the default has been cured or
waived and such acceleration has been rescinded. In addition, if any default
occurs with respect to certain Senior Indebtedness and certain other conditions
are satisfied, the Company may not make any payments on the Notes for a
designated period of time.
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The Company's Canadian subsidiaries have not guaranteed the Company's
obligations under the Notes. The rights of the Company and its creditors,
including the holder of the Notes, to realize upon the assets of such
subsidiaries in the event of any such subsidiaries' liquidation or
reorganization (and the consequent right of holders of the Notes to participate
in those assets) will be subject to the prior claims of such subsidiaries'
creditors, including the lenders under the Senior Credit Facility, except to the
extent that the Company may itself be a creditor with recognized claims against
any such subsidiaries. In such case, the Company's claim would still be
subordinate to any security interests in the assets of such subsidiaries and any
indebtedness of such subsidiaries which is senior to the claims of the Company.
The Company's Canadian subsidiaries' borrowings under the Senior Credit Facility
are secured by substantially all of the assets of such subsidiaries. See
"Description of Senior Credit Facility."
Restrictive Debt Covenants. The Senior Credit Facility contains a number
of significant covenants that, among other things, restrict the ability of the
Company to (i) incur indebtedness; (ii) incur liens or guarantee obligations;
(iii) enter into mergers or consolidations or liquidate, wind up or otherwise
dispose of all or substantially all of its property, or make any material change
in its method of conducting business; (iv) with certain exceptions, sell or
otherwise dispose of property, business or assets; (v) declare or pay dividends
or distributions or purchase or redeem any shares of capital stock or pay
interest on subordinate indebtedness in cash at a rate per annum greater than
15% or in any other form at a rate per annum greater than 20%; (vi) make capital
expenditures; (vii) make loans or investments; (viii) make optional payments or
prepay or redeem indebtedness or amend or modify payment terms or interest on
indebtedness; (ix) enter into transactions with affiliates; (x) enter into sale
and leaseback arrangements; (xi) alter the business it conducts; or (xii) enter
into agreements prohibiting or limiting its ability to create liens upon its
assets or revenues to secure the obligations under the Senior Credit Facility.
In addition, under the Senior Credit Facility, the Company is required to comply
with financial covenants with respect to a maximum total leverage ratio and
senior leverage ratio and a minimum interest coverage ratio and fixed charge
coverage ratio. If the Company were unable to borrow under the Senior Credit
Facility due to a default, it could be left without sufficient liquidity.
Fraudulent Conveyance Considerations. Management of the Company believes
that the indebtedness of the Company represented by the Notes, and the
indebtedness of Guarantors under the guarantees of the Notes, are being incurred
for proper purposes and in good faith, and that, based on present forecasts,
asset valuations and other financial information, the Company and each of the
Guarantors will be, after giving effect to the incurrence of the Notes and the
consummation of the Transactions, solvent, will have sufficient capital for
carrying on their business and will be able to pay their debts as they mature.
Notwithstanding management's belief, if a court of competent jurisdiction in a
suit by an unpaid creditor or a representative of creditors (such as a trustee
in bankruptcy or a debtor-in-possession) were to find that the Company (or any
Guarantor) did not receive fair consideration or reasonably equivalent value for
incurring the Notes (or the Guarantee) or any debt being refinanced thereby and,
at the time of the incurrence of the Notes (or Guarantee) or such indebtedness,
the Company (or such Guarantor), was insolvent, was rendered insolvent by reason
of such incurrence, was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital, intended to incur, or
believed that it would incur, debts beyond its ability to pay as such debts
matured, or intended to hinder, delay or defraud its creditors, such court could
avoid such indebtedness. A possible consequence of such avoidance would be the
subordination of the indebtedness represented by the Notes or the respective
Guarantees to existing and future indebtedness of the respective Guarantors.
Another possible consequence would be the effective abrogation of the
Guarantees. The measure of insolvency for purposes of the foregoing will vary
depending upon the law of the relevant jurisdiction. Generally, however, a
company would be considered insolvent for purposes of the foregoing if the
present fair saleable value of the company's assets is less than the amount that
will be required to pay its probable liability on existing debts as they become
absolute and mature. In rendering its opinion on the validity of the Notes,
counsel for each of the Company and the Underwriters will express no opinion as
to federal or state laws relating to fraudulent transfers.
Challenges of Business Integration. The Company has never consummated an
acquisition of a business the size of Gannett Outdoor, and faces significant
challenges in integrating the operations of Gannett Outdoor
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with those of the Company. Integration of Gannett Outdoor will require
substantial attention from the Company's management team, which has had limited
experience in integrating operations of the size of Gannett Outdoor. Diversion
of management attention from the Company's existing business could have an
adverse impact on the revenues and operating results of the Company. There can
be no assurance that the Company will be able to integrate the operations of the
Company and Gannett Outdoor successfully. In addition, Gannett Outdoor
historically has operated with a higher cost structure than the Company and the
pro forma financial statements assume that the Company will be able to achieve
significant cost reductions following the Acquisition, including cost reductions
associated with employee reductions and production plant closings. The Company
could face regulatory, contractual and other restrictions on its ability to
implement the cost reductions. There can be no assurance that the Company will
be successful in reducing the overhead and other costs associated with Gannett
Outdoor, or that realization of such cost reductions will not be delayed. In
addition, to the extent that the Company is successful in achieving part or all
of such cost reductions, there can be no assurance that the reductions will not
have a material adverse effect on the business of the Company.
Nature of Acquisition Agreement; Limited Recourse to Seller. The
representations and warranties made by Gannett in connection with the
Acquisition relating to Gannett Outdoor and the assets acquired and the
associated indemnities are limited and qualified. The Company's recourse to
Gannett is extremely limited. In addition, the Acquisition was consummated on a
very rapid schedule, and Outdoor Systems' ability to conduct due diligence was
limited by time constraints and other factors. Accordingly, unanticipated events
or liabilities related to the Gannett Outdoor business could materially and
adversely affect the Company and the success of the Acquisition.
Increase in Interest Rates. All of the indebtedness under the Senior
Credit Facility bears interest at variable rates. While the Company is required
by the Senior Credit Facility to enter into interest rate cap agreements to
reduce its exposure to increases in such interest rates with respect to at least
$265 million of indebtedness ($225 million upon amendment of the Senior Credit
Facility), such agreements will not apply to the Company's entire variable rate
debt and, therefore, will not entirely eliminate the Company's exposure to
variable rates. Any increase in the interest rates on the Company's indebtedness
will reduce funds available to the Company for its operations and future
business opportunities and will exacerbate the consequences of the Company's
leveraged capital structure. See "Description of Senior Credit Facility."
Prior Stockholders' Deficiency; Prior Period Losses. Until completion of
its initial public offering in April 1996, Outdoor Systems had a Common
Stockholders' Equity Deficiency as a result of net losses attributable to common
stockholders for periods prior to December 31, 1995. Outdoor Systems' net losses
in prior periods resulted in significant part from substantial depreciation and
amortization expenses related to assets purchased in Outdoor Systems'
acquisitions, interest expense associated with related indebtedness and deferred
financing cost charges recorded as extraordinary losses. Outdoor Systems
realized a net loss attributable to common stockholders during the first six
months of 1996 of approximately $1.3 million, in part due to a pre-tax
extraordinary loss of $1.4 million ($0.8 million net of tax benefit) arising
from the discount on subordinated debt retired in connection with its initial
public offering and a $2.3 million charge to additional paid in capital arising
from the unamortized discount on preferred stock retired as part of the initial
public offering. When the Bridge Financing is retired, the Company will write
off deferred financing costs related thereto (approximately $7.0 million if the
Bridge Financing is retired in the third quarter of 1996). In addition, the
Company incurred a commitment fee of $3.3 million related to a preferred stock
commitment that was not exercised and will incur an extraordinary loss of $13.3
million related to the Debt Tender Offer. The Company will record goodwill and
other intangible assets of approximately $60 million in connection with the
Acquisition, which will be amortized over a period of 30 years. In addition, the
cost basis of advertising structures acquired by the Company from Gannett will
increase by approximately $482.5 million over the $132.6 million historic cost
basis, which will be amortized over 20 years. The increased depreciation,
amortization, interest and other expenses associated with the Acquisition may
result in net losses in the future. There can be no assurance that the Company
will become profitable in the future.
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Acquisition Strategy. The Company's growth has been facilitated by
strategic acquisitions that have substantially increased the Company's inventory
of advertising displays. One element of the Company's operating strategy is to
make strategic acquisitions in markets in which it currently competes as well as
in new markets. While the Company believes that the outdoor advertising industry
is highly fragmented and that significant acquisition opportunities are
available, there can be no assurance that suitable acquisition candidates can be
found, and the Company is likely to face competition from other outdoor
advertising companies or other parties for acquisition opportunities that are
available. In addition, if the prices sought by sellers of outdoor advertising
displays and companies continue to rise, as management believes may happen, the
Company may find fewer acceptable acquisition opportunities. There can be no
assurance that the Company will have sufficient capital resources to complete
acquisitions, that acquisitions can be completed on terms acceptable to the
Company, or that any acquisitions that are completed can be successfully
integrated into the Company. While the Company continues to evaluate acquisition
opportunities, there are no material acquisitions pending as of the date of this
Prospectus.
Economic Conditions; Advertising Trends. The Company relies on sales of
advertising space for its revenues and its 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 particular markets where the Company conducts business
or a reallocation of advertising expenditures to other available media by
significant users of the Company's displays. While the Company has benefitted
from special events in the past, there can be no assurance that the Company will
continue to benefit to the same degree in the future from special events such as
the 1996 Olympic Games in Atlanta, and results in a particular market, year or
period could be adversely affected by the lack of such special events.
Tobacco revenues have historically accounted for a significant portion of
outdoor advertising revenues. Beginning in 1992, the leading tobacco companies
substantially reduced their domestic advertising expenditures in response to a
declining population of smokers in the United States, societal pressures to
reduce advertising, consolidation in the tobacco industry and increasing price
competition from generic products. In 1995, tobacco advertising accounted for
9.1% of Outdoor Systems' net revenues, and 9.9% of Gannett Outdoor's net
revenues. In addition, the Food and Drug Administration recently promulgated
rules which, among other things, would limit certain types of outdoor
advertising by tobacco companies. There can be no assurance that the tobacco
industry will not further reduce advertising expenditures in the future or that
future legislation or rules will not further limit the use of outdoor
advertising by tobacco companies.
Competition. The Company faces competition for advertising revenues from
other outdoor advertising companies, as well as from other media such as radio,
television, print media 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 has increased substantially over the past several years to
include advertising displays in shopping centers and malls, airports, stadiums,
movie theaters and supermarkets, and on taxis, trains, buses and subways. Some
of the Company's competitors, principally in other media such as radio and
television, are substantially larger, better capitalized and have access to
greater resources than the Company. There can be no assurance that outdoor
advertising media will be able to compete with other types of media, or that the
Company will be able to compete successfully either within the outdoor
advertising industry or with other media. See "Business -- Competition."
Reliance on Key Executives. The Company's success depends to a significant
extent upon the continued services of its executive officers and other key
management and sales personnel, in particular its President and Chief Executive
Officer, Arthur R. Moreno, and its Senior Vice President of Sales, Wally C.
Kelly. Although the Company has designed its incentive and compensation programs
to retain key employees, including options to purchase shares of Common Stock
(certain of which are subject to forfeiture in the event the recipients violate
non-competition clauses included therein), the Company has no employment
contracts with any of its employees, and none of its employees are bound by
non-competition agreements. The unavailability of the continuing services of its
executive officers and other key management and sales personnel could have a
material adverse effect on the Company's business.
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Regulation of Outdoor Advertising. Outdoor advertising displays are
subject to governmental regulation at the federal, state, provincial and local
levels. These regulations, in some cases, limit the height, size, location and
operation of billboards and, in limited circumstances, regulate the content of
the advertising copy displayed on the billboards. Some governmental regulations
prohibit the construction of new billboards or the replacement, relocation,
enlargement or upgrading of existing structures. Some cities, including Houston,
Kansas City and St. Louis, have adopted amortization ordinances or regulations
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. To date, regulations in the Company's
markets have not materially adversely affected its operations. However, no
assurance can be given as to the effect on the Company of existing laws and
regulations or of new laws and regulations that may be adopted in the future.
See "Business -- Government Regulation."
Contract Consents. The transfer by Gannett to the Company of certain
contractual and other rights as part of the Acquisition requires the consent and
approval of certain other parties doing business with Gannett Outdoor prior to
the Acquisition. In addition, transfer of the capital stock of certain of the
subsidiaries of Gannett may violate change of control or other non-assignment
clauses contained in contracts to which such subsidiaries are a party. These
contractual and other rights were assigned to the Company as part of the
Acquisition even though the Company did not have all of the consents and
approvals required for such transfer prior to the closing of the Acquisition
which could result in termination of or default under such contracts or other
rights. There can be no assurance that the Company will receive the requisite
consents or approvals or obtain any necessary waivers to secure the benefits of
any such contracts.
Transit Business. A portion of the business acquired from Gannett Outdoor
(net revenues of approximately $28.5 million in 1995) consists of revenues under
contracts for the operation of display faces on bus shelters and in subway
stations and subways in the City of New York. Transfer of rights under these
contracts requires consent from the relevant public authorities. The Company has
obtained a number of such consents. Although the Company anticipates that it
will be able to secure the remaining consents or make other arrangements
providing to it the benefit of these contracts, there can be no assurance that
it will be able to do so. Further, most of these contracts are subject to
termination upon short notice by the applicable governmental authority,
terminate at scheduled times which impose competitive bidding and other
requirements for renewal, include letter of credit and other requirements
obligating the Company to fund and meet certain minimum payment requirements to
the governmental authority and erect and maintain shelters in the applicable
jurisdiction, and contain other performance obligations which are imposed on the
Company. There can be no assurance that these various obligations and conditions
will not adversely affect the Company. The transit business in New York
historically has generated relatively low operating margins and there can be no
assurance that the Company will be able to improve the performance of this
business.
Environmental Matters. As the owner, lessee or operator of various real
properties and facilities, the Company is subject to various federal, state and
local environmental laws and regulations. To date, compliance with such laws and
regulations has not had a material adverse effect on the historical business of
Outdoor Systems. However, a number of the properties acquired from Gannett have
existing environmental conditions relating primarily to underground storage
tanks for which the Company has assumed responsibility in connection with the
Acquisition. In addition, two of the sites are adjacent to Superfund sites and
other properties are in the vicinity of other industrial properties with known
contamination. Of the two properties adjacent to a Superfund site, one is
believed to be contaminated by such site. Although the Company believes that the
existing environmental conditions are manageable, there can be no assurance that
these conditions will not create greater costs than currently expected or that
compliance with existing or new environmental laws or regulations will not
require the Company to make significant expenditures in the future, all of which
could adversely affect the Company.
Seasonality. The Company's revenues and operating results have exhibited
some degree of seasonality in past periods. Typically, the Company experiences
its strongest financial performance in the fourth quarter and its lowest
revenues in the first quarter. The Company expects this trend to continue in the
future. Because
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a significant portion of the Company's expenses are fixed, a reduction in
revenues in any quarter is likely to result in a period-to-period decline in
operating performance and net income.
Control by Executive Officers and Directors. Upon consummation of the
Offering, the Company's executive officers, directors and their respective
affiliates will beneficially own (including for this purpose options exercisable
within 60 days after the date of this Prospectus and shares over which such
persons have voting control) approximately 49% of the outstanding shares of
Common Stock. Such persons, if acting together, would have sufficient voting
power to control the outcome of corporate actions submitted to the stockholders
for approval and to control the management and affairs of the Company, including
the election of the Board of Directors of the Company. As a result of such
control, certain transactions may not be possible without the approval of such
stockholders, including proxy contests, mergers involving the Company and tender
offers or other purchases of Common Stock that could give stockholders of the
Company the opportunity to realize a premium over the then-prevailing market
price for their shares of Common Stock. See "Principal Stockholders."
Lack of a Public Market for the Notes. There is no public market for the
Notes and the Company does not intend to list the Notes on any securities
exchange or for quotation over any over-the-counter market. The Company has been
advised by the Underwriters that the Underwriters intend to make a market in the
Notes following the completion of the Offering. However, the Underwriters are
under no obligation to do so and may discontinue any market making activities at
any time without notice. No assurance can be given as to the liquidity of the
trading market for the Notes or that an active public market for the Notes will
develop or, if developed, will continue. If an active public market does not
develop or is not maintained, the market price and liquidity of the Notes may be
adversely affected.
Change of Control. In the event of a Change of Control, the Company will
be required to offer to repurchase all of the outstanding Notes at 101% of the
principal amount thereof plus any accrued and unpaid interest thereon to the
date of the purchase. A Change of Control under the Indenture will result in a
default under the Senior Credit Facility. The exercise by the holders of the
Notes of their right to require the Company to repurchase the Notes upon a
Change of Control could also cause a default under other indebtedness of the
Company, even if the Change of Control itself does not, because of the financial
effect of such repurchase on the Company. The Company's ability to pay cash to
the holders of the Notes upon a repurchase may be limited by the Company's then
existing financial resources. There can be no assurance that in the event of a
Change of Control, the Company will have, or will have access to, sufficient
funds or will be contractually permitted under the terms of outstanding
indebtedness to pay the required purchase price for all Notes tendered by
holders upon a Change of Control. See "Description of the Notes -- Change of
Control Offer" and "Description of Senior Credit Facility."
Risks Associated with Forward-Looking Statements. This Prospectus contains
and incorporates by reference certain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Those statements include, among other things, the discussions of the Company's
business strategy and expectations concerning the Company's market position,
future operations, margins, profitability, liquidity and capital resources, as
well as statements concerning the integration of the Acquisition and achievement
of cost savings in connection therewith. Investors in the Notes offered hereby
are cautioned that reliance on any forward-looking statement involves risks and
uncertainties, and that although the Company believes that the assumptions on
which the forward-looking statements contained herein are based are reasonable,
any of those assumptions could prove to be inaccurate, and as a result, the
forward-looking statements based on those assumptions also could be incorrect.
The uncertainties in this regard include, but are not limited to, those
identified in the risk factors discussed above. In light of these and other
uncertainties, the inclusion of a forward-looking statement herein should not be
regarded as a representation by the Company that the Company's plans and
objectives will be achieved.
16
<PAGE> 19
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be approximately $144.8 million, after deducting estimated
underwriting discounts and commissions and offering expenses. The Company
intends to use the net proceeds to repay amounts outstanding under the
Subordinated Credit Facility. The remaining net proceeds, if any, are intended
to be used to pay outstanding borrowings under the Senior Credit Facility. As of
the date hereof, the Company has $140 million principal amount of indebtedness
outstanding under the Subordinated Credit Facility which currently bears
interest at an interest rate of approximately 11.7% per annum. The Subordinated
Credit Facility matures on August 22, 2006. For information relating to the
interest rates and maturities applicable to borrowings under the Senior Credit
Facility, see "Description of Senior Credit Facility" herein.
CAPITALIZATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth the consolidated capitalization of the
Company (i) as of June 30, 1996, (ii) pro forma giving effect as of June 30,
1996 to the Acquisition, the Debt Tender Offer and the Acquisition Financing,
all of which occurred on August 22, 1996 and (iii) pro forma as further adjusted
giving effect to the Offering and the application of the estimated net proceeds
therefrom and the proposed amendment to the Senior Credit Facility. This table
should be read in conjunction with the information contained in "Unaudited
Consolidated Pro Forma Financial Information" and Outdoor Systems' consolidated
financial statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE
ACTUAL TRANSACTIONS(1) OFFERING(2)
-------- --------------- -----------
<S> <C> <C> <C>
Current maturities of long-term debt....................... $ 173 $ 0 $ 0
-------- -------- --------
Long-term debt:
Senior Credit Facility................................... 23,750 459,497 455,897
Existing Notes........................................... 114,670 -- --
Subordinated Credit Facility............................. -- 140,000 --
Notes.................................................... -- -- 150,000
Other.................................................... 40 40 40
-------- -------- --------
Total long-term debt.................................. 138,460 599,537 605,937
-------- -------- --------
Common stockholders' equity:
Common Stock, $0.01 par value............................ 180 266 266
Additional paid in capital............................... 33,987 316,808 316,808
Accumulated deficit(3)................................... (19,690) (31,694) (35,844)
Treasury stock (at cost) 7,650,297 shares................ (4,053) (4,053) (4,053)
-------- -------- --------
Total common stockholders' equity(4).................. 10,424 281,327 277,177
-------- -------- --------
Total capitalization............................. $149,057 $ 880,864 $ 883,114
======== ======== ========
</TABLE>
- ---------------
(1) Pro forma to give effect to the consummation of the Acquisition, the Debt
Tender Offer and the Acquisition Financing.
(2) Pro forma as adjusted to give effect to the Offering and the application of
the net proceeds therefrom and the proposed amendment to the Senior Credit
Facility.
(3) Pro forma as adjusted for the Transactions also reflects the write-off of a
$3.3 million commitment fee related to a preferred stock commitment that was
not exercised. Pro forma as adjusted for the Offering reflects the write-off
of approximately $7.0 million of deferred financing costs incurred in
connection with the borrowings under the Subordinated Credit Facility. Such
amounts were reduced by related tax benefits.
(4) Excludes 4,100,184 shares of Common Stock issuable upon exercise of options,
of which 2,884,135 are exercisable immediately and 1,216,049 vest ratably
over a four-year period, and 156,797 shares of Common Stock issuable in
settlement of accounts under the Company's Incentive Plan.
17
<PAGE> 20
UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The following unaudited consolidated pro forma financial information
combines the historical financial information of the Company and Gannett Outdoor
at June 30, 1996 and for the year ended December 31, 1995, the twelve month
period ended June 30, 1996 and for the six month period ended June 30, 1996,
giving effect to (i) the Transactions (including the proposed amendment to the
Senior Credit Facility); (ii) the net reduction in operating expenses of Gannett
Outdoor; (iii) the effect of conforming the capitalization of property and
equipment accounting policy of Gannett Outdoor to that of the Company; and (iv)
the Offering and the application of the net proceeds therefrom. The pro forma
consolidated balance sheet as of June 30, 1996 has been prepared as if the
Transactions and the Offering had occurred on June 30, 1996.
The detailed assumptions used to prepare the unaudited consolidated pro
forma financial information are contained in the notes to unaudited consolidated
pro forma financial information. The unaudited consolidated pro forma financial
information reflects the use of the purchase method of accounting for the
Acquisition.
Pro forma adjustments for the Acquisition are based upon preliminary
estimates, available information and certain assumptions that the management of
the Company deems appropriate. Final adjustments may differ from the pro forma
adjustments presented herein. The unaudited consolidated pro forma financial
information does not purport to represent the results of operations or the
financial position of the Company and Gannett Outdoor that actually would have
resulted had the Acquisition occurred as of the date indicated, nor should it be
taken as indicative of the future results of the operations or future financial
position of the Company and Gannett Outdoor. The unaudited consolidated pro
forma financial information should be read in conjunction with the notes to
unaudited consolidated pro forma financial information and the separate
historical financial statements and notes thereto of the Company and Gannett
Outdoor which are contained elsewhere herein.
This pro forma data does not give effect to cost reductions that are
anticipated to be achieved subsequent to the Acquisition from (i) reductions in
facility costs arising from renegotiated rents or reduced space and the
elimination of expenses relating to terminated employees; (ii) a reduction in
labor costs arising from production efficiencies and a reduced number of direct
production and direct sales employees; and (iii) increased sales efficiencies
arising from a modification of the sales compensation system.
18
<PAGE> 21
OUTDOOR SYSTEMS, INC.
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
------------------- PRO FORMA PRO FORMA
GANNETT ACQUISITION OFFERING PRO FORMA
COMPANY OUTDOOR ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS............................. $ 15,070 $ 81,202 $ 4,404(1) $ 100,676 $ 100,676
PROPERTY AND EQUIPMENT -- Net.............. 112,457 132,636 482,537(1) 727,630 727,630
PERPETUAL LAND EASEMENTS................... 23,674 -- 23,674 23,674
INTANGIBLE ASSETS -- Net................... -- 41,243 23,563(2) 60,000 60,000
(4,806)(1)
DEFERRED FINANCING COSTS................... 3,920 -- (3,274)(3) 17,207 $ 7,750(4) 24,957
16,561(1)
BRIDGE DEFERRED FINANCING COSTS............ -- -- 8,300(1) 8,300 (1,350)(4) --
(6,950)(5)
DEFERRED INCOME TAXES...................... 3,827 -- 7,900(1) 11,727 2,800(5) 14,527
OTHER ASSETS............................... 1,597 1,175 2,772 2,772
-------- -------- --------- -------- --------- --------
TOTAL...................................... $160,545 $256,256 $ 535,185 $ 951,986 $ 2,250 $ 954,236
======== ======== ========= ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES........................ $ 7,188 $ 23,113 $ 5,580(1) $ 35,881 $ 35,881
-------- -------- --------- -------- --------
LONG-TERM DEBT:
10.75% Senior Notes...................... 114,670 -- (114,670)(1) -- --
Senior Credit Facility................... 23,750 -- 435,747(1) 459,497 $ (3,600)(4) 455,897
Subordinated Credit Facility............. -- -- 140,000(1) 140,000 (140,000)(4) --
Notes.................................... -- -- -- 150,000(4) 150,000
Other long-term obligations.............. 40 -- 40 40
-------- -------- --------- -------- --------- --------
Total long-term obligations............ 138,460 -- 461,077 599,537 6,400 605,937
-------- -------- --------- -------- --------- --------
OTHER LONG-TERM LIABILITIES................ 4,473 7,205 23,563(2) 35,241 35,241
-------- -------- --------- -------- --------- --------
Total liabilities...................... 150,121 30,318 490,220 670,659 6,400 677,059
-------- -------- --------- -------- --------- --------
NET ASSETS TO BE ACQUIRED.................. -- 225,938 (225,938)(1) -- --
-------- -------- --------- -------- --------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock............................. 180 -- 86(1) 266 266
Additional paid-in capital............... 33,987 -- 282,821(1) 316,808 316,808
Accumulated deficit...................... (19,690) -- (13,330)(1) (31,694) (4,150)(5) (35,844)
(3,274)(3)
(3,300)(1)
7,900(1)
Treasury stock........................... (4,053) -- (4,053) (4,053)
-------- -------- --------- -------- --------- --------
Total stockholders' equity (deficit)... 10,424 -- 270,903 281,327 (4,150) 277,177
-------- -------- --------- -------- --------- --------
TOTAL...................................... $160,545 $256,256 $ 535,185 $ 951,986 $ 2,250 $ 954,236
======== ======== ========= ======== ========= ========
</TABLE>
19
<PAGE> 22
OUTDOOR SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AT JUNE 30, 1996
(DOLLARS IN THOUSANDS)
The following explanations describe the assumptions used in determining the
pro forma adjustments necessary to present the pro forma financial position of
the Company after giving effect to the Acquisition, the Debt Tender Offer and
the Acquisition Financing.
<TABLE>
<S> <C>
1. Entry records the Acquisition Financing that the Company used to acquire
Gannett Outdoor and the use of the financing proceeds:
DEBIT
(CREDIT)
Sale of 8,590,000 shares of Common Stock
Common Stock................................................................... $ (86)
Additional paid in capital..................................................... (282,821)
Increase debt as follows:
Senior Credit Facility......................................................... (435,747)
Subordinated Credit Facility................................................... (140,000)
Elimination of historical net assets of Gannett Outdoor........................ 225,938
Change in assets and liabilities resulting from allocation of purchase price:
Intangibles.................................................................... (4,806)
Property and equipment......................................................... 482,537
Increase in deferred financing costs attributable to the Bridge Financing...... 8,300
Increase in other deferred financing costs..................................... 16,561
Increase in accumulated deficit due to premium paid and other costs of
tendering for 10.75% Senior Notes............................................ 13,330
Increase in accumulated deficit due to commitment fee for preferred stock...... 3,300
Increase in current assets..................................................... 4,404
Accrual for estimated severance costs for Gannett Outdoor employees to be
terminated at Acquisition date (estimated to be an average of six weeks
compensation)................................................................ (5,580)
Redemption of 10.75% Senior Notes.............................................. 114,670
Deferred income taxes.......................................................... 7,900
Increase in accumulated deficit to record tax benefit on write-off of tender
fees and financing costs..................................................... (7,900)
$ 0
2. Entry records the increase in intangibles (excess of costs over net assets
acquired) and deferred income taxes arising from application of SFAS No. 109
to allocation of purchase price:
Intangibles.................................................................... $ 23,563
Deferred income taxes.......................................................... (23,563)
$ 0
3. Entry records the write-off of deferred financing cost related to the 10.75%
Senior Notes:
Write-off of deferred financing costs.......................................... $ (3,274)
Increase in accumulated deficit................................................ 3,274
$ 0
</TABLE>
20
<PAGE> 23
OUTDOOR SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
4. Entry records the sale of the Notes and the application of the net proceeds
therefrom:
DEBIT
(CREDIT)
Deferred financing costs....................................................... $ 7,750
Refund of bridge deferred financing costs...................................... (1,350)
Senior Credit Facility......................................................... 3,600
Subordinated Credit Facility................................................... 140,000
Notes.......................................................................... (150,000)
$ 0
5. Entry records the write-off of the bridge deferred financing costs:
Deferred tax asset............................................................. $ 2,800
Bridge deferred financing costs................................................ (6,950)
Accumulated deficit............................................................ 4,150
$ 0
</TABLE>
21
<PAGE> 24
OUTDOOR SYSTEMS, INC.
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ACQUISITION ADJUSTMENTS
--------------------- --------------------------------------- PRO FORMA
GANNETT ACQUISITION SUPPLEMENTAL PRO OFFERING PRO FORMA
COMPANY OUTDOOR ADJUSTMENTS TOTAL ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED
---------- -------- ----------- -------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Outdoor
advertising -- net... $ 64,396 $247,271 $ (1,112)(1) $310,555 $ 310,555 $ 310,555
Other income..... 417 193 3,221(1) 3,831 3,831 3,831
---------- -------- -------- -------- ---------- ----------
Net
revenues... 64,813 247,464 2,109 314,386 314,386 314,386
---------- -------- -------- -------- ---------- ----------
OPERATING EXPENSES:
Direct
advertising.... 30,462 171,091 (756)(1) 200,797 $ (4,080)(4) 174,353 174,353
(22,364)(5)
General and
administrative... 4,096 33,101 374(1) 37,571 (10,848)(6) 26,723 26,723
Depreciation and
amortization... 9,970 17,262 172(1) 51,585 51,585 51,585
24,181(2)
---------- -------- -------- -------- -------- ---------- ----------
Total
operating
expenses... 44,528 221,454 23,971 289,953 (37,292) 252,661 252,661
---------- -------- -------- -------- -------- ---------- ----------
OPERATING INCOME... 20,285 26,010 (21,862) 24,433 37,292 61,725 61,725
INTEREST EXPENSE... 17,199 -- 43,732(3) 61,970 61,970 $(7,831)(8) 54,139
1,039(1)
---------- -------- -------- -------- -------- ---------- -------- ----------
INCOME (LOSS)
BEFORE INCOME
TAXES............ 3,086 26,010 (66,633) (37,537) 37,292 (245 ) 7,831 7,586
INCOME TAXES
(BENEFIT)........ 318 -- 318 (1,332)(7) (1,014 ) 3,132(9) 2,118
---------- -------- -------- -------- -------- ---------- -------- ----------
NET INCOME
(LOSS)........... 2,768 26,010 (66,633) (37,855) 38,624 769 4,699 5,468
LESS PREFERRED AND
COMMON STOCK
ITEMS............ (2,461) -- (2,461) (2,461 ) (2,461 )
---------- -------- -------- -------- -------- ---------- -------- ----------
INCOME (LOSS)
ATTRIBUTABLE TO
COMMON
STOCKHOLDERS..... $ 307 $ 26,010 $ (66,633) $(40,316) $ 38,624 $ (1,692 ) $ 4,699 $ 3,007
========== ======== ======== ======== ======== ========== ======== ==========
INCOME (LOSS) PER
COMMON AND COMMON
EQUIVALENT
SHARES........... $ .02 $ (.07 ) $ .12
========== ========== ==========
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING...... 16,949,385 25,539,385 25,539,385
========== ========== ==========
</TABLE>
22
<PAGE> 25
OUTDOOR SYSTEMS, INC.
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ACQUISITION ADJUSTMENTS
--------------------- --------------------------------------- PRO FORMA
GANNETT ACQUISITION SUPPLEMENTAL PRO OFFERING PRO FORMA
COMPANY OUTDOOR ADJUSTMENTS TOTAL ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED
---------- -------- ----------- -------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Outdoor
advertising -- net... $ 70,887 $249,116 $ (1,515)(1) $318,488 $ 318,488 $ 318,488
Other income..... 715 128 2,917(1) 3,760 3,760 3,760
------- ------- -------- -------- -------- --------
Net
revenues... 71,602 249,244 1,402 322,248 322,248 322,248
------- ------- -------- -------- -------- --------
OPERATING EXPENSES:
Direct
advertising.... 32,017 171,547 (982)(1) 202,582 $ (3,829)(4) 176,389 176,389
(22,364)(5)
General and
administrative... 4,302 33,146 300(1) 37,748 (11,076)(6) 26,672 26,672
Depreciation and
amortization... 10,271 17,341 9(1) 51,723 51,723 51,723
24,102(2)
------- ------- -------- -------- -------- -------- --------
Total
operating
expenses... 46,590 222,034 23,429 292,053 (37,269) 254,784 254,784
------- ------- -------- -------- -------- -------- --------
OPERATING INCOME... 25,012 27,210 (22,027) 30,195 37,269 67,464 67,464
INTEREST EXPENSE... 16,111 -- 44,820(3) 61,970 61,970 $(7,831)(8) 54,139
1,039(1)
------- ------- -------- -------- -------- -------- ------- --------
INCOME (LOSS)
BEFORE INCOME
TAXES............ 8,901 27,210 (67,886) (31,775) 37,269 5,494 7,831 13,325
INCOME TAXES
(BENEFIT)........ 2,308 -- 2,308 (1,363)(7) 945 3,132(9) 4,077
------- ------- -------- -------- -------- -------- ------- --------
INCOME (LOSS)
BEFORE
EXTRAORDINARY
LOSS............. 6,593 27,210 (67,886) (34,083) 38,632 4,549 4,699 9,248
EXTRAORDINARY
LOSS............. (844) (844) (844) (844 )
------- ------- -------- -------- -------- -------- ------- --------
NET INCOME
(LOSS)........... 5,749 27,210 (67,886) (34,927) 38,632 3,705 4,699 8,404
LESS PREFERRED AND
COMMON STOCK
ITEMS............ (4,727) -- (4,727) (4,727) (4,727 )
------- ------- -------- -------- -------- -------- ------- --------
INCOME (LOSS)
ATTRIBUTABLE TO
COMMON
STOCKHOLDERS..... $ 1,022 $ 27,210 $ (67,886) $ 39,654 $ 38,632 $ (1,022) $ 4,699 $ 3,677
======= ======= ======== ======== ======== ======== ======= ========
INCOME (LOSS) PER
COMMON AND COMMON
EQUIVALENT
SHARES........... $ .07 $ (.04) $ .15
======= ======== ========
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING...... 15,573,117 24,163,117 24,163,117
======= ======== ========
</TABLE>
23
<PAGE> 26
OUTDOOR SYSTEMS, INC.
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ACQUISITION ADJUSTMENTS
--------------------- --------------------------------------- PRO FORMA
GANNETT ACQUISITION SUPPLEMENTAL PRO OFFERING PRO FORMA
COMPANY OUTDOOR ADJUSTMENTS TOTAL ADJUSTMENTS FORMA ADJUSTMENTS AS ADJUSTED
---------- -------- ----------- -------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Outdoor
advertising--net. $ 36,229 $117,733 $ (959) (1) $153,003 $ 153,003 $ 153,003
Other income..... 298 201 1,306 (1) 1,805 1,805 1,805
---------- -------- -------- -------- ---------- ----------
Net
revenues... 36,527 117,934 347 154,808 154,808 154,808
---------- -------- -------- -------- ---------- ----------
OPERATING EXPENSES:
Direct
advertising.... 16,151 82,410 (604)(1) 97,957 $ (400)(4) 86,375 86,375
(11,182)(5)
General and
administrative... 2,213 17,169 113(1) 19,495 (5,697)(6) 13,798 13,798
Depreciation and
amortization... 5,259 8,822 (77)(1) 25,904 25,904 25,904
11,900(2)
---------- -------- -------- -------- -------- ---------- ----------
Total
operating
expenses... 23,623 108,401 11,332 143,356 (17,279) 126,077 126,077
---------- -------- -------- -------- -------- ---------- ----------
OPERATING INCOME... 12,904 9,533 (10,985) 11,452 17,279 28,731 28,731
INTEREST EXPENSE... 7,929 -- 22,537(3) 30,986 30,986 $(3,916)(8) 27,070
520(1)
---------- -------- -------- -------- -------- ---------- ------- ----------
INCOME (LOSS)
BEFORE INCOME
TAXES............ 4,975 9,533 (34,042) (19,534) 17,279 (2,255) 3,916 1,661
INCOME TAXES
(BENEFIT)........ 1,990 -- 1,990 (2,892)(7) (902) 1,566(9) 664
---------- -------- -------- -------- -------- ---------- ------- ----------
INCOME (LOSS)
BEFORE
EXTRAORDINARY
LOSS............. 2,985 9,533 (34,042) (21,524) 20,171 (1,353) 2,350 997
EXTRAORDINARY
LOSS............. (844) (844) (844) (844)
---------- -------- -------- -------- -------- ---------- ------- ----------
NET INCOME
(LOSS)........... 2,141 9,533 (34,042) (22,368) 20,171 (2,197) 2,350 153
LESS PREFERRED AND
COMMON STOCK
ITEMS............ (3,461) -- (3,461) (3,461) (3,461)
---------- -------- -------- -------- -------- ---------- ------- ----------
INCOME (LOSS)
ATTRIBUTABLE TO
COMMON
STOCKHOLDERS..... $ (1,320) $ 9,533 $ (34,042) $(25,829) $ 20,171 $ (5,658) $ 2,350 $ (3,308)
========== ======== ======== ======== ======== ========== ======= ==========
INCOME (LOSS) PER
COMMON AND COMMON
EQUIVALENT
SHARES........... $ (.08) $ (.23) $ (.14)
========== ========== ==========
WEIGHTED AVERAGE
NUMBER OF COMMON
AND COMMON
EQUIVALENT SHARES
OUTSTANDING...... 15,573,117 24,163,117 24,163,117
========== ========== ==========
</TABLE>
24
<PAGE> 27
OUTDOOR SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995, FOR THE TWELVE MONTHS ENDED JUNE 30, 1996
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS)
The following explanations describe the assumptions used in determining the
pro forma adjustments necessary to present the pro forma results of operations
of the Company and Gannett Outdoor for the year ended December 31, 1995, for the
twelve months ended June 30, 1996 and for the six months ended June 30, 1996.
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996
------------ ------------- ------------
<S> <C> <C> <C>
(1) Entry records pro forma changes in revenues and
expenses arising from the Bench Ad Acquisition
and the CSX Assets Acquisition in 1996, less
revenues and expenses of outdoor advertising
structures of the Company in Denver that will
be sold in the Denver Disposition:
Revenues....................................... $ (1,112) $ (1,515) $ (959)
Other income................................... 3,221 2,917 1,306
Direct advertising............................. (756) (982) (604)
General and administrative..................... 374 300 113
Depreciation and amortization.................. 172 9 (77)
Interest....................................... 1,039 1,039 520
Interest reflects the cost of such acquisitions at the Company's average borrowing rate less
interest on the proceeds from the sale of the certain outdoor advertising structures that will
be sold.
(2) Entry records the increase in depreciation and
amortization expense arising from purchase
accounting adjustments as follows:
</TABLE>
<TABLE>
<CAPTION>
ASSETS AMORTIZATION PERIOD
------------------------ ------------------------
<S> <C> <C> <C> <C>
Advertising structures 20 years $ 39,443 $ 39,443 $ 19,722
Goodwill 30 years 2,000 2,000 1,000
--------
Total............................................. 41,443 41,443 20,722
Amount recorded in financial statements........... 17,262 17,341 8,822
--------
Pro forma adjustment.............................. $ 24,181 $ 24,102 $ 11,900
======== ========= ========
</TABLE>
25
<PAGE> 28
OUTDOOR SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA
STATEMENTS OF OPERATIONS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996
------------ ------------- ------------
<C> <S> <C> <C> <C>
(3) Entry records additional interest expense and
amortization of debt discount expense on the
debt issued in connection with the Acquisition
less interest on the 10.75% Senior Notes
redeemed, as follows:
Interest expense:
Senior Credit Facility......................... $ 41,355 $ 41,355 $ 20,678
Subordinated Credit Facility................... 16,380 16,380 8,190
Less interest on 10.75% Senior Notes and
existing senior credit facility......... (17,199) (16,111) (7,929)
Amortization of deferred financing
costs................................... 3,196 3,196 1,598
------------ ------------- ------------
Total interest expense......................... $ 43,732 $ 44,820 $ 22,537
========== =========== ==========
It is anticipated that the total amount of the bridge deferred financing costs will be written
off when the Bridge Financing is redeemed.
(4) Entry records a decrease in direct advertising
expenses due to differences in fixed asset
capitalization policies........................ $ 4,080 $ 3,829 $ 400
========== =========== ==========
(5) Entry records a decrease in payroll and payroll
related costs due to termination of employees
at date of the Acquisition or as soon as
permitted under applicable laws due to:
Elimination of production and sales overhead
functions................................. $ 7,724 $ 7,724 $ 3,862
Consolidation of Canadian production
facility.................................. 1,640 1,640 820
Elimination of production support
positions................................. 2,591 2,591 1,295
Elimination of national sales and marketing
support positions......................... 5,053 5,053 2,527
Elimination of administrative support
positions................................. 5,356 5,356 2,678
------------ ------------- ------------
$ 22,364 $ 22,364 $ 11,182
========== =========== ==========
Amounts for 1995 and the twelve months ended June 30, 1996 have been determined based upon
specific employees identified for termination plus benefits estimated to be 30% of payroll.
Amounts for the six months ended June 30, 1996 have been determined based upon 50% of 1995
amounts.
</TABLE>
26
<PAGE> 29
OUTDOOR SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA
STATEMENTS OF OPERATIONS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1996
------------ ------------- ------------
<C> <S> <C> <C> <C>
(6) Entry records a decrease in payroll and payroll
related costs due to termination of employees
at date of the Acquisition or as soon as
permitted under applicable laws due to:
Elimination of national office functions....... $ 4,162 $ 4,162 $ 2,081
Consolidation of accounting and
administrative functions to eliminate
positions or duplicate
efforts................................... 5,770 5,770 2,885
------------ ------------- ------------
9,932 9,932 4,966
Expenses of national office to be closed....... 916 1,144 731
------------ ------------- ------------
$ 10,848 $ 11,076 $ 5,697
========== =========== ==========
Amounts for 1995 and the twelve months ended June 30, 1996 have been determined based upon
specific employees identified for termination plus benefits estimated to be 30% of payroll.
Amounts for the six months ended June 30, 1996 have been determined based upon 50% of 1995
amounts adjusted for known changes and actual expenses of the national office.
(7) Entry records the income tax effect of pro
forma adjustments at a blended rate of 40%..... $ 1,332 $ 1,363 $ 2,892
========== =========== ==========
(8) Entry records interest expense to reflect the
modification of the terms of the Senior Credit
Facility, issuance of $150,000 of Notes, the
redemption of the Subordinated Credit Facility
and the repayment of $3,600 under the Senior
Credit Facility:
Senior Credit Facility......................... $ 36,560 $ 36,560 $ 18,280
Notes.......................................... 14,438 14,438 7,219
Amortization of deferred financing costs....... 3,141 3,141 1,571
Less interest reflected in pro forma........... (61,970) (61,970) (30,986)
------------ ------------- ------------
$ (7,831) $ (7,831) $ (3,916)
========== =========== ==========
(9) Entry records the income tax effect of pro
forma adjustments at a blended rate of 40%..... $ 3,132 $ 3,132 $ 1,566
========== =========== ==========
</TABLE>
27
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS)
The selected consolidated financial data presented below were derived from
the audited consolidated financial statements of the Company for the five years
ended December 31, 1995 and the unaudited interim consolidated financial
statements for the six-month periods ended June 30, 1995 and 1996. The financial
statements of the Company for the three years in the period ended December 31,
1995 and as of December 31, 1994 and 1995 were audited by Deloitte & Touche LLP,
independent auditors, as indicated in their report included elsewhere in this
Prospectus. The selected balance sheet data as of June 30, 1995 and 1996 and
statement of operations data for the six months ended June 30, 1995 and 1996 are
unaudited, but, in the opinion of management of the Company, reflect all
adjustments (consisting only of normal, recurring adjustments) necessary for
fair presentation of results for such periods. Results for these periods are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net revenues(2)................ $ 30,439 $ 44,886 $ 49,151 $ 52,077 $ 64,813 $ 29,738 $ 36,527
Operating Expenses:
Direct advertising
expenses................... 15,341 21,781 23,721 24,433 30,462 14,596 16,151
General and administrative
expenses................... 1,989 2,238 2,777 3,357 4,096 2,007 2,213
Depreciation and
amortization............... 9,706 12,350 10,421 9,165 9,970 4,958 5,259
Gain on 1994 Disposal.......... -- -- -- 4,325 -- -- --
Operating income............... 3,403 8,517 12,232 19,447 20,285 8,177 12,904
Interest expense............... 7,657 9,526 11,894 16,393 17,199 9,017 7,929
Income (loss) before
extraordinary item and change
in accounting principle(3)... (4,254) (955) 111 1,333 2,768 (840) 2,985
Net income (loss).............. (4,254) 5,775 (3,176) 1,333 2,768 (840) 2,141
OTHER DATA:
EBITDA(4)...................... $ 13,109 $ 20,867 $ 22,653 $ 24,287 $ 30,255 $ 13,135 $ 18,163
EBITDA margin(5)............... 43.1% 46.5% 46.1% 46.6% 46.7% 44.2% 49.7%
Capital expenditures........... $ 3,311 $ 5,382 $ 4,387 $ 4,924 $ 7,070 $ 4,251 $ 2,891
Number of advertising
displays..................... 8,200 10,700 10,800 11,900 12,700 12,000 18,000
Ratio of earnings to fixed
charges(6)................... -- -- 1.02x 1.15x 1.14x -- 1.48x
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital................ $ 7,639 $ 5,218 $ 13,967 $ 15,022 $ 8,221 $ 10,681 $ 7,882
Total assets................... 108,621 129,651 129,433 151,260 138,213 144,599 160,545
Total debt..................... 99,608 109,283 129,812 155,204 142,269 151,021 138,633
Common stockholders' equity
(deficit).................... (25,607) (23,769) (28,811) (29,074) (28,767) (31,110) 10,424
</TABLE>
(See footnotes on the following page)
28
<PAGE> 31
NOTES TO SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(1) Prior to the Acquisition, the Company consummated significant acquisitions
during each of 1991, 1992 and 1994. In December 1994, the Company
consummated the Atlanta Transaction. In addition, in 1993 the Company
refinanced a substantial portion of its indebtedness with 10.75% Senior
Notes. Accordingly, operating results are not necessarily comparable on a
year-to-year basis. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
(2) Net revenues are gross revenues minus agency commissions, plus other income
of $1.0 million and $0.4 million for the years ended December 31, 1994 and
1995, and $0.3 million for the six months ended June 30, 1996.
(3) Deferred financing costs of $3.3 million and $0.8 million associated with
borrowings which were retired or redeemed were charged as an extraordinary
loss during 1993 and the six months ended June 30, 1996, respectively. As of
January 1, 1992, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109 Accounting for Income Taxes. SFAS No. 109 allows
the income tax consequences resulting from the utilization of net operating
loss carry forwards to be recorded as a deferred asset. The cumulative
effect of this change in accounting principle was a one-time credit to
income of $6.7 million in the first quarter of 1992. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
(4) "EBITDA" is defined as operating income (loss) before depreciation and
amortization expense and, in 1994, before the gain on the 1994 Disposal.
While EBITDA should not be considered in isolation or as a substitute for
net income, cash flows from operating activities and other income or cash
flow statement data prepared in accordance with generally accepted
accounting principles, or as a measure of profitability or liquidity,
management understands that it is customarily used by certain investors as
one measure to evaluate the financial performance of companies in the
outdoor advertising industry.
(5) "EBITDA margin" is EBITDA stated as a percentage of net revenues.
(6) Earnings consist of pre-tax income (loss) before extraordinary loss plus
fixed charges, excluding capitalized interest. The Company's fixed charges
consist of (i) interest, whether expensed or capitalized; (ii) amortization
of debt expense, including any discount or premium, whether expensed or
capitalized; and (iii) a portion of rental expense representing the interest
factor. Earnings were inadequate to cover fixed charges by $4.3 million,
$1.0 million and $0.8 million for the years ended December 31, 1991 and 1992
and for the six months ended June 30, 1995, respectively.
29
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto included elsewhere in this
Prospectus. The following discussion contains certain forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Risk
Factors," "Business" and elsewhere in this Prospectus, including, without
limitation, risks and uncertainties relating to leverage, the need for
additional funds, integration of the Acquisition, the ability of the Company to
achieve certain cost savings, the management of growth and the popularity of
outdoor advertising as an advertising medium.
Except as otherwise indicated, the following discussion relates to Outdoor
Systems on an historical basis, without giving effect to the Acquisition.
GENERAL
The performance of an outdoor advertising business, such as the Company, is
often measured by its ability to generate EBITDA. EBITDA is defined as operating
income (loss) before depreciation and amortization expense and, with respect to
1994, before the gain on the 1994 Disposal. Although EBITDA is not a measure of
performance calculated in accordance with generally accepted accounting
principles, the Company believes that EBITDA is accepted by the outdoor
advertising industry as a generally recognized measure of performance and is
used by analysts who report publicly on the performance of outdoor advertising
companies. Nevertheless, this measure should not be considered in isolation or
as a substitute for operating income, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with generally
accepted accounting principles.
Revenues are a function of both the occupancy of the Company's outdoor
advertising display inventory (the amount of time that its display faces contain
advertisements) and the rates that the Company charges for use of its display
faces. Accordingly, the Company focuses its sales efforts on attaining an
optimal "mix" of occupancy and rates in order to maximize revenues, and believes
that there are opportunities for additional improvements to its occupancy and
rate mix with respect to its entire inventory.
Net revenues are gross revenues less commissions paid to advertising
agencies that contract for the use of advertising display faces on behalf of
advertisers plus other income arising from the Company's operations. Advertisers
typically contract for advertising space through agencies, although in some
cases the Company sells advertising space directly to local or national
advertisers. Agency commissions are typically 15% of gross revenues on local
sales and 16 2/3% of gross revenues on national sales. The Company does not
consider agency commissions as "operating expenses," and measures its operating
performance based upon percentages of net revenues rather than gross revenues.
The Company's most significant operating expenses are direct advertising
expenses and general and administrative expenses. Direct advertising expenses
consist of rental payments to property owners for use of land on which
advertising display faces are located, production expenses and selling expenses.
Production expenses consist of salaries for operations personnel and real estate
representatives, materials and supplies used in the preparation and display of
advertising copy, annual permits, property taxes and other similar expenses.
Selling expenses consist of salaries and commissions for salespeople, travel and
entertainment relating to sales, sales administration and other similar
expenses. The Company's general and administrative expenses consist of expenses
related to accounting, administrative functions, insurance, bad debts and other
similar expenses.
The Company had Federal income tax net operating losses of approximately
$17.5 million as of December 31, 1995, which will expire over a period of years
beginning in 2003. The Company expects that the annual limit for use of its net
operating losses will be approximately $9.0 million for 1996 and 1997. See
30
<PAGE> 33
Note 8 to the Consolidated Financial Statements. Management believes that the
Company's taxable income will be sufficient to use the $17.5 million of net
operating losses prior to their expiration in 2009. However, there can be no
assurances that the Company will generate taxable income in the future.
CERTAIN EFFECTS OF THE ACQUISITION
Prior to the Acquisition, the Company owned and operated approximately
18,000 advertising display faces in eight metropolitan United States markets. As
a result of the Acquisition, the Company owns and operates approximately 58,000
advertising display faces located in 22 metropolitan markets in the United
States and seven metropolitan markets in Canada. Management believes that upon
the successful consolidation of Gannett Outdoor with the existing business of
Outdoor Systems, the Company's position as a leading provider of outdoor
advertising services will be significantly enhanced.
Certain Cost Savings. The Company believes that the consolidation of
certain administrative, sales management and leasing management functions will
result in certain cost savings, including the reduction and consolidation of
duplicative (i) production and sales overhead functions, (ii) production and
administrative support positions, (iii) national sales and marketing support
functions, and (iv) accounting and administrative functions. The Company
believes it will achieve additional cost savings by closing one of Gannett
Outdoor's production facilities in Canada and by consolidating the Canadian
accounting and administrative functions.
The Company believes that, had such cost savings been implemented as of
January 1, 1995, such savings would have approximated $33.2 million and $16.9
million in the aggregate during the fiscal year ended December 31, 1995 and the
six months ended June 30, 1996, respectively, as detailed below.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Elimination of production and sales overhead functions......... $ 7,724 $ 3,862
Elimination of production support positions.................... 2,591 1,295
Elimination of national sales and marketing support
positions.................................................... 5,053 2,527
Elimination of administrative support positions................ 5,356 2,678
Consolidation of Canadian production facilities................ 1,640 820
Elimination of national office................................. 5,078 2,812
Consolidation of accounting and administrative positions....... 5,770 2,885
------------ ------------
$ 33,212 $ 16,879
========== ==========
</TABLE>
In addition to these cost savings, the Company believes that it may be able
to achieve additional cost savings arising from (i) reductions in facility costs
arising from renegotiated rents or reduced space and the reduction of expenses
relating to terminated employees, (ii) a reduction in labor costs arising from
production efficiencies and a reduced number of direct production and direct
sales employees, and (iii) increased sales efficiencies arising from a
modification of the sales compensation system.
While management believes that such cost savings are achievable, the
Company's ability to achieve such cost savings is uncertain and subject to
numerous factors, many of which are beyond the Company's control. There can be
no assurance that the Company will realize any such cost savings or that the
realization of such cost savings will not be delayed over an extended period of
time. In addition, the Company may discover currently unknown issues regarding
the cost savings plan. See "Risk Factors -- Challenges of Business Integration."
Certain Costs Associated with the Acquisition. The Company incurred
significant additional costs as a result of the Acquisition. The Acquisition
Financing significantly increased the Company's interest expense through adding
approximately $461 million to the Company's total indebtedness. Depreciation and
amortization expense also will increase significantly. The Company will record
goodwill and other intangible assets of approximately $60 million in connection
with the Acquisition, which will be amortized over a period of 30 years. In
addition, the cost basis of advertising structures acquired by the Company from
Gannett will increase by approximately $483 million over the approximately $133
million historic cost basis, which will be amortized over 20 years.
31
<PAGE> 34
Possible Revenue Enhancement. The Company also believes that there are
significant opportunities for revenue enhancement in its combined operations.
The increased presence in North America resulting from the Acquisition should
allow the Company to better market its services to national advertisers through
direct sales efforts offering access to multiple markets. In addition, the
Company believes that its operating and sales strategies will allow it to
improve utilization of the Gannett Outdoor advertising display faces. See "Risk
Factors -- Challenges of Business Integration."
RESULTS OF OPERATIONS
Comparison of Six Months Ended June 30, 1995 and June 30, 1996
Gross revenues increased 22.6% from $34.2 million during the first six
months of 1995 to $41.9 million in the first six months of 1996. This increase
was attributable to increased revenue in all markets, particularly in Atlanta
where the Company has experienced continued growth since the 1994 Acquisition,
and partially to revenues from the acquisition of bus benches and to revenues
from license fees from the acquisition of perpetual easements.
Agency commissions were 13.1% and 13.6% of gross revenues in the first six
months of 1995 and the first six months of 1996, respectively, primarily as a
result of a slightly higher proportion of revenues generated through advertising
agencies in 1996.
Net revenues, including recurring revenues from use licenses acquired with
perpetual easements in May 1996, increased by 22.8% from $29.7 million in the
first six months of 1995 to $36.5 million in the first six months of 1996,
primarily as a result of the increase in gross revenues.
Direct advertising expenses decreased by 4.9% as a percentage of net
revenues from 49.1% in the first six months of 1995 to 44.2% in the first six
months of 1996. This was primarily a result of increased net revenue coverage of
fixed costs included in direct advertising expenses.
General and administrative expenses decreased as a percentage of net
revenues from 6.7% for the first six months of 1995 to 6.1% for the first six
months of 1996. This decrease was due primarily to increased net revenue
coverage of fixed costs included in general and administrative expenses.
As a result of the above factors, EBITDA increased by 38.3% from $13.1
million for the first six months of 1995 to $18.2 million for the first six
months of 1996.
Depreciation and amortization expense increased by 6.1% from $5.0 million
in the first six months of 1995 to $5.3 million in the first six months of 1996,
primarily due to depreciation expense associated with small acquisitions in New
Orleans and Atlanta in the last half of 1995 and in Denver in April 1996, and
amortization expense associated with the May 1996 acquisition of perpetual
easements in the Atlanta market.
Interest expense deceased by 12.1% from $9.0 million in the first six
months of 1995 to $7.9 million in the first six months of 1996, primarily
because of the repayment of subordinated notes and the repayment of borrowings
under the Existing Senior Credit Facility as a result of the Company's initial
public offering completed in April 1996.
Income before income taxes and extraordinary loss increased from a loss of
$0.8 million in the first six months of 1995 to income of $5.0 million in the
first six months of 1996, primarily due to increased revenues and decreased
interest expense.
The Company recorded no income tax benefit for the first six months of 1995
compared to an income tax provision of approximately $2.0 million in the first
six months of 1996. The Company reported a $0.8 million extraordinary loss, net
of $0.6 million tax benefit, in the first six months of 1996 resulting from the
redemption of subordinated notes.
The foregoing factors contributed to the change in net income (loss) from a
net loss of $0.8 million for the first six months of 1995 to net income of $2.1
million for the first six months of 1996.
Comparison of Years Ended December 31, 1994 and December 31, 1995
Operating results for 1995 included a full twelve months of revenues from
the 1994 Acquisition, which was completed in December 1994. Gross revenues
increased by 26.3% from $59.2 million in 1994 to $74.7 million in 1995.
Approximately 73% of this increase in gross revenues was attributable to the net
increase in
32
<PAGE> 35
revenues from the 1994 Acquisition, with the remaining 27% of such increase
resulting from increased revenues in all other markets. The inclusion of a full
year of operating results from the 1994 Acquisition was the primary reason for
the increases in agency commissions, direct advertising expenses, general and
administrative expenses and EBITDA.
Agency commissions increased by 27.5% from $8.1 million in 1994 to $10.3
million in 1995. As a percentage of gross revenues, agency commissions increased
from 13.6% in 1994 to 13.8% in 1995 as a result of a slightly higher proportion
of revenues generated through advertising agencies.
Net revenues increased by 24.5% from $52.1 million in 1994 to $64.8 million
in 1995, primarily as a result of the increase in gross revenues which was
partially offset by the reduction of other income from $1.0 million in 1994 to
$0.4 million in 1995.
Direct advertising expenses increased by 24.7% from $24.4 million in 1994
to $30.5 million in 1995, primarily as a result of expenses associated with
increased net revenues. As a percentage of net revenues, direct advertising
expense was approximately 47.0% in both 1994 and 1995.
General and administrative expenses increased by 22.0% from $3.4 million in
1994 to $4.1 million in 1995, primarily due to increased provisions for bad
debts and increases in incentive and management compensation in 1995. As a
percentage of net revenues, general and administrative expenses decreased from
6.4% in 1994 to 6.3% in 1995, primarily due to increased net revenues.
As a result of the above factors, EBITDA increased by 24.6% from $24.3
million in 1994 to $30.3 million in 1995.
Depreciation and amortization expenses increased by 8.8% from $9.2 million
in 1994 to $10.0 million in 1995, primarily due to the net increase in
depreciation as a result of the 1994 Acquisition which was offset in part by
certain assets becoming fully depreciated during 1995. As a percentage of net
revenues, depreciation and amortization expense decreased from 17.6% in 1994 to
15.4% in 1995.
Interest expense increased by 4.9% from $16.4 million in 1994 to $17.2
million in 1995, as a result of interest expense related to obligations incurred
in connection with the 1994 Acquisition. As a percentage of net revenues,
interest expense decreased from 31.5% in 1994 to 26.5% in 1995, primarily due to
the increase in net revenues.
Income before taxes and extraordinary item was approximately $3.1 million
for both 1994 and 1995. Included in 1994 income before taxes and extraordinary
item was a $4.3 million gain on the 1994 Disposal. Disregarding the effect of
this gain, income before taxes and extraordinary item increased from a loss of
$1.3 million in 1994 to income of $3.1 million in 1995.
The Company recorded an income tax provision of $1.7 million in 1994 and
$0.3 million in 1995. The low effective tax rate in 1995 is the result of
reversing a $1.1 million valuation allowance for deferred income taxes. See Note
8 to the Consolidated Financial Statements.
The foregoing factors contributed to the increase of net income by 107.7%
from $1.3 million in 1994 to $2.8 million in 1995.
Comparison of Years Ended December 31, 1993 and December 31, 1994
Gross revenues increased by 4.5% from $56.6 million for 1993 to $59.2
million in 1994, primarily as a result of increased sales in 1994 but also due
to the inclusion of a partial month of revenues from the 1994 Acquisition.
Approximately 42% of the increase in gross revenues was attributable to the net
increase in revenues from operations acquired in the 1994 Acquisition, with the
remaining 58% of such increase resulting from increased revenues in the
Company's other markets. During 1994, the Company continued to replace 1993
reductions in tobacco revenues with increases in sales to other customers,
principally to consumer product companies, financial institutions and
professional service firms.
Agency commissions increased by 8.1% from $7.5 million in 1993 to $8.1
million in 1994 as a result of the increase in gross revenues. As a percentage
of gross revenues, agency commissions increased from 13.2% during 1993 to 13.6%
in 1994, primarily due to a slightly higher proportion of revenues being
generated through advertising agencies.
33
<PAGE> 36
Net revenues increased by 5.9% from $49.2 million in 1993 to $52.1 million
in 1994, due to the increase in gross revenues and the early termination of an
agreement entered into in connection with an acquisition in 1992 in exchange for
a cash payment of $1.0 million, which has been included in other income.
Direct advertising expenses increased by 3.0% from $23.7 million in 1993 to
$24.4 million in 1994, primarily as a result of expenses associated with
increases in net revenues. As a percentage of net revenues, direct advertising
expenses decreased from 48.3% in 1993 to 47.0% in 1994, primarily due to
increases in net revenues as well as operating efficiencies.
General and administrative expenses increased by 20.9% from $2.8 million in
1993 to $3.4 million in 1994, primarily due to increased provisions for bad
debts in 1994, the inclusion of operating results of the 1994 Acquisition and
increased expenses associated with incentive and management compensation. As a
percentage of net revenues, general and administrative expenses increased from
5.6% in 1993 to 6.4% in 1994.
As a result of the above factors, EBITDA increased by 7.2% from $22.7
million in 1993 to $24.3 million in 1994.
Depreciation and amortization expenses decreased by 12.1% from $10.4
million in 1993 to $9.2 million in 1994, primarily due to full depreciation of
certain assets in 1994. As a percentage of net revenues, depreciation and
amortization expenses decreased from 21.2% in 1993 to 17.6% in 1994.
Interest expense increased by 37.8% from $11.9 million in 1993 to $16.4
million in 1994, primarily as a result of additional interest expense on the
Senior Notes which were outstanding for the full year of 1994. As a percentage
of net revenues, interest expense increased from 24.2% in 1993 to 31.5% in 1994.
Income before taxes and extraordinary item increased from $0.3 million in
1993 to $3.1 million in 1994. Included in 1994 income before taxes and
extraordinary item was a $4.3 million gain on the 1994 Disposal. Disregarding
the effect of this gain, income before taxes and extraordinary item decreased
from $0.3 million in 1993 to a loss of $1.3 million in 1994, primarily due to
increased interest expense relating to debt incurred in connection with the 1994
Acquisition.
The Company recorded an income tax provision of $0.2 million in 1993
compared to $1.7 million in 1994, as a result of the higher pre-tax income in
1994 from the gain on the 1994 Disposal. See Note 2 to the Consolidated
Financial Statements. The Company reported a $3.3 million extraordinary loss in
1993 resulting from the write-off of deferred financing costs associated with
borrowings which were retired or redeemed during 1993.
The foregoing factors contributed to the Company's $3.2 million net loss in
1993 compared to $1.3 million net income in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Senior Credit Facility provides for revolving credit loans to the
Company of up to $40 million prior to completion of the acquisition of assets
under the Houston Option and $50 million thereafter and to the Canadian
subsidiary of the Company of up to cdn$35 million. The revolving credit loan
commitment applicable to the Company automatically reduces in each year
commencing in 1998, and continuing through 2002, and the revolving credit loan
commitment applicable to the Canadian subsidiary automatically reduces in each
year commencing in 1998 and continuing through 2001. The Company or the Canadian
subsidiary, as applicable, may prepay revolving credit loans (other than cdn$
loans constituting bankers' acceptances) and reborrow (up to the amount of the
revolving credit loan commitment then in effect, subject to certain conditions)
any amounts that are repaid or prepaid.
The Senior Credit Facility provides for a total term loan commitment of
$420 million and cdn$48 million. The term loans are payable in quarterly
installments commencing in 1997, with the final installment due in 2003. The
revolving credit loans and term loans bear interest at various rates tied to
base rates. See "Description of Senior Credit Facility."
34
<PAGE> 37
It is expected that the Senior Credit Facility will be amended concurrently
with or shortly following the consummation of the Offering. The Senior Credit
Facility, as amended, will provide for revolving credit loans to the Company of
up to $125 million and to the Canadian subsidiary of the Company of up to $25
million. The revolving credit loan commitment applicable to the Company and the
Canadian subsidiary are expected to automatically reduce each year commencing in
1998 through 2002. The Senior Credit Facility, as amended, will provide for a
total term loan commitment to the Company of $350 million and to the Canadian
subsidiary of $75 million. The term loans will be payable in quarterly
installments commencing in 1997, with the final installment due in 2003. See
"Description of Senior Credit Facility."
The Company's working capital was $15.0 million and $8.2 million at
December 31, 1994 and 1995, respectively, and $7.9 million at June 30, 1996. The
decrease in working capital from December 31, 1994 to December 31, 1995 and from
December 31, 1995 to June 30, 1996 resulted primarily from a reduction in
accounts receivable as a result of improved collection efforts, the proceeds of
which were used to reduce the amount outstanding under the Company's then
existing senior credit facility. After giving effect to the Acquisition, the
Company's pro forma working capital at June 30, 1996 would have increased by
$59.9 million.
Net cash provided by operating activities increased from $11.5 million for
the year ended December 31, 1994 to $18.6 million for the year ended December
31, 1995, and increased from $7.1 million for the six months ended June 30, 1995
to $12.6 million for the six months ended June 30, 1996, primarily due to the
decrease in accounts receivable as well as higher income in 1995 and in the
first six months of 1996 compared to 1994 and the first six months of 1995. Net
cash used in investing activities decreased from $27.6 million in 1994 to $6.3
million in 1995, and increased from $4.3 million in the first six months of 1995
to $26.2 million in the first six months of 1996, primarily due to the net
expenditure in 1994 of $22.6 million in connection with the Atlanta Transactions
and expenditures in 1996 in connection with the CSX Assets Acquisition and the
Bench Ad Acquisition. Net cash provided by financing activities was $17.7
million in 1994 compared to $14.2 million in 1995, and net cash used in
financing activities was $4.9 million for the first six months of 1995 compared
to net cash provided by financing activities of $14.6 million for the first six
months of 1996. The changes from 1994 to 1995 were primarily due to the
repayment of debt during 1995 as compared to net borrowings of $21.1 million in
1994 under its then existing senior credit facility to finance the 1994
Acquisition. The changes for the six month periods were primarily due to the
borrowings under the then existing senior credit facility used to finance the
CSX Assets Acquisition and the completion of the Company's initial public
offering in April 1996.
The Company completed its initial public offering (the "IPO") of 4,016,088
shares of its Common Stock on April 24, 1996, resulting in net proceeds to the
Company of $37.4 million. The holders of the Common Stock Subject to Put Option
sold their shares upon the completion of the IPO, resulting in the removal of
the put option. The removal of the put option resulted in the liability
representing the Common Stock Subject to Put Option being credited to
stockholders' equity. The Company utilized a portion of the net proceeds from
the IPO to redeem at par or face value all of the outstanding Class A Preferred
Stock and the 1990 Subordinated Notes which were also held by these
stockholders. The Company utilized the remaining portion of the net proceeds to
redeem at par value all of the outstanding Class B Preferred Stock and the
Junior Subordinated Exchange Notes, and to repay $17.0 million of the then
existing senior credit facility.
The Company made approximately $4.9 million of capital expenditures in 1994
compared to approximately $7.1 million in 1995 and approximately $4.3 million
for the first six months of 1995 compared to approximately $2.9 million in the
first six months of 1996. On a pro forma basis giving effect to the Acquisition,
capital expenditures were $21.7 million in 1995 and $8.0 million in the first
six months of 1996. Currently, the Company has no material commitments for
capital expenditures, although it expects ongoing capital expenditures in the
ordinary course of business relating to its display inventory to continue and to
be in amounts not materially greater than the pro forma amounts of such capital
expenditures in 1995.
The Company believes that internally generated funds and amounts available
under the Senior Credit Facility will be sufficient to satisfy its operating
cash requirements and make required interest and principal payments under the
Senior Credit Facility and the Notes for the next twelve to twenty-four months.
The
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<PAGE> 38
Company may, however, require additional capital through borrowings or
securities offerings if the Company is not successful in integrating Gannett
Outdoor or the Company requires funding for additional acquisitions. There can
be no assurance that such capital will be available.
INFLATION
Because a significant portion of the Company's costs are fixed, the Company
does not believe that inflation has had or will have a material adverse effect
on its operations. However, there can be no assurance that a high rate of
inflation in the future will not have an adverse effect on the Company's
operations.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, which established a new accounting principle for accounting for
the impairment of certain loans, certain investments in debt and equity
securities, long-lived assets that will be held and used including certain
identifiable intangibles and goodwill related to those assets, and long-lived
assets and certain identifiable intangibles to be disposed of. While the Company
has not completed its evaluation of the impact that will result from adopting
this statement, it does not believe that adoption of the statement will have a
significant impact on the Company's financial position and results of
operations. In addition, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which allows a Company to
record stock-based compensation on the basis of fair value. The Company will not
change to the fair value method and will continue to use Accounting Principles
Board Opinion No. 25 for measurement and recognition of employee stock based
compensation. The Company will present in its annual financial statements the
additional disclosures required under SFAS No. 123.
36
<PAGE> 39
BUSINESS
GENERAL
The Company is the largest outdoor advertising company in North America,
operating approximately 58,000 advertising display faces in 22 metropolitan
markets in the United States and seven metropolitan markets in Canada. The
Company has significant operations in seven of the ten largest United States
markets and six of the ten largest Canadian markets. Through the Acquisition,
the Company significantly increased its presence in North America and
diversified into additional major metropolitan markets following the
Acquisition.
INDUSTRY OVERVIEW
The outdoor advertising industry has experienced increased advertiser
interest and revenue growth in recent years. Outdoor advertising generated total
revenues of approximately $1.8 billion in 1995, or approximately 1.1% of the
total advertising expenditures in the United States, and the out-of-home
advertising industry generated revenues in excess of $3.0 billion in 1995,
according to estimates by the OAAA. Outdoor advertising's 1995 revenues
represent growth of approximately 8.2% over estimated total revenues for 1994,
which compares favorably to the growth of total U.S. advertising expenditures of
approximately 7.7% during the same period.
Advertisers purchase outdoor advertising for a number of reasons. Outdoor
advertising offers repetitive impact and a relatively low cost
per-thousand-impressions, a commonly used media measurement, as compared to
television, radio, newspaper, magazines and direct mail marketing. Accordingly,
because of its cost-effective nature, outdoor advertising is a good vehicle to
build "mass market" support. In addition, outdoor advertising can be used to
target a defined audience in a specific location and, therefore, can be relied
upon by local businesses concentrating on a particular geographic area where
customers have specific demographic characteristics. For instance, restaurants,
motels, service stations and similar roadside businesses may use outdoor
advertising to reach potential customers close to the point of sale and provide
directional information. Other local businesses such as television and radio
stations and consumer products companies may wish to appeal more broadly to
customers and consumers in the local market. National brand name advertisers may
use the medium to attract customers generally and build brand awareness. In all
cases, outdoor advertising can be combined with other media such as radio and
television to reinforce messages being provided to consumers.
The outdoor advertising industry has experienced significant changes due to
a number of factors. First, the entire "out-of-home" advertising category has
expanded to include, in addition to traditional billboards and roadside
displays, displays in shopping centers and malls, airports, stadiums, movie
theaters and supermarkets, as well as on taxis, trains, buses and subways.
Second, while the outdoor advertising industry has experienced a decline in the
use of outdoor advertising by tobacco companies, it has increased its visibility
with and attractiveness to local advertisers as well as national retail and
consumer products-oriented companies. Third, the industry has benefited
significantly from improvements in production technology, including the use of
computer printing, vinyl advertising copy and improved lighting techniques,
which have facilitated a more dynamic, colorful and creative use of the medium.
This technological advance has permitted the outdoor advertising industry to
respond more promptly and cost effectively to the changing needs of its
advertising customers and to make greater use of advertising copy used in other
media. Lastly, the outdoor advertising industry has benefited from the growth in
automobile travel time for business and leisure due to increased highway
congestion and continued demographic shifts of residences and businesses from
the cities to outlying suburbs. The Company believes that the foregoing trends
have resulted in increased consumer exposure to existing billboard structures at
a time when other media have been fragmenting their audiences as the number of
broadcast and cable networks and other narrowly targeted formats has increased.
An expanding opportunity within the out-of-home advertising industry is
transit advertising. Local governments are providing transit shelters and
benches to enhance the service and image of local transit systems and these
locations, as well as buses, are increasingly being used for
out-of-home-advertising.
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<PAGE> 40
Municipalities have begun to issue contracts for transit displays on bus
shelters, subways, benches and buses to private enterprises. Under these
contracts, the private party constructs the shelters or benches, which it can
use for advertising displays. The primary benefits of privatizing transit
advertising are the avoidance of capital expenditures by the municipality, the
prospect of additional revenue for the municipality, the consistent quality that
a coordinated transit program can provide and the benefits of regular cleaning
and maintenance undertaken by private enterprises.
The outdoor advertising industry is comprised of several large outdoor
advertising and media companies with operations in multiple markets, as well as
many smaller and local companies operating a limited number of structures in a
single or a few local markets. While the industry has experienced some
consolidation within the past few years, the OAAA estimates that there are still
approximately 1,000 companies in the outdoor advertising industry operating
approximately 396,000 billboard displays. The Company expects the trend of
consolidation in the outdoor advertising industry to continue.
OPERATING STRATEGY
The Company's primary objective is to be the leading provider of outdoor
advertising services in each of its markets. Outdoor Systems' successful
operating strategy, focusing on superior sales and service, optimal management
of its inventory, centralized administration and strategic acquisitions, has
enabled it to improve the historical operating results in each of its existing
markets. Management intends to apply this strategy to each of its newly-acquired
markets.
- - Superior Sales and Service. The Company seeks to gain market share in each of
its markets through an intensive focus on customer sales and service, quality
displays and competitive pricing. Outdoor Systems has recruited and trained a
skilled sales force that is motivated by a program of commission-based
compensation and supported by a network of experienced local managers who
operate under a centrally coordinated marketing plan. Each Outdoor Systems
market has a general manager who is actively engaged in sales. In addition,
the Company seeks to attract and retain advertisers through creative
advertising layouts, timely installation and rotation of displays and rapid
response to customer needs.
- - Optimal Inventory Management. The Company seeks to balance advertising rate
growth with optimal occupancy of its displays in order to maximize revenues.
The Company's variety of outdoor advertising displays in its geographically
diverse markets permits flexibility in pricing and packaging its display
inventory.
- - Centralized Administration. Outdoor Systems has historically consolidated
substantially all of its administration, accounting, sales management and
leasing management functions at its Phoenix headquarters and plans to
consolidate a significant amount of these functions relating to the business
of Gannett Outdoor into its Phoenix headquarters and four regional markets.
This centralization allows the Company to focus local efforts on customer
service and sales and to exercise greater control over administrative costs
and expenditures, resulting in general and administrative expenses for Outdoor
Systems of 6.3% and 6.1% of net revenues for the year ended December 31, 1995
and the six months ended June 30, 1996, respectively. For the year ended
December 31, 1995 and the six months ended June 30, 1996, Gannett Outdoor's
general and administrative expenses were 13.4% and 14.6%, respectively, of net
revenues. The Company believes that it will be able to significantly reduce
the general and administrative expenses of Gannett Outdoor as part of the
integration of Gannett Outdoor's business with Outdoor Systems' operations.
- - Strategic Acquisitions. Although the Company's focus in the near term will be
the consolidation and integration of the Acquisition and the promotion of
internal growth of both new and existing properties, the Company will continue
to pursue strategic acquisitions in existing and new markets to achieve
increased operating efficiencies, greater geographic diversification and
increased market penetration. The Company is primarily interested in further
expansion in the 50 largest United States markets, because these markets
typically generate greater outdoor market revenues, readily attract national
advertisers, provide a better basis for regional advertising, attract quality
management and offer opportunities to gain a larger market share from
competitive media.
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<PAGE> 41
MARKETS
The Company's markets generally possess demographic characteristics that
are attractive to national advertisers, allowing the Company to package displays
in several of its markets in a single contract for advertisers in national and
regional campaigns. Each market also has unique local industries, businesses,
sports franchises and special events that are frequent users of outdoor
advertising. The following table sets forth, as of June 30, 1996 or for the year
ended December 31, 1995, certain information with respect to the Company's
outdoor markets after giving effect to the Acquisition and the Denver
Disposition (dollars in thousands):
<TABLE>
<CAPTION>
PERCENTAGE
1995 OF 1995 MALL AND TOTAL
MARKET PRO FORMA PRO FORMA 30-SHEET 8-SHEET AIRPORT DISPLAY
MARKET RANK NET REVENUES NET REVENUES BULLETINS POSTERS POSTERS POSTERS TRANSIT FACES
- ------------------------ ------ ------------ ------------ --------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES:
New York/
New Jersey(1)......... 1 $ 53,188 16.9% 579 2,730 125 -- 3,507 6,941
Los Angeles............. 2 41,739 13.3 785 2,962 -- -- 2,804 6,551
Chicago................. 3 6,499 2.1 155 -- 638 -- -- 793
Philadelphia............ 4 1,941 0.6 -- -- -- -- 690 690
San Francisco........... 5 18,679 5.9 202 972 571 -- 1,346 3,091
Detroit................. 9 20,264 6.4 438 1,340 104 -- 800 2,682
Houston(2).............. 10 5,480 1.7 377 -- -- -- -- 377
Atlanta................. 11 21,654 6.9 748 1,910 -- -- -- 2,658
Sacramento(3)........... 17 -- -- 60 291 -- -- -- 351
Phoenix................. 18 16,745 5.4 605 1,530 677 -- 1,418 4,230
St. Louis............... 19 8,010 2.6 268 852 -- -- -- 1,120
Denver.................. 21 7,975 2.5 163 775 -- -- 5,300 6,238
San Diego............... 22 5,349 1.7 114 540 -- -- 668 1,322
New Haven(4)............ 26 5,496 1.8 149 835 -- -- -- 984
Kansas City............. 33 6,988 2.2 198 849 -- -- -- 1,047
Grand Rapids............ 38 4,339 1.4 110 550 -- -- 80 740
New Orleans............. 40 9,532 3.0 346 1,053 481 -- 213 2,093
Louisville.............. 49 8,002 2.6 320 1,067 264 -- -- 1,651
Flint................... 59 2,705 0.9 93 450 20 -- -- 563
Rochester............... 72 308 0.1 -- -- -- -- 240 240
Tucson.................. 81 1,700 0.5 112 6 345 -- -- 463
Columbus, GA............ 127 2,596 0.8 180 422 100 -- -- 702
CANADA:
Toronto................. 1 39,280 12.5 303 1,834 -- 418 2,474 5,029
Montreal................ 2 12,045 3.8 134 770 -- 322 1,794 3,020
Ottawa.................. 6 1,691 0.5 23 214 -- 68 -- 305
Winnipeg................ 7 4,959 1.6 154 415 -- 77 406 1,052
Quebec City............. 8 3,530 1.1 71 782 -- 194 296 1,343
Hamilton(5)............. 9 -- -- 36 288 -- 80 576 980
Halifax................. 14 1,612 0.5 11 122 -- 26 214 373
Other................... N/A 2,080 0.7 24 108 -- 108 94 334
------------ ----- --------- -------- ------- -------- ------- -------
Total............... $314,386 100.0% 6,758 23,667 3,325 1,293 22,920 57,963
============ ============ ======== ======== ======= ======== ====== =======
</TABLE>
- ---------------
(1) All of the Company's bulletins and posters are located in New Jersey.
(2) Includes only Outdoor Systems' existing Houston operations. The Company has
the right to acquire Gannett Outdoor's Houston operations pursuant to the
Houston Option. See "The Transactions -- The Houston Option."
(3) Net revenues are included with San Francisco.
(4) Includes advertising display faces in New Haven, as well as other areas of
Connecticut.
(5) Net revenues are included with Toronto.
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<PAGE> 42
INVENTORY
The Company operates four standard types of outdoor advertising billboards
and displays:
- - Bulletins generally are 14 feet high and 48 feet wide (672 square feet) and
consist of panels on which advertising copy is displayed. The advertising copy
is either hand painted onto the panels at the facilities of the outdoor
advertising company in accordance with design specifications supplied by the
advertiser and attached to the outdoor advertising structure, or is printed
with computer-generated graphics on a single sheet of vinyl that is "wrapped"
around the structure. On occasion, to attract more attention, some of the
panels may extend beyond the linear edges of the display face and may include
three-dimensional embellishments. Because of their greater impact and higher
cost, bulletins are usually located on major highways.
- - 30-sheet posters generally are 12 feet high by 25 feet wide (300 square feet)
and are the most common type of billboard. Advertising copy for 30-sheet
posters consists of lithographed or silk-screened paper sheets supplied by the
advertiser that are pasted and applied like wallpaper to the face of the
display, or single sheets of vinyl with computer-generated advertising copy
that are wrapped around the structure. 30-sheet posters are concentrated on
major traffic arteries.
- - Junior (8-sheet) posters usually are 6 feet high by 12 feet wide (72 square
feet). Displays are prepared and mounted in the same manner as 30-sheet
posters, except that vinyl sheets are not typically used on junior posters.
Most junior posters, because of their smaller size, are concentrated on city
streets and target pedestrian traffic.
- - Transit displays include displays on bus shelters, subways and bus benches.
Bus shelters and benches are usually constructed, owned and maintained by the
outdoor advertising company under a contract with the municipality or transit
authority which receives a share of the shelter's advertising revenues. Bus
shelter displays are enclosed within glassed, backlighted cases on sides of a
pedestrian shelter at an urban bus stop on city easements or sidewalks. Subway
displays are located within subway stations and walkways as well as in subway
trains. Advertisements appear on lithographed or silk-screened posters
supplied in a single sheet by the advertiser. Transit displays are an
attractive medium to advertisers using "vertical" advertising copy, such as
magazines and movie posters, because the advertising copy is easily adapted
for use in transit shelters.
Billboards generally are mounted on structures owned by the outdoor
advertising company and located on sites that are either owned or leased by it
or on which it has acquired a permanent easement. Billboard structures, bus
shelters and benches are durable, have long useful lives and do not require
substantial maintenance. When disassembled, they typically can be moved and
relocated at new sites.
SALES AND SERVICE
The Company devotes considerable time and resources to recruiting, training
and coordinating the activities of its sales force. Sales personnel are
compensated primarily on a commission basis to maximize the incentive to
perform. Messrs. Moreno and Kelly, the Company's two principal officers
responsible for day-to-day operations, have an aggregate of 40 years of
experience in the outdoor advertising industry, virtually all of which has been
spent in sales and management positions. The industry experience of Mr. Moreno
and other members of Outdoor Systems' management team includes significant prior
experience with Gannett Outdoor. Outdoor Systems' general managers in its
existing markets have an average of nearly 14 years of experience in the outdoor
advertising industry.
CUSTOMERS
Advertisers usually contract for outdoor displays through advertising
agencies, which are responsible for the artistic design and written content of
the advertising as well as the choice of media and the planning and
implementation of the overall campaign. The Company pays commissions to the
agencies for advertising contracts that are procured by or through those
agencies. Advertising rates are based on a particular display's exposure (or
number of "impressions" delivered) in relation to the demographics of the
particular market and its location within that market. The number of
"impressions" delivered by a display is measured by the number of vehicles
passing the site during a defined period and is weighted to give effect to such
factors as its proximity to other displays, the speed and viewing angle of
approaching traffic, the national average of adults
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<PAGE> 43
riding in vehicles and whether the display is illuminated. The number of
impressions delivered by a display is verified by independent auditing
companies.
The size and geographic diversity of the Company's markets expanded
significantly with the completion of the Acquisition, which the Company expects
will strengthen its ability to attract national advertisers by providing the
opportunity to package displays in several of its markets in a single contract
to allow a national advertiser to simplify its purchasing process and present
its message in several markets. National advertisers generally seek wide
exposure in major markets and therefore tend to make larger purchases. The
Company competes for national advertisers primarily on the basis of price,
availability and service.
The Company also focuses its efforts on local sales, and approximately
65.3% of the Company's pro forma gross revenues in 1995 were generated from
local advertisers. Local advertisers tend to have smaller advertising budgets
and require greater assistance from the Company's production and creative
personnel to design and produce advertising copy. In local sales, the Company
often expends more sales efforts on educating customers regarding the benefits
of outdoor media and helping potential customers develop an advertising strategy
using outdoor advertising. While price and availability are important
competitive factors, service and customer relationships are also critical
components of local sales.
Tobacco revenues have historically accounted for a significant portion of
outdoor advertising revenues. In the 1990s, due to a declining population of
smokers, societal pressures, consolidation in the tobacco industry and price
competition from generic brands, the leading tobacco companies substantially
reduced their expenditures for outdoor advertising. Because tobacco advertisers
often utilized some of the industry's prime inventory, the decline in
tobacco-related advertising expenditures made this space available for other
advertisers, including those that had not traditionally utilized outdoor
advertising. As a result of this decline in tobacco-related advertising revenues
and the increased use of outdoor advertising by other advertisers, the range of
the Company's advertisers has become quite diverse, with no single category of
advertisers accounting for more than 23% of pro forma net revenues in 1995. The
following table illustrates the diversity of the Company's advertising base:
1995 PRO FORMA NET REVENUES BY CATEGORY
<TABLE>
<CAPTION>
PERCENTAGE OF
NET REVENUES
---------------
<S> <C>
Retail/Consumer products............................................ 22.8%
Travel and Entertainment............................................ 22.6
Tobacco............................................................. 9.6
Liquor.............................................................. 6.7
Media............................................................... 6.1
Banking............................................................. 6.1
Restaurants......................................................... 4.5
Health.............................................................. 4.4
Automotive.......................................................... 2.8
Beer................................................................ 1.3
Home Building....................................................... 1.1
Miscellaneous....................................................... 12.0
-----
Total..................................................... 100.0%
=====
</TABLE>
PRODUCTION
The Company has internal production facilities and staff to perform the
full range of activities required to develop, create and install outdoor
advertising. Production work includes creating the advertising copy design and
layout, painting the design or coordinating its printing and installing the
designs on its displays. The Company usually provides its full range of
production services to local advertisers and to advertisers that are not
represented by advertising agencies, since national advertisers and advertisers
represented by advertising
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<PAGE> 44
agencies often use preprinted designs that require only installation. However,
the Company's creative and production personnel frequently are involved in
production activities even when advertisers are represented by agencies by
developing new designs or adapting copy from other media for use on billboards.
The Company's artists also assist in the development of marketing presentations,
demonstrations and strategies to attract new advertisers.
With the increased use of vinyl and pre-printed advertising copy furnished
to the outdoor advertising company by the advertiser or its agency, outdoor
advertising companies are becoming less responsible for labor-intensive
production work since vinyl and pre-printed copy is typically produced by the
advertiser or its agency and can be installed quickly. The Company believes that
this trend over time will reduce operating expenses associated with production
activities.
COMPETITION
The Company competes in each of its markets with other outdoor advertisers
as well as other media, including broadcast and cable television, radio, print
media and direct mail marketers. In addition, the Company also competes with a
wide variety of "out-of-home" media, including advertising in shopping centers
and malls, airports, stadiums, movie theaters and supermarkets, as well as on
taxis, trains, buses and subways. Advertisers compare relative costs of
available media and cost-per-thousand impressions, particularly when delivering
a message to customers with distinct demographic characteristics. In competing
with other media, outdoor advertising relies on its low cost per-thousand
impressions and its ability to reach a broad segment of the population in a
specific market or to target a particular geographic area or population with a
particular set of demographic characteristics within that market.
The outdoor advertising industry is highly fragmented, consisting of
several large outdoor advertising and media companies with operations in
multiple markets as well as smaller and local companies operating a limited
number of structures in single or a few local markets. Although some
consolidation has occurred over the past few years, according to the OAAA there
are approximately 1,000 companies in the outdoor advertising industry operating
approximately 396,000 billboard displays. In several of its markets, the Company
encounters direct competition from other major outdoor media companies. The
Company believes that its strong emphasis on sales and customer service and its
position as a major provider of advertising services in each of its markets
enable it to compete effectively with the other outdoor advertising companies,
as well as other media, within those markets. See, however, "Risk
Factors -- Competition."
GOVERNMENT REGULATION
U.S. Regulations. The outdoor advertising industry is subject to
governmental regulation at the federal, state and local level. Federal law,
principally the Highway Beautification Act of 1965, encourages states, by the
threat of withholding 10% of the federal appropriations for the construction and
improvement of highways within such states, to implement legislation to prohibit
billboards located within 660 feet of, or visible from, interstate and primary
highways except in commercial or industrial areas where off-site signage is
permitted provided it meets spacing and size restrictions. All of the states
have implemented regulations at least as restrictive as the Highway
Beautification Act, including the prohibition 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. The
Highway Beautification Act, and the various state statutes implementing it,
require the payment of just compensation whenever governmental authorities
require legally erected and maintained billboards to be removed from areas
adjacent to federally-aided highways.
The states and local jurisdictions have, in some cases, passed additional
and more restrictive regulations on the construction, repair, upgrading, height,
size and location of outdoor advertising structures adjacent to federally-aided
highways and other thoroughfares. Such regulations, often in the form of
municipal building, sign or zoning ordinances, specify minimum standards for the
height, size and location of billboards. In some cases, the construction of new
billboards or relocation of existing billboards is prohibited. Some
jurisdictions also have restricted the ability to enlarge or upgrade existing
billboards, such as converting from wood to steel
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<PAGE> 45
or from nonilluminated to illuminated structures, and/or restrict the
reconstruction of billboards which are substantially destroyed as a result of
storms or other causes. From time to time governmental authorities order the
removal of billboards by the exercise of eminent domain. Thus far, the Company
believes it 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.
Amortization of billboards has also been adopted in varying forms in
certain jurisdictions. In theory, 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 the
state and federal courts and cases have reached differing conclusions as to the
constitutionality of these regulations. Several municipalities in the Company's
markets, including municipalities or townships in Houston, Kansas City and St.
Louis, currently have amortization ordinances or regulations. In Houston,
litigation is pending over the amortization and other provisions of the Houston
Sign Code, and the city is currently not enforcing its amortization
requirements. In other cities, amortization ordinances or regulations are not
being enforced or have been held unconstitutional. There can be no assurance,
however, that these ordinances or regulations will not be enforced in the
future.
In recent years, there have been movements to restrict billboard
advertising of certain products, including tobacco and alcohol. Congress has
passed no legislation at the federal level except legislation requiring health
hazard warnings similar to those on cigarette packages and print advertisements.
However, the Food and Drug Administration recently promulgated rules which,
among other things, prohibit tobacco companies from advertising on billboards
located within 1,000 feet of schools and playgrounds and limit other billboards
which advertise tobacco products to black-and-white, text only formats,
eliminating the use of color and images. Certain states in which the Company
operates have historically prohibited the outdoor advertising of distilled
spirits. In California, transit shelter advertising posters are maintained on
public right of way, and most of the contracts prohibit tobacco and/or alcohol
advertising. San Francisco has adopted an ordinance banning all tobacco and
alcohol advertising on public property, but has "grandfathered" Gannett
Outdoor's existing contract through 2002. For each of the past three years, the
California legislature has considered proposed legislation which would ban, or
substantially limit, all tobacco advertising on outdoor advertising. While that
legislation has not been passed, the proponents have publicly stated they will
continue to attempt to have such bans/limitations enacted. It is uncertain
whether additional legislation of this type will be enacted on the national
level or in any of the Company's markets.
Canadian Regulations. Outdoor advertising in Canada is subject to
regulation at the federal, provincial and municipal levels. These regulations
may prohibit outdoor signs advertising certain products in certain locations.
For example, in Ontario, billboards and posters advertising liquor may not be
placed within 200 meters of a primary or secondary school. A Federal Canadian
law banning tobacco advertising was recently overturned by the courts. However,
it is anticipated that new legislation may be introduced to regulate or restrict
tobacco advertising. Currently the tobacco industry is operating under a
voluntary advertising code. The placement of outdoor billboards and posters is
primarily regulated at the provincial and local level. For example, Quebec
regulates the placement of advertising adjacent to highways, as well as the
language of outdoor signs.
General. To date, regulations in the Company's markets have not materially
adversely affected its operations. However, the outdoor advertising industry is
heavily regulated and at various times and in various markets can be expected to
be subject to varying degrees of regulatory pressure affecting the operation of
advertising displays. Accordingly, although the Company's experience to date is
that the regulatory environment can be managed, no assurance can be given that
existing or future laws or regulations will not materially adversely affect the
Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
YEARS
WITH
NAME AGE POSITION COMPANY
- --------------------------------- --- ---------------------------------------------- -------
<S> <C> <C> <C>
William S. Levine................ 64 Chairman of the Board and Director 16
Arthur R. Moreno................. 50 President, Chief Executive Officer and 12
Director
Wally C. Kelly................... 39 Senior Vice President 12
Bill M. Beverage................. 46 Treasurer, Secretary, Chief Financial Officer 6
Brian J. O'Connor................ 39 Director 3
Stephen F. Butterfield........... 43 Director --
</TABLE>
Mr. Levine, a founder and principal stockholder of the Company, has been
Chairman of the Board and a director of the Company since its formation. Mr.
Levine has 16 years of experience in the outdoor advertising industry. He is an
owner and officer of numerous privately-owned firms and commercial real estate
operations. Since 1990, Mr. Levine has dedicated a substantial portion of his
time to the Company's affairs.
Mr. Moreno has served as the Company's President and Chief Executive
Officer and has been a director of the Company since April 1984. Mr. Moreno has
23 years of experience in the outdoor advertising industry. From 1981 to 1984,
Mr. Moreno served as President and General Manager of Gannett Outdoor of New
Jersey. From 1979 to 1981, he was President and General Manager of Gannett
Outdoor of Kansas City (Missouri). From 1973 to 1981, Mr. Moreno worked in
Phoenix as a Vice President of Sales for Gannett Outdoor and its predecessor
company.
Mr. Kelly has been the Company's Senior Vice President since 1984. Mr.
Kelly has 17 years of experience in the outdoor advertising business. From 1979
to 1984, Mr. Kelly worked for Whiteco Metrocom, Inc. in Tucson (1979 to 1981) as
Sales Manager and in Chicago as Vice President of National Sales (1982 to 1984).
Mr. Beverage has served as the Company's controller since 1992, its
Treasurer and Secretary since May 1993, and its Chief Financial Officer since
October 1995. Mr. Beverage has 16 years of experience in the accounting
departments of various outdoor advertising companies. From 1990 to 1992, he
served as the Company's Atlanta real estate manager. From 1988 until 1990, he
worked for Outdoor Today, Inc. in Atlanta (which was acquired by the Company in
1990) as a consultant and as its accounting manager. Prior to 1988, he worked
for five years for Turner Outdoor Advertising in Atlanta and for four years for
Creative Displays in Atlanta. From 1976 to 1979, he was an auditor for Arthur
Young & Co. (now known as Ernst & Young).
Mr. O'Connor has been a Senior Vice President and financial principal of
Alden Capital Markets, Inc., which underwrites and trades securities for various
local governments in Arizona and the western United States, since 1990. From
1988 to 1990, he was a Senior Vice President with Capital Markets Corporation, a
financial advisor and underwriter of tax exempt securities for state and local
governments. From 1987 to 1988, he was a Vice President for Security Pacific
Merchant Bank in Phoenix. From 1983 to 1987, Mr. O'Connor was with Boettcher &
Company, Inc., a regional investment banking firm specializing in municipal
finance. Mr. O'Connor has been a director of the Company since 1993.
Mr. Butterfield has been President of Student Loan Acquisition Authority of
Arizona, a not-for-profit firm which participates in the secondary market for
student loans, since 1991. From 1988 to 1991, Mr. Butterfield served as
President of Western Loan Marketing Association. From 1987 to 1988, Mr.
Butterfield served as Vice President of Security Pacific Merchant Bank, and from
1983 to 1987 he was a partner of Boettcher & Company, Inc., a regional
investment banking firm specializing in municipal finance.
44
<PAGE> 47
From 1974 to 1983, Mr. Butterfield served in various positions with Young Smith
& Peacock, an Arizona-based municipal bond house. Mr. Butterfield was elected a
director of the Company in April 1996.
The Company instituted a classified Board of Directors on April 17, 1996.
Upon the completion of their initial terms, which vary from one to three years,
all directors of the Company hold office for three year terms until the next
annual meeting of stockholders of the Company and until their successors are
duly elected and qualified. Executive officers of the Company are elected by the
Board of Directors on an annual basis and serve at the discretion of the Board
of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors formed an Audit Committee on April 15, 1996, which
will be responsible for reviewing the Company's accounting controls and
recommending to the Board of Directors the engagement of the Company's outside
auditors. The members of the Company's Audit Committee are Messrs. O'Connor and
Butterfield.
The Board of Directors formed a Compensation Committee on April 15, 1996,
which will be responsible for reviewing and approving the amount and type of
consideration to be paid to senior management and for administering the
Company's stock option plans. The members of the Company's Compensation
Committee are Messrs. Levine, O'Connor and Butterfield.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation paid to the Company's Chief Executive Officer and the two other
executive officers whose total annual salary and bonus exceeded $100,000 for the
fiscal year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
NAME AND ---------------------------------- RESTRICTED ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS COMPENSATION(1)
- --------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Arthur R. Moreno........... 1995 $375,000(2) $311,614(3) -- $ 1,305
President and Chief 1994 275,000 283,163(3) -- 1,349
Executive Officer 1993 275,000 268,239(3) -- 1,309
William S. Levine.......... 1995 $350,000(2)(4) -- -- --
Chairman of the Board 1994 250,000(4) -- -- --
1993 351,000(4) -- -- --
Wally C. Kelly............. 1995 $283,987 -- -- 330
Senior Vice President 1994 244,890 -- -- --
1993 239,231 -- $ 15,000(5) --
</TABLE>
- ---------------
(1) Represents contributions made by the Company on behalf of the named
executive officers to a 401(k) plan.
(2) Reflects an increase in annual salary as of July 1, 1995. In 1996, Mr.
Moreno's salary will be $475,000 and Mr. Levine's salary will be $450,000.
(3) Earned and paid in the current year in an amount determined by reference to
operating results for the prior year. Based upon an understanding between
the Company and Mr. Moreno, for so long as Mr. Moreno is the Chief Executive
Officer and President of the Company, Mr. Moreno may be awarded an annual
bonus in an amount equal to 1.25% of the Company's EBITDA for the
immediately preceding fiscal year as reported in the Company's audited
financial statements. The bonus will be awarded at the discretion of the
Board of Directors following a review by the Compensation Committee, and
will be made after the audited financial statements for the previous fiscal
year have been released by the Company's auditors. The bonus is paid to Mr.
Moreno in the year awarded. Based upon this formula, the amount of bonus
paid to Mr. Moreno in 1996 upon the approval of the Compensation Committee
was $378,185 (1.25% of EBITDA for 1995), and would have been approximately
$1.4 million based upon pro forma EBITDA for 1995.
(4) Mr. Levine received no salary, bonus or other compensation from the Company
in 1995, 1994 or 1993 for his services as Chairman of the Board. However, in
1995, 1994 and 1993 the Company agreed to pay an aggregate of $350,000,
45
<PAGE> 48
$250,000 and $351,000, respectively, to two entities controlled by Mr.
Levine as a management fee for providing Mr. Levine's services to the
Company. The Company intends to continue to compensate Mr. Levine through
these entities pursuant to this arrangement at an annual rate of $450,000.
See Note 10 to the Consolidated Financial Statements.
(5) Represents the value of Incentive Units awarded to Mr. Kelly pursuant to the
Incentive Plan as of the date of grant. Mr. Kelly received awards under the
Incentive Plan in prior years, which have increased in value pursuant to the
terms of the Plan. As of January 1, 1996, the total value of Mr. Kelly's
Incentive Units was $646,000. Mr. Kelly may elect to have the value of his
Incentive Units settled in cash or up to 51,595 shares of the Company's
Common Stock. The award in 1993 represents 1,198 of the total shares of
Common Stock that could ultimately be issued to Mr. Kelly in settlement of
his account.
PRINCIPAL STOCKHOLDERS
The table below sets forth the number and percentage of outstanding shares
of Common Stock beneficially owned by (i) each director of the Company, (ii)
each executive officer identified under "Management -- Executive Compensation,"
(iii) all directors and executive officers of the Company as a group, and (iv)
each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock. The Company believes that each individual or
entity named has sole investment and voting power with respect to shares of
Common Stock indicated as beneficially owned by such stockholder, except as
otherwise noted.
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME OF BENEFICIAL OWNER OF SHARES OF CLASS
- ----------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
William S. Levine...................................................... 9,877,660(1) 36.9%
1702 E. Highland, Suite 310
Phoenix, Arizona 85016
Arthur R. Moreno....................................................... 7,973,275(2) 27.1%
2502 N. Black Canyon Highway
Phoenix, Arizona 85009
Stephen J. Haberkorn................................................... 3,674,410(3) 13.7%
1702 E. Highland, Suite 310
Phoenix, Arizona 85016
Putnam Investments, Inc................................................ 1,869,150(4) 7.0%
One Post Office Square
Boston, Massachusetts 02109
Wally C. Kelly......................................................... 251,758(5) *
Stephen J. Butterfield................................................. 30,000 *
Brian J. O'Connor...................................................... 10,500 *
All directors and executive officers as a group (6 persons)............ 14,468,783 48.8%
</TABLE>
- ---------------
* Represents less than 1% of the number of outstanding shares of Common Stock.
(1) Includes 3,674,410 shares of Common Stock owned by M-K Link Investments
Limited Partnership ("M-K Link") over which Mr. Levine shares voting control
with Mr. Moreno and over which Messrs. Levine and Moreno have certain rights
of first refusal with respect to certain private sales; of those 3,674,410
shares, 201,005 shares are subject to an option granted to Mr. Levine (now
held by Mr. Levine's family partnership) and 1,328,945 shares are subject to
an option granted to Mr. Moreno (see Note 2 below). Mr. Levine disclaims
beneficial ownership of the shares owned by M-K Link except to the extent of
the 201,005 shares subject to the options granted to Mr. Levine. The options
for the 201,005 shares of Common Stock of M-K Link and the remaining
6,203,250 shares of Common Stock attributed to Mr. Levine are owned by
Levine Investments Limited Partnership, 1702 E. Highland, Suite 310,
Phoenix, Arizona 85016. Mr. Levine is the sole general partner of Levine
Investments Limited Partnership; Mr. Levine, his wife and children are the
limited partners. Mr. Levine disclaims beneficial ownership of such shares
and options except in his capacity as general partner to the extent of his
interest.
(2) Includes 3,674,410 shares of Common Stock owned by M-K Link over which Mr.
Moreno shares voting control with Mr. Levine and over which Messrs. Levine
and Moreno have certain rights of first refusal with respect to certain
private sales. Of those 3,674,410 shares, 1,328,945 shares are subject to an
option granted to Mr. Moreno and 201,005
46
<PAGE> 49
shares are subject to an option granted to Mr. Levine now held by Mr.
Levine's family partnership (see Note 1 above). Mr. Moreno disclaims
beneficial ownership of those shares owned by M-K Link except to the extent
of the 1,328,945 shares subject to the options granted to Mr. Moreno. Also
includes (i) 2,632,377 shares of Common Stock that may be purchased by Mr.
Moreno pursuant to options granted by the Company; (ii) 852,422 shares of
Common Stock held directly by Mr. Moreno, all of which are subject to a
pledge in favor of Mr. Haberkorn securing a note payable to Mr. Haberkorn;
and (iii) 814,077 shares held by BRN Properties Limited Partnership, an
Arizona limited partnership, of which Mr. Moreno and his wife are the sole
general partners and his children are limited partners, over which shares
Mr. Moreno retains voting and dispositive power. Does not include 457,524
shares of Common Stock subject to options under the Omnibus Plan that vest
ratably over four years.
(3) This number represents shares owned by M-K Link, 1,529,950 of which shares
are subject to options granted to Levine Investments Limited Partnership and
to Mr. Moreno. Mr. Haberkorn disclaims beneficial ownership of shares owned
by his family partnership, except to the extent of his interest therein, and
both he and his family partnership disclaim beneficial ownership of shares
subject to options in favor of Messrs. Levine and Moreno. Messrs. Levine and
Moreno hold certain voting and rights of refusal power as to shares owned by
M-K Link. See Notes 1 and 2 above.
(4) Based on Schedule 13G filed by the indicated person with the Securities and
Exchange Commission reporting beneficial ownership as of July 10, 1996. Each
of Putnam Investment Management, Inc. and the Putnam Advisory Company, Inc.,
wholly-owned registered investment advisors of Putnam Investments, Inc.
having the same address, also filed a Schedule 13G with the Commission
reporting beneficial ownership of 1,591,350 shares and 277,800 shares,
respectively.
(5) Represents an option to purchase shares of Common Stock from the Company.
Does not include any shares of Common Stock that Mr. Kelly may receive in
settlement of his Incentive Unit Awards or 225,000 shares of Common Stock
subject to options under the Omnibus Plan that vest ratably over four years.
47
<PAGE> 50
DESCRIPTION OF SENIOR CREDIT FACILITY
The following summary of certain provisions of the Senior Credit Facility
is qualified in its entirety by reference to the Credit Agreement relating to
the Senior Credit Facility, a copy of which is incorporated by reference in the
Registration Statement of which this Prospectus is a part. See "Available
Information." Capitalized terms used below and not defined have the meanings set
forth in the Credit Agreement relating to the Senior Credit Facility.
The Senior Credit Facility has been made available to the Company and the
Canadian Subsidiary (as defined herein) pursuant to the Third Amended and
Restated Credit Agreement dated as of August 22, 1996 among the Company, the
Canadian Subsidiary, the several banks and other financial institutions
(collectively, the "Lenders") from time to time parties thereto and Canadian
Imperial Bank of Commerce ("CIBC"), through its New York Agency, as United
States administrative agent for the Lenders, and CIBC, as Canadian
administrative agent for the Lenders. The term "Canadian Subsidiary" refers to
the entity that was formed by the Company in connection with the Acquisition
through an amalgamation of 3284085 Canada Inc., a wholly owned subsidiary of the
Company, and Mediacom Inc. The Senior Credit Facility provides for revolving
credit loans, letters of credit and term loans to the Company (the "US
Facility") payable in United States currency ("US Currency" or "$") and for
revolving credit loans, letters of credit, bankers' acceptances, and term loans
to the Canadian Subsidiary (the "Canadian Facility"), payable in Canadian
currency ("Canadian Currency" or "cdn$") or with respect to certain term loans
payable in US Currency. The Company and the Lenders are currently negotiating
amendments to certain of the provisions of the terms of the Senior Credit
Facility (the "Proposed Amendments") which are expected to become effective
concurrently with or shortly after the consummation of the Offering. The
following summary includes a description of certain of the changes to the Senior
Credit Facility which are expected to be made by the Proposed Amendments.
However, there can be no assurance that the Proposed Amendments will be executed
in the current form.
US FACILITY
Revolving Credit Loans. The US Facility currently provides for revolving
credit loans of up to $40 million prior to consummation of the acquisition of
Gannett of Texas' outdoor operations in Houston, Texas pursuant to the Houston
Option and $50 million upon and after consummation of such acquisition (see "The
Transactions -- The Houston Option"). The US revolving credit loan commitment
currently reduces automatically each year commencing in 1998 and continuing
through 2001.
The US Facility under the Proposed Amendments will provide for a revolving
credit loan commitment of up to $125 million, with such commitment automatically
reducing each year commencing in 1998 and continuing through 2002.
Term Loans. The US Facility currently provides for term loans in the
aggregate amount of $380 million, payable in quarterly installments commencing
in 1997 with a final installment due in 2003.
Under the terms of the Proposed Amendments, the US Facility will provide
for term loans in an aggregate amount of $350 million, payable in quarterly
installments commencing in 1997 with the final installment due in 2003.
Letters of Credit. The US Lenders have agreed to issue letters of credit
under the US Facility for the account of the Company during the US revolving
credit commitment period up to the letter of credit commitment amount of $30
million (but only to the extent there is available US revolving credit
commitment which is not being utilized). The Company is required to pay fees in
connection with the US letter of credit commitment and to reimburse amounts
drawn thereunder. Interest is payable on the amounts drawn until reimbursed at
the rate which would be payable on any outstanding and overdue ABR Loan.
US Facility Interest. The US revolving credit loans and US term loans may
be, at the option of the Company, Eurodollar Loans, ABR Loans, or a contribution
thereof. Eurodollar Loans bear interest at a rate per annum equal to the
Eurodollar rate (as hereinafter described) plus an applicable margin. The
"Eurodollar rate" is a rate per annum determined by CIBC, as administrative
agent, based upon the rates at which U.S. dollar deposits with a term comparable
to the interest period applicable to the Eurodollar Loan being made are
48
<PAGE> 51
offered by leading banks in the London interbank deposit market (adjusted for
maximum reserves). ABR Loans bear interest at a rate per annum equal to the ABR
(as defined below) plus an applicable margin. "ABR" means, on a particular date,
a rate per annum equal to the highest of (a) the rate of interest most recently
announced by CIBC as its Base Rate, (b) the rate of interest for such date
offered in the interbank market to CIBC, as administrative agent, as the
overnight Federal Funds Rate, plus 1%, and (c) the rate determined by CIBC, as
administrative agent, based on the latest 3-week moving average of daily
secondary market morning offering rates in the United States for 3-month
certificates of deposit of major United States money market lenders as published
by the Federal Reserve Bank of New York (as adjusted for reserves and
assessments), plus 1%.
Security. The obligations of the Company under the Senior Credit Facility
are secured by a security interest in substantially all of the Company's assets,
including, with certain exceptions, both real and personal property.
CANADIAN FACILITY
Revolving Credit Loans. The Canadian Facility currently provides for a
revolving credit loan commitment to the Canadian Subsidiary of up to cdn$35
million (the equivalent of $25 million), which commitment reduces automatically
each year commencing in 1998 to 2001. Under the terms of the Proposed
Amendments, the Canadian revolving credit loan commitment will be extended to
2002.
Term Loans. The Canadian Facility currently provides for term loans to the
Canadian Subsidiary payable in Canadian Currency in the aggregate amount of
cdn$48 million (the equivalent of $35 million) and payable in US Currency in the
aggregate amount of $40 million. The Canadian Currency term loans are currently
payable in quarterly installments commencing in 1997 with the final installment
due in 2000 (which is expected to be extended to 2002 by the Proposed
Amendments). The US Currency term loans are payable in quarterly installments
commencing in 1997 with the final installment due in 2003.
Bankers' Acceptances. The Canadian Subsidiary is allowed to effect
revolving credit loan borrowings and certain term loan borrowings through the
issuance of bankers' acceptances in a minimum aggregate face amount of cdn$4
million and for a term of 30, 60, 90 or 180 days. Bankers' acceptances are
purchased by the Lenders from the Canadian Subsidiary at the applicable discount
rate which is the per annum rate of interest appearing on "Reuters Screen CDOR
Page" applicable to cdn$ bankers' acceptances of certain Canadian banks with a
term equivalent to the term of the bankers' acceptances being issued by the
Canadian Subsidiary.
Canadian Letters of Credit. The Lenders have agreed to purchase
participation interests in letters of credit issued by CIBC under the Canadian
Facility for the account of the Canadian Subsidiary during the Canadian
revolving credit commitment period up to the Canadian letter of credit
commitment amount of cdn$7 million (but only to the extent there is available
Canadian revolving credit commitment which is not being utilized). Interest is
payable on amounts drawn until reimbursed at the rate which would be payable on
any outstanding and overdue cdn$ Prime Loans. See "-- Canadian Facility
Interest" below.
Canadian Facility Interest. The Canadian revolving credit loans and the
Canadian Currency term loans may be, at the option of the Canadian Subsidiary,
cdn$ Prime Loans, bankers' acceptances or a combination thereof. Cdn$ Prime
Loans bear interest at a rate per annum equal to the cdn$ Prime Rate (as
hereinafter described) plus an applicable margin. The cdn$ Prime Rate is a rate
per annum equal to the greater of (i) the CIBC reference rate and (ii) the sum
of 0.50% plus the per annum rate of interest appearing on "Reuters Screen CDOR
Page" applicable to 30 day cdn$ bankers' acceptances of certain Canadian banks.
Bankers' acceptance are priced as described under "-- Bankers' Acceptances"
above. The US Currency term loans may be at the option of the Canadian
Subsidiary, Eurodollar Loans, ABR Loans or a combination thereof. See "-- US
Facility -- US Facility Interest".
Security. The obligations of the Canadian Subsidiary under the Senior
Credit Facility are secured by a security interest in substantially all of the
assets of the Canadian Subsidiary, including, with certain exceptions, both real
and personal property.
49
<PAGE> 52
GENERAL TERMS
The US Facility and the Canadian Facility are subject to the following
terms:
Covenants. The Senior Credit Facility limits the ability of the Company
and its subsidiaries to, among other things: (i) incur indebtedness; (ii) incur
liens or guarantee obligations; (iii) enter into mergers, consolidations or
amalgamations or liquidate, wind up or otherwise dispose of all or substantially
all of its property, or make any material change in its method of conducting
business; (iv) with certain exceptions, sell or otherwise dispose of property,
business or assets; (v) declare or pay dividends or distributions or purchase or
redeem any shares of capital stock of the Company, or pay interest on
subordinated indebtedness in cash at a rate per annum greater than 15% or in any
other form at a rate per annum greater than 20%; (vi) make capital expenditures;
(vii) make loans or investments; (viii) make optional payments or prepay or
redeem indebtedness or amend or modify payment terms or interest on
indebtedness; (ix) enter into transactions with affiliates; (x) enter into sale
and leaseback arrangements; (xi) enter into any business except for the business
in which the Company and its subsidiaries were engaged on the date of the Senior
Credit Facility or which are directly related thereto; and (xii) enter into
agreements prohibiting or limiting the ability of the Company or any of its
subsidiaries to create liens upon its assets or revenues to secure the
obligations under the Senior Credit Facility. The Senior Credit Facility also
requires the Company and its subsidiaries to maintain a total leverage ratio and
a senior leverage ratio at certain levels and to maintain certain interest
expense coverage and fixed charges coverage. The Senior Credit Facility contains
various affirmative covenants including, without limitation, a covenant to enter
into hedging arrangements to provide interest rate protection in respect of a
portion of the Company's indebtedness.
Events of Default and Restrictions. The Senior Credit Facility contains
customary events of default, including, without limitation, the following: (i)
the Company's failure to pay principal or interest when due; (ii) the Company's
material breach of any covenant, representation or warranty; (iii) customary
cross-default provisions; (iv) certain events of bankruptcy, insolvency or
reorganization of the Company or its subsidiaries; (v) certain adverse events
under ERISA plans of the Company or its subsidiaries; (vi) the levy of certain
judgments against the Company or any of its subsidiaries; (vii) any of the
agreements or liens securing payment of the obligations of the Company or the
Subsidiary Guarantors under the Senior Credit Facility cease to be enforceable
or (viii) the destruction or loss without replacement of a certain percentage of
the total number of signs owned by the Company during a 12-month period. In
addition, the following events constitute events of default under the Senior
Credit Facility: (i) except for the Designated Holders (as defined below), any
person or group (within the meaning of Section 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended) (A) acquires beneficial ownership of 20% or
more of any outstanding class of capital stock having ordinary voting power in
the election of directors of the Company or (B) obtains the power to elect a
majority of the Company's directors; or (ii) the aggregate amount of capital
stock having ordinary voting power in the election of directors of the Company
held by the Designated Holders no longer constitutes 40% (or 25% under certain
circumstances) of the issued and outstanding capital stock having such voting
power; or (iii) either of the Designated Holders owns fewer than 60% of the
shares of capital stock of the Company of any class held by them on the date of
the closing of the Acquisition Financing; or (iv) a Change of Control, as
defined in the Indenture, occurs; or (v) the Board of Directors of the Company
does not consist of a majority of Continuing Directors. The term "Continuing
Directors" means the directors of the Company on the Closing Date and each other
director, if such other director's nomination for election to the Board of
Directors is recommended by a majority of the then Continuing Directors. The
term "Designated Holders" means William S. Levine and Arthur R. Moreno or any
trust solely for the benefit of Mr. Levine or his immediate family members or
Mr. Moreno or his immediate family members, as the case may be, or any
partnership all of the ownership interests in which are beneficially owned or
controlled by any of the foregoing; provided that with respect to any such trust
or partnership Mr. Levine or Mr. Moreno, as the case may be, has the power to
direct the voting of the shares of capital stock held by such trust or
partnership. The occurrence of an event of default permits the Lenders to
terminate the commitments and accelerate the indebtedness under the Senior
Credit Facility.
Mandatory Prepayments and Reduction in Revolving Credit Commitments. The
Senior Credit Facility requires with certain exceptions that net cash proceeds
from certain sales or transfers of assets of the Company
50
<PAGE> 53
or its subsidiaries or from the issuance, sale or other disposition of capital
stock or debt securities by the Company or its subsidiaries be applied first, to
payment of outstanding term loans and second, to the permanent reduction of the
revolving credit loan commitment then in effect. However, if certain conditions
are met, such net cash proceeds may be applied by the Company to refinancing of
subordinated indebtedness. In addition, in certain events cash flow of the
Company in excess of certain amounts is also required to be applied first, to
payment of outstanding term loans and second, to the permanent reduction of the
revolving credit loan commitments.
US Guarantee and Collateral Agreement. The Company's obligations under the
Senior Credit Facility are guaranteed by the Guarantors pursuant to a Guaranty
and Collateral Agreement in favor of CIBC, as US administrative agent for the
Lenders, and the Lenders. The Canadian Subsidiary's obligations under the Senior
Credit Facility are also guaranteed by the Company, the subsidiaries of the
Canadian Subsidiary and the Guarantors pursuant to the Guaranty and Collateral
Agreement. Each guarantor's obligations under the Guaranty and Collateral
Agreement is secured by a security interest in certain property of such
guarantor and certain pledged securities.
51
<PAGE> 54
DESCRIPTION OF THE NOTES
The Notes will be issued under an Indenture, dated as of , 1996
(the "Indenture") among the Company, the Guarantors and The Bank of New York, as
trustee (the "Trustee"). The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), as in effect on
the date of the Indenture. The Notes are subject to all such terms, and holders
of the Notes are referred to the Indenture and the Trust Indenture Act for a
statement of them. The following is a summary of the material terms and
provisions of the Notes. This summary does not purport to be a complete
description of the Notes and is subject to the detailed provisions of, and
qualified in its entirety by reference to, the Notes and the Indenture
(including the definitions contained therein). A copy of the form of Indenture
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The definitions of certain capitalized terms are set forth
under "-- Certain Definitions" and throughout this description. Capitalized
terms that are used but not otherwise defined herein have the meanings assigned
to them in the Indenture and such definitions are incorporated herein by
reference. For purposes of this section, references to the "Company" include
only the Company and not its Subsidiaries.
GENERAL
The Notes will be limited in aggregate principal amount to $150 million.
The Notes will be general unsecured obligations of the Company, subordinated in
right of payment to Senior Indebtedness of the Company and senior in right of
payment to any current or future subordinated indebtedness of the Company.
The Notes will be unconditionally guaranteed, on a senior subordinated
basis, as to payment of principal, premium, if any, and interest, jointly and
severally, by the Guarantors (together with each other Restricted Subsidiary
which guarantees payment of the Notes pursuant to the covenant described under
"Guarantees of Certain Indebtedness").
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on , 2006. The Notes will bear interest at
a rate of % per annum from the date of original issuance until maturity.
Interest is payable semi-annually in arrears on and
commencing , 1997, to holders of record of the Notes at the close of
business on the immediately preceding , and
, respectively.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after , 2001 at the following
redemption prices (expressed as a percentage of principal amount), together, in
each case, with accrued and unpaid interest to the redemption date, if redeemed
during the twelve-month period beginning on , of each year
listed below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ------------------------------------------------------- ----------
<S> <C>
2001................................................... %
2002................................................... %
2003................................................... %
2004 and thereafter.................................... %
</TABLE>
Notwithstanding the foregoing, the Company may redeem in the aggregate up
to 35% of the original principal amount of Notes at any time and from time to
time prior to , 1999 at a redemption price equal to 110% of the
aggregate principal amount so redeemed, plus accrued interest to the redemption
date out of the Net Proceeds of one or more Public Equity Offerings; provided
that at least $97.5 million of the principal amount of Notes originally issued
remain outstanding immediately after the occurrence of any such redemption and
that any such redemption occurs within 60 days following the closing of any such
Public Equity Offering.
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<PAGE> 55
In the event of redemption of fewer than all of the Notes, the Trustee
shall select by lot or in such other manner as it shall deem fair and equitable
the Notes to be redeemed; provided, however, that if a partial redemption is
made with the proceeds of a Public Equity Offering, selection of the Notes for
redemption shall be made by the Trustee only on a pro rata basis, unless such
method is otherwise prohibited. The Notes will be redeemable in whole or in part
upon not less than 30 nor more than 60 days' prior written notice, mailed by
first class mail to a holder's last address as it shall appear on the register
maintained by the Registrar of the Notes. On and after any redemption date,
interest will cease to accrue on the Notes or portions thereof called for
redemption unless the Company shall fail to redeem any such Note.
SUBORDINATION
The indebtedness represented by the Notes is, to the extent and in the
manner provided in the Indenture, subordinated in right of payment to the prior
payment and satisfaction in full in cash or cash equivalents of all existing and
future Senior Indebtedness of the Company. As of June 30, 1996, after giving pro
forma effect to the Transactions, the Offering and the application of the net
proceeds of the Offering, the principal amount of outstanding Senior
Indebtedness of the Company, on a consolidated basis, would have been
approximately $455.9 million.
In the event of any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, arrangement, reorganization or other similar case or
proceeding in connection therewith, relative to the Company or to its creditors,
as such, or to its assets, whether voluntary or involuntary, or any liquidation,
dissolution or other winding-up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or any general assignment
for the benefit of creditors or other marshalling of assets or liabilities of
the Company (except in connection with the merger or consolidation of the
Company or its liquidation or dissolution following the transfer of
substantially all of its assets, upon the terms and conditions permitted under
the circumstances described under "-- Merger, Consolidation or Sale of Assets")
(all of the foregoing referred to herein individually as a "Bankruptcy
Proceeding" and collectively as "Bankruptcy Proceedings"), the holders of Senior
Indebtedness of the Company will be entitled to receive payment and satisfaction
in full in cash or cash equivalents of all amounts due on or in respect of all
Senior Indebtedness of the Company before the holders of the Notes are entitled
to receive or retain any payment or distribution of any kind on account of the
Notes. In the event that, notwithstanding the foregoing, the Trustee or any
holder of Notes receives any payment or distribution of assets of the Company of
any kind, whether in cash, property or securities, including, without
limitation, by way of set-off or otherwise, in respect of the Notes before all
Senior Indebtedness of the Company is paid and satisfied in full in cash, then
such payment or distribution will be held by the recipient in trust for the
benefit of holders of Senior Indebtedness and will be immediately paid over or
delivered to the holders of Senior Indebtedness or their representative or
representatives to the extent necessary to make payment in full in cash or cash
equivalents of all Senior Indebtedness remaining unpaid, after giving effect to
any concurrent payment or distribution, or provision therefor, to or for the
holders of Senior Indebtedness. By reason of such subordination, in the event of
liquidation or insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than other creditors of the Company, and
creditors of the Company who are not holders of Senior Indebtedness or of the
Notes may recover more, ratably, than the holders of the Notes.
No payment or distribution of any assets or securities of the Company or
any Restricted Subsidiary of any kind or character (including, without
limitation, cash, property and any payment or distribution which may be payable
or deliverable by reason of the payment of any other Indebtedness of the Company
being subordinated to the payment of the Notes by the Company) may be made by or
on behalf of the Company or any Restricted Subsidiary, including, without
limitation, by way of set-off or otherwise, for or on account of the Notes, or
for or on account of the purchase, redemption or other acquisition of the Notes,
and neither the Trustee nor any holder or owner of any Notes shall take or
receive from the Company or any Restricted Subsidiary, directly or indirectly in
any manner, payment in respect of all or any portion of Notes following the
delivery by the representative of the holders of Designated Senior Indebtedness
under or in respect of the Senior Credit Facility, for so long as there shall
exist any Designated Senior Indebtedness under or in respect of the Senior
Credit Facility, and thereafter, the holders of Designated Senior Indebtedness
(in either such case, the
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"Representative") to the Trustee of written notice of (i) the occurrence of a
Payment Default or (ii) the occurrence of a Non-Payment Event of Default on
Designated Senior Indebtedness and the acceleration of the maturity of such
Designated Senior Indebtedness in accordance with its terms, and in any such
event, such prohibition shall continue until such Payment Default is cured,
waived in writing or ceases to exist or such acceleration has been rescinded or
otherwise cured. At such time as the prohibition set forth in the preceding
sentence shall no longer be in effect, subject to the provisions of the
following paragraph, the Company shall resume making any and all required
payments in respect of the Notes, including any missed payments.
Upon the occurrence of a Non-Payment Event of Default on Designated Senior
Indebtedness, no payment or distribution of any assets of the Company of any
kind or character (including, without limitation, cash, property and any payment
or distribution which may be payable or deliverable by reason of the payment of
any other Indebtedness of the Company being subordinated to the payment of the
Notes by the Company) may be made by the Company, including, without limitation,
by way of set-off or otherwise, for or on account of the Notes, or for or on
account of the purchase, redemption, defeasance or other acquisition of Notes,
and neither the Trustee nor any holder or owner of any Notes shall take or
receive from the Company, directly or indirectly in any manner, payment in
respect of all or any portion of the Notes, for a period (a "Payment Blockage
Period") commencing on the date of receipt by the Trustee of written notice from
the Representative of such Non-Payment Event of Default unless and until
(subject to any blockage of payments that may then be in effect under the
preceding paragraph) the earliest of (x) more than 179 days shall have elapsed
since receipt of such written notice by the Trustee, (y) such Non-Payment Event
of Default shall have been cured or waived in writing or shall have ceased to
exist or such Designated Senior Indebtedness shall have been paid in full or (z)
such Payment Blockage Period shall have been terminated by written notice to the
Company or the Trustee from such Representative, after which, in the case of
clause (x), (y) or (z), the Company shall resume making any and all required
payments in respect of the Notes, including any missed payments. Notwithstanding
any other provision of the Indenture, in no event shall a Payment Blockage
Period commenced in accordance with the provisions of the Indenture described in
this paragraph extend beyond 179 days from the date of the receipt by the
Trustee of the notice referred to above (the "Initial Blockage Period"). Any
number of additional Payment Blockage Periods may be commenced during the
Initial Blockage Period; provided, however, that no such additional Payment
Blockage Period shall extend beyond the Initial Blockage Period. After the
expiration of the Initial Blockage Period, no Payment Blockage Period may be
commenced until at least 180 consecutive days have elapsed from the last day of
the Initial Blockage Period. Notwithstanding any other provision of the
Indenture, no event of default with respect to Designated Senior Indebtedness
(other than a Payment Default) which existed or was continuing on the date of
the commencement of any Payment Blockage Period initiated by the Representative
shall be, or be made, the basis for the commencement of a second Payment
Blockage Period initiated by the Representative, whether or not within the
Initial Blockage Period, unless such event of default shall have been cured or
waived for a period of not less than 90 consecutive days.
Each Guarantee will, to the extent set forth in the Indenture, be
subordinated in right of payment to the prior payment in full of all Senior
Indebtedness of the respective Guarantor, including obligations of such
Guarantor with respect to the Senior Credit Facility (including any guarantee
thereof), and will be subject to the rights of holders of Designated Senior
Indebtedness of such Guarantor to initiate blockage periods, upon terms
substantially comparable to the subordination of the Notes to all Senior
Indebtedness of the Company.
If the Company or any Guarantor fails to make any payment on the Notes or
any Guarantee, as the case may be, when due or within any applicable grace
period, whether or not on account of payment blockage provisions, such failure
would constitute an Event of Default under the Indenture and would enable the
holders of the Notes to accelerate the maturity thereof. See "Events of
Default."
A holder of Notes by his acceptance of Notes agrees to be bound by such
provisions and authorizes and expressly directs the Trustee, on his behalf, to
take such action as may be necessary or appropriate to effectuate the
subordination provided for in the Indenture and appoints the Trustee his
attorney-in-fact for such purpose.
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CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants.
Limitation on Additional Indebtedness
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, incur (as defined) any Indebtedness (including Acquired
Indebtedness) unless (a) after giving effect to the incurrence of such
Indebtedness and the receipt and application of the proceeds thereof, the
Company's Leverage Ratio is less than (i) 6.50 to 1 if such Indebtedness is
incurred on or prior to , 1999, (ii) 6.25 to 1 if such Indebtedness
is incurred after , 1999 and on or prior to ,
2001 and (iii) 6.00 to 1 if such Indebtedness is incurred thereafter, and (b) no
Default or Event of Default shall have occurred and be continuing at the time or
as a consequence of the incurrence of such Indebtedness.
Notwithstanding the foregoing, the Company and the Restricted Subsidiaries
may incur Permitted Indebtedness; provided that the Company will not incur any
Permitted Indebtedness that ranks junior in right of payment to the Notes that
has a maturity or mandatory sinking fund payment prior to the maturity of the
Notes.
Limitation on Restricted Payments
The Company will not make, and will not permit any of the Restricted
Subsidiaries to, directly or indirectly, make, any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or immediately after giving effect to such
Restricted Payment;
(b) immediately after giving pro forma effect to such Restricted
Payment, the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the covenant set forth under "Limitation
on Additional Indebtedness"; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate of all Restricted Payments declared or made after the Issue Date
does not exceed the sum of (1) 100% of the Company's Cumulative EBITDA
minus 1.4 times the Company's Cumulative Consolidated Interest Expense,
plus (2) 100% of the aggregate Net Proceeds and the fair market value of
securities or other property received by the Company from the issue or
sale, after the Issue Date, of Capital Stock (other than Disqualified
Capital Stock or Capital Stock of the Company issued to any Subsidiary of
the Company) of the Company or any Indebtedness or other securities of the
Company convertible into or exercisable or exchangeable for Capital Stock
(other than Disqualified Capital Stock) of the Company which has been so
converted or exercised or exchanged, as the case may be, plus (3) $10
million. For purposes of determining under this clause (c) the amount
expended for Restricted Payments, cash distributed shall be valued at the
face amount thereof and property other than cash shall be valued at its
fair market value.
The provisions of this covenant shall not prohibit (i) the payment of any
distribution within 60 days after the date of declaration thereof, if at such
date of declaration such payment would comply with the provisions of the
Indenture, (ii) the retirement of any shares of Capital Stock of the Company or
subordinated Indebtedness by conversion into, or by or in exchange for, shares
of Capital Stock (other than Disqualified Capital Stock), or out of, the Net
Proceeds of the substantially concurrent sale (other than to a Subsidiary of the
Company) of other shares of Capital Stock of the Company (other than
Disqualified Capital Stock), (iii) the redemption or retirement of Indebtedness
of the Company subordinated to the Notes in exchange for, by conversion into, or
out of the Net Proceeds of, a substantially concurrent sale or incurrence of
Indebtedness (other than any Indebtedness owed to a Subsidiary of the Company)
of the Company that is contractually subordinated in right of payment to the
Notes to at least the same extent as the subordinated Indebtedness being
redeemed or retired, (iv) the retirement of any shares of Disqualified Capital
Stock by conversion into, or by exchange for, shares of Disqualified Capital
Stock, or out of the Net Proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of other shares of Disqualified Capital
Stock, (v) the repurchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of
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the Company (other than Disqualified Capital Stock) solely out of the proceeds
of any policy of insurance maintained to provide funds for such purpose, (vi)
the purchase, redemption or other acquisition for value of shares of Capital
Stock of the Company (other than Disqualified Capital Stock) or options on such
shares held by the Company's or the Restricted Subsidiaries' officers or
employees or former officers or employees (or their estates or beneficiaries
under their estates) upon the death, disability, retirement or termination of
employment of such current or former officers or employees pursuant to the terms
of an employee benefit plan or any other agreement pursuant to which such shares
of Capital Stock or options were issued or pursuant to a severance, buy-sell or
right of first refusal agreement with such current or former officer or
employee; provided that the aggregate cash consideration paid, or distributions
made, pursuant to this clause (vi) do not in any one fiscal year exceed $2
million, (vii) the making of Investments in Unrestricted Subsidiaries and joint
ventures; provided that the Net Investment therein shall not exceed an aggregate
of $10 million; provided, however, that the Company or the Restricted
Subsidiaries may make additional Investments pursuant to this clause (vii) up to
an additional Net Investment therein of $20 million if the Company is able, at
the time of any such Investment and immediately after giving effect thereto, to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) in compliance with the "Limitation on Additional Indebtedness"
covenant; provided, further, that in calculating the aggregate amount of
Restricted Payments made subsequent to the Issue Date for purposes of clause (c)
of the immediately preceding paragraph, the amount of Net Investment made
pursuant to clause (vii) shall be included in the calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Limitation on Restricted Payments" were computed,
which calculations may be based upon the Company's latest available financial
statements, and that no Default or Event of Default exists and is continuing and
no Default or Event of Default will occur immediately after giving effect to any
Restricted Payments.
Limitation on Other Senior Subordinated Debt
The Company will not, and will not permit any of the Restricted
Subsidiaries to, directly or indirectly, incur, contingently or otherwise, any
Indebtedness (other than the Notes and the Guarantees, as the case may be) that
is both (i) subordinate in right of payment to any Senior Indebtedness of the
Company or any of the Subsidiary Guarantors, as the case may be, and (ii) senior
in right of payment to the Notes or any of the Guarantees, as the case may be.
For purposes of this covenant, Indebtedness is deemed to be senior in right of
payment to the Notes and the Guarantees, as the case may be, if it is not
explicitly subordinate in right of payment to Senior Indebtedness at least to
the same extent as the Notes and the Guarantees, as the case may be, are
subordinate to Senior Indebtedness.
Limitations on Investments
The Company will not, and will not permit any of the Restricted
Subsidiaries to, make any Investment other than (i) a Permitted Investment or
(ii) an Investment that is made as a Restricted Payment in compliance with the
"Limitation on Restricted Payments" covenant after the Issue Date.
Limitations on Liens
The Company will not, and will not permit any of the Restricted
Subsidiaries to, create, incur or otherwise cause or suffer to exist or become
effective any Liens of any kind (other than Permitted Liens) upon any Property
of the Company or any Restricted Subsidiary or any shares of stock or debt of
any Restricted Subsidiary which owns Property, now owned or hereafter acquired,
unless (i) if such Lien secures Indebtedness which is pari passu with the Notes,
then the Notes are secured on an equal and ratable basis with the obligations so
secured until such time as such obligation is no longer secured by a Lien or
(ii) if such Lien secures Indebtedness which is subordinated to the Notes, any
such Lien shall be subordinated to the Lien granted to the Holders of the Notes
in the same collateral as that securing such Lien to the same extent as such
subordinated Indebtedness is subordinated to the Notes.
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Limitation on Transactions with Affiliates
The Company will not, and will not permit any of the Restricted
Subsidiaries to, directly or indirectly, enter into or suffer to exist any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with any
Affiliate (including entities in which the Company or any of the Restricted
Subsidiaries own a minority interest) or holder of 10% or more of the Company's
Common Stock (each of the foregoing, an "Affiliate Transaction") or extend,
renew, waive or otherwise modify the terms of any Affiliate Transaction entered
into prior to the Issue Date unless (i) such Affiliate Transaction is between or
among the Company and/or Wholly-Owned Restricted Subsidiaries; or (ii) the terms
of such Affiliate Transaction are fair and reasonable to the Company or such
Restricted Subsidiary, as the case may be, and the terms of such Affiliate
Transaction are at least as favorable as the terms which could be obtained by
the Company or such Restricted Subsidiary, as the case may be, in a comparable
transaction made on an arm's-length basis between unaffiliated parties. In any
Affiliate Transaction involving an amount or having a value in excess of $1
million which is not permitted under clause (i) above, the Company must obtain a
resolution of the board of directors approved by a majority of the members of
the board of directors (and a majority of the disinterested members of the board
of directors) certifying that such Affiliate Transaction complies with clause
(ii) above. In transactions with a value in excess of $5 million which are not
permitted under clause (i) above, the Company must obtain a written opinion as
to the fairness of such a transaction from an independent investment banking
firm of nationally recognized standing.
The foregoing provisions will not apply to (i) any Restricted Payment that
is not prohibited by the provisions described under "Limitations on Restricted
Payments" contained herein, (ii) any transaction, approved by the Board of
Directors of the Company, with an officer or director of the Company or of any
Restricted Subsidiary in his or her capacity as officer or director entered into
in the ordinary course of business, including compensation and employee benefit
arrangements with any officer or director of the Company or of any Restricted
Subsidiary, or (iii) any Affiliate Transaction entered into prior to the Issue
Date.
Limitation on Creation of Subsidiaries
The Company shall not create or acquire, or permit any of the Restricted
Subsidiaries to create or acquire, any Subsidiary other than (i) a Restricted
Subsidiary existing as of the date of the Indenture, (ii) a Restricted
Subsidiary conducting a business similar or reasonably related to the business
of the Company and its Subsidiaries as conducted on the Issue Date or (iii) an
Unrestricted Subsidiary.
Guarantees of Certain Indebtedness
The Company will not permit any of the domestic Restricted Subsidiaries
(other than the Guarantors) to (a) incur, guarantee or secure through the
granting of Liens the payment of any Indebtedness under the Senior Credit
Facility or any refinancings thereof or (b) pledge any intercompany notes
representing obligations of any of the Restricted Subsidiaries to secure the
payment of any Indebtedness under the Senior Credit Facility or any refinancings
thereof, in each case unless such Restricted Subsidiary, the Company and the
Trustee execute and deliver a supplemental indenture evidencing such Restricted
Subsidiary's Guarantee under the Indenture. Thereafter, such Restricted
Subsidiary shall be a Guarantor for all purposes of the Indenture. As of the
Issue Date, the Company will have no domestic Subsidiaries, other than the
Guarantors. Mediacom, Inc., a Canadian corporation, which is a Restricted
Subsidiary, will not execute a Guarantee of the Company's obligations under the
Notes. See "Description of the Notes -- General."
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any of the Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary to (a) pay dividends or make any
other distributions to the Company or any Restricted Subsidiary on its Capital
Stock, (b) pay any Indebtedness owed to the Company
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or any Restricted Subsidiary, (c) make loans or advances to the Company or any
Restricted Subsidiary, (d) transfer any of its properties or assets to the
Company or any Restricted Subsidiary, (e) grant liens or security interests on
the assets of the Company or the Restricted Subsidiaries in favor of the holders
of the Notes, or (f) guarantee the Notes or any renewals or refinancings
thereof, except for Permitted Dividend Encumbrances.
Limitation on Certain Asset Sales
The Company will not, and will not permit any of the Restricted
Subsidiaries to, consummate an Asset Sale unless (i) the Company or such
Restricted Subsidiary, as the case may be, receives consideration at the time of
such sale or other disposition at least equal to the fair market value thereof
(as determined in good faith by the Company's board of directors, and evidenced
by a board resolution); (ii) not less than 85% of the consideration received by
the Company or such Restricted Subsidiary, as the case may be, is in the form of
cash or cash equivalents (those equivalents allowed under "Temporary Cash
Investments"), provided, however, that the amount of (x) any liabilities of the
Company or any Restricted Subsidiaries that are assumed by the transferee of
such assets, including any Indebtedness of a Restricted Subsidiary whose stock
is purchased by the transferee and (y) any notes or other securities received by
the Company or any such Restricted Subsidiary which are converted into cash
within 180 days of such Asset Sale (to the extent of cash received) shall be
deemed to be cash for purposes of this provision; provided further that the
Company or such Restricted Subsidiary will not be required to comply with this
clause (ii) with respect to a Permitted Asset Swap or a Houston Disposition; and
(iii) the Asset Sale Proceeds received by the Company or such Restricted
Subsidiary are applied (a) first, to the extent the Company elects, or is
required, to prepay, repay or purchase debt under any then existing Senior
Indebtedness of the Company or any Restricted Subsidiary within 270 days
following the receipt of the Asset Sale Proceeds from any Asset Sale; provided
that any such repayment shall result in a permanent reduction of the commitments
thereunder in an amount equal to the principal amount so repaid; (b) second, to
the extent of the balance of Asset Sale Proceeds after application as described
above, to the extent the Company elects, to an investment in assets (including
Capital Stock or other securities purchased in connection with the acquisition
of Capital Stock or property of another Person) used or useful in businesses
similar or ancillary to the business of the Company and the Restricted
Subsidiaries as conducted at the time of such Asset Sale, provided that such
investment occurs and such Asset Sale Proceeds are so applied within 270 days
following the receipt of such Asset Sale Proceeds (the "Reinvestment Date"); and
(c) third, if on the Reinvestment Date with respect to any Asset Sale, the
Available Asset Sale Proceeds exceed $10 million, the Company shall apply an
amount equal to such Available Asset Sale Proceeds to an offer to repurchase the
Notes, at a purchase price in cash equal to 100% of the principal amount thereof
plus accrued and unpaid interest, if any, to the date of repurchase (an "Excess
Proceeds Offer"). If an Excess Proceeds Offer is not fully subscribed, the
Company may retain the portion of the Available Asset Sale Proceeds not required
to repurchase Notes.
If the Company is required to make an Excess Proceeds Offer, the Company
shall mail, within 30 days following the Reinvestment Date, a notice to the
Holders stating, among other things: (1) that such Holders have the right to
require the Company to apply the Available Asset Sale Proceeds to repurchase
such Notes at a purchase price in cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase; (2)
the purchase date, which shall be no earlier than 30 days and not later than 60
days from the date such notice is mailed; (3) the instructions, determined by
the Company, that each Holder must follow in order to have such Notes
repurchased; and (4) the calculations used in determining the amount of
Available Asset Sale Proceeds to be applied to the repurchase of such Notes.
Limitation on Capital Stock of Restricted Subsidiaries
The Company will not (i) sell, pledge, hypothecate or otherwise convey or
dispose of any Capital Stock of a Restricted Subsidiary (other than under the
Senior Credit Facility or under the terms of any Designated Senior Indebtedness)
or (ii) permit any Restricted Subsidiary to issue any Capital Stock, other than
to the Company or a Wholly-Owned Restricted Subsidiary. The foregoing
restrictions shall not apply to an Asset Sale made in compliance with
"Limitation on Certain Asset Sales."
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Limitation on Sale and Lease-Back Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale and Lease-Back Transaction unless (i) the consideration
received in such Sale and Lease-Back Transaction is at least equal to the fair
market value of the property sold, as determined by a board resolution of the
Company and (ii) the Company could incur the Attributable Indebtedness in
respect of such Sale and Lease-Back Transaction in compliance with the covenant
described under "Limitation on Additional Indebtedness."
Line of Business
The Company will not, and will not permit any of the Restricted
Subsidiaries to, engage in any business other than the business of out-of-home
advertising or a substantially similar business.
Payments for Consent
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or agreed
to be paid to all holders of the Notes which so consent, waive or agree to amend
in the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
CHANGE OF CONTROL OFFER
Within 30 days of the occurrence of a Change of Control, the Company shall
notify the Trustee in writing of such occurrence and shall make an offer to
purchase (the "Change of Control Offer") the outstanding Notes at a purchase
price equal to 101% of the principal amount thereof plus any accrued and unpaid
interest thereon to the Change of Control Payment Date (as hereinafter defined)
(such applicable purchase price being hereinafter referred to as the "Change of
Control Purchase Price") in accordance with the procedures set forth in this
covenant.
Within 30 days of the occurrence of a Change of Control, the Company also
shall (i) cause a notice of the Change of Control Offer to be sent at least once
to the Dow Jones News Service or similar business news service in the United
States and (ii) send by first-class mail, postage prepaid, to the Trustee and to
each holder of the Notes, at the address appearing in the register maintained by
the Registrar of the Notes, a notice stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment, and
otherwise subject to the terms and conditions set forth herein;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a business day no earlier than 30 business days nor later than 60
business days from the date such notice is mailed (the "Change of Control
Payment Date"));
(3) that any Note not tendered will continue to accrue interest;
(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change of
Control Payment Date;
(5) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender the
Notes to the Paying Agent at the address specified in the notice prior to
the close of business on the business day preceding the Change of Control
Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount
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of the Notes delivered for purchase, and a statement that such holder is
withdrawing his election to have such Notes purchased;
(7) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered, provided that each Note purchased and each such new
Note issued shall be in an original principal amount in denominations of
$1,000 and integral multiples thereof;
(8) any other procedures that a holder must follow to accept a Change
of Control Offer or effect withdrawal of such acceptance; and
(9) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (i) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (ii) deposit with the Paying Agent money sufficient
to pay the purchase price of all Notes or portions thereof so tendered and (iii)
deliver or cause to be delivered to the Trustee Notes so accepted together with
an Officers' Certificate stating the Notes or portions thereof tendered to the
Company. The Paying Agent shall promptly mail to each holder of Notes so
accepted payment in an amount equal to the purchase price for such Notes, and
the Company shall execute and issue, and the Trustee shall promptly authenticate
and mail to such holder, a new Note equal in principal amount to any unpurchased
portion of the Notes surrendered; provided that each such new Note shall be
issued in an original principal amount in denominations of $1,000 and integral
multiples thereof.
The Indenture requires that if the Senior Credit Facility is in effect, or
any amounts are owing thereunder or in respect thereof, at the time of the
occurrence of a Change of Control, prior to the mailing of the notice to holders
described in the second preceding paragraph, but in any event within 30 days
following any Change of Control, the Company covenants to (i) repay in full all
obligations under or in respect of the Senior Credit Facility or offer to repay
in full all obligations under or in respect of the Senior Credit Facility and
repay the obligations under or in respect of the Senior Credit Facility of each
lender who has accepted such offer or (ii) obtain the requisite consent under
the Senior Credit Facility to permit the repurchase of the Notes as described
above. The Company must first comply with the covenant described in the
preceding sentence before it shall be required to purchase Notes in the event of
a Change of Control; provided that the Company's failure to comply with the
covenant described in the preceding sentence constitutes an Event of Default
described in clause (c) under "Events of Default" below if not cured within 60
days after the notice required by such clause. As a result of the foregoing, a
holder of the Notes may not be able to compel the Company to purchase the Notes
unless the Company is able at the time to refinance all of the obligations under
or in respect of the Senior Credit Facility or obtain requisite consents under
the Senior Credit Facility. Failure by the Company to make a Change of Control
Offer when required by the Indenture constitutes a default under the Indenture
and, if not cured within 60 days after notice, constitutes an Event of Default.
The Indenture will provide that, (A) if the Company or any Restricted
Subsidiary has issued any outstanding Indebtedness that is subordinated in right
of payment to the Notes or the Guarantee of such Restricted Subsidiary or the
Company has issued any Preferred Stock, and the Company or such Restricted
Subsidiary is required to make a Change of Control Offer or to make a
distribution with respect to such subordinated Indebtedness or Preferred Stock
in the event of a change of control, the Company or such Restricted Subsidiary
shall not consummate any such offer or distribution with respect to such
subordinated Indebtedness or Preferred Stock until such time as the Company
shall have paid the Change of Control Purchase Price in full to the holders of
Notes that have accepted the Company's Change of Control Offer and shall
otherwise have consummated the Change of Control Offer made to holders of the
Notes and (B) the Company or any Restricted Subsidiary will not issue
Indebtedness that is subordinated in right of payment to the Notes or the
Guarantee of such Restricted Subsidiary and the Company will not issue Preferred
Stock with change of control provisions requiring the payment of such
Indebtedness or Preferred Stock prior to the payment of the Notes in the event
of a Change of Control under the Indenture.
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In the event that a Change of Control occurs and the holders of Notes
exercise their right to require the Company to purchase Notes, if such purchase
constitutes a "tender offer" for purposes of Rule 14e-1 under the Exchange Act
at that time, the Company will comply with the requirements of Rule 14e-1 as
then in effect with respect to such repurchase.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Company will not and will not permit any Guarantor to consolidate with,
merge with or into, or transfer all or substantially all of its assets (as an
entirety or substantially as an entirety in one transaction or a series of
related transactions), to any Person unless: (i) the Company or the Guarantor,
as the case may be, shall be the continuing Person, or the Person (if other than
the Company or the Guarantor) formed by such consolidation or into which the
Company or the Guarantor, as the case may be, is merged or to which the
properties and assets of the Company or the Guarantor, as the case may be, are
transferred shall be a corporation organized and existing under the laws of the
United States or any State thereof or the District of Columbia and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all of the obligations of the
Company or the Guarantor, as the case may be, under the Notes or the Guarantee
of such Guarantor, as the case may be, and the Indenture, and the obligations
under the Indenture shall remain in full force and effect; (ii) immediately
before and immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and (iii) immediately
after giving effect to such transaction on a pro forma basis the Company or such
Person could incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the covenant set forth under "Limitation on
Additional Indebtedness," provided that a Person that is a Guarantor may merge
into the Company or another Person that is a Guarantor without complying with
this clause (iii).
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent herein
provided for relating to such transaction or transactions have been complied
with.
GUARANTEES
The Notes are guaranteed on a senior subordinated basis by the Guarantors.
All payments pursuant to the Guarantees by the Guarantors are subordinated in
right of payment to the prior payment in full of all Senior Indebtedness of the
Guarantor, to the same extent and in the same manner that all payments pursuant
to the Notes are subordinated in right of payment to the prior payment in full
of all Senior Indebtedness of the Company.
The obligations of each Guarantor are limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of such
Guarantor (including, without limitation, any guarantees of Senior Indebtedness)
and after giving effect to any collections from or payments made by or on behalf
of any other Guarantor in respect of the obligations of such other Guarantor
under its Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Guarantor under the Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to a contribution from each other Guarantor in a pro rata
amount based on the Adjusted Net Assets of each Guarantor.
A Guarantor shall be released from all of its obligations under its
Guarantee if all or substantially all of its assets are sold or all of its
Capital Stock is sold, in each case in a transaction in compliance with the
covenant described under "Limitation on Certain Asset Sales," or the Guarantor
merges with or into or consolidates with, or transfers all or substantially all
of its assets to, the Company or another Guarantor in a transaction in
compliance with "Merger, Consolidation or Sale of Assets," and such Guarantor
has delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent herein provided for relating to such
transaction have been complied with.
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EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(a) default in payment of any principal of, or premium, if any, on the
Notes;
(b) default for 30 days in payment of any interest on the Notes;
(c) default by the Company or any Guarantor in the observance or
performance of any other covenant in the Notes or the Indenture for 60 days
after written notice from the Trustee or the holders of not less than 25%
in aggregate principal amount of the Notes then outstanding;
(d) default in the payment at final maturity of principal in an
aggregate amount of $10 million or more with respect to any Indebtedness of
the Company or any Restricted Subsidiary which default shall not be cured,
waived or postponed pursuant to an agreement with the holders of such
Indebtedness within 60 days after written notice, or the acceleration of
any such Indebtedness aggregating $10 million or more which acceleration
shall not be rescinded or annulled within 20 days after written notice as
provided in the Indenture;
(e) any final judgment or judgments which can no longer be appealed
for the payment of money in excess of $10 million (not covered by
insurance) shall be rendered against the Company or any Restricted
Subsidiary and shall not be discharged for any period of 60 consecutive
days during which a stay of enforcement shall not be in effect; and
(f) certain events involving bankruptcy, insolvency or reorganization
of the Company or any Restricted Subsidiary.
The Indenture provides that the Trustee may withhold notice to the holders
of the Notes of any default (except in payment of principal or premium, if any,
or interest on the Notes) if the Trustee considers it to be in the best interest
of the holders of the Notes to do so.
The Indenture will provide that if an Event of Default (other than an Event
of Default resulting from certain events of bankruptcy, insolvency or
reorganization) shall have occurred and be continuing, then the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may declare to be immediately due and payable the entire principal
amount of all the Notes then outstanding plus accrued interest to the date of
acceleration and (i) such amounts shall become immediately due and payable or
(ii) if there are any amounts outstanding under or in respect of the Senior
Credit Facility, such amounts shall become due and payable upon the first to
occur of an acceleration of amounts outstanding under or in respect of the
Senior Credit Facility or five business days after receipt by the Company and
the Representative of the holders of Senior Indebtedness under or in respect of
the Senior Credit Facility of notice of the acceleration of the Notes; provided,
however, that after such acceleration but before a judgment or decree based on
acceleration is obtained by the Trustee, the holders of a majority in aggregate
principal amount of outstanding Notes may, under certain circumstances, rescind
and annul such acceleration if all Events of Default, other than nonpayment of
accelerated principal, premium or interest, have been cured or waived as
provided in the Indenture. In case an Event of Default resulting from certain
events of bankruptcy, insolvency or reorganization with respect to the Company
shall occur, the principal, premium and interest amount with respect to all of
the Notes shall be due and payable immediately without any declaration or other
act on the part of the Trustee or the holders of the Notes.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to waive any existing default or compliance with any
provision of the Indenture or the Notes and to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, subject to
certain limitations specified in the Indenture.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the holders of at least 25% in aggregate principal
amount of the outstanding Notes shall have made written request and offered
reasonable indemnity to the Trustee to institute
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such proceeding as a trustee, and unless the Trustee shall not have received
from the holders of a majority in aggregate principal amount of the outstanding
Notes a direction inconsistent with such request and shall have failed to
institute such proceeding within 60 days. However, such limitations do not apply
to a suit instituted on such Note on or after the respective due dates expressed
in such Note.
DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides the Company may elect either (a) to defease and be
discharged from any and all obligations with respect to the Notes (except for
the obligations to register the transfer or exchange of such Notes, to replace
temporary or mutilated, destroyed, lost or stolen Notes, to maintain an office
or agency in respect of the Notes and to hold monies for payment in trust)
("defeasance") or (b) to be released from their obligations with respect to the
Notes under certain covenants contained in the Indenture and described above
under "Covenants" ("covenant defeasance"), upon the deposit with the Trustee (or
other qualifying trustee), in trust for such purpose, of money and/or U.S.
Government Obligations (as defined in the Indenture) which through the payment
of principal and interest in accordance with their terms will provide money, in
an amount sufficient to pay the principal of, premium, if any, and interest on
the Notes, on the scheduled due dates therefor or on a selected date of
redemption in accordance with the terms of the Indenture. Such a trust may only
be established if, among other things, the Company has delivered to the Trustee
an opinion of counsel (as specified in the Indenture) (i) to the effect that
neither the trust nor the Trustee will be required to register as an investment
company under the Investment Company Act of 1940, as amended, and (ii)
describing either a private ruling concerning the Notes or a published ruling of
the Internal Revenue Service, to the effect that holders of the Notes or persons
in their positions will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit, defeasance and discharge and will be
subject to federal income tax on the same amount and in the same manner and at
the same times, as would have been the case if such deposit, defeasance and
discharge had not occurred.
MODIFICATION OF INDENTURE
From time to time, the Company, the Guarantors and the Trustee may, without
the consent of holders of the Notes, amend the Indenture or the Notes or
supplement the Indenture for certain specified purposes, including providing for
uncertificated Notes in addition to certificated Notes, and curing any
ambiguity, defect or inconsistency, or making any other change that does not
materially and adversely affect the rights of any holder. The Indenture contains
provisions permitting the Company, the Guarantors and the Trustee, with the
consent of holders of at least a majority in principal amount of the outstanding
Notes, to modify or supplement the Indenture or the Notes, except that no such
modification shall, without the consent of each holder affected thereby, (i)
reduce the amount of Notes whose holders must consent to an amendment,
supplement, or waiver to the Indenture or the Notes, (ii) reduce the rate of or
change the time for payment of interest on any Note, (iii) reduce the principal
of or premium on or change the stated maturity of any Note, (iv) make any Note
payable in money other than that stated in the Note, (v) change the amount or
time of any payment required by the Notes or reduce the premium payable upon any
redemption of Notes, or change the time before which no such redemption may be
made, (vi) waive a default on the payment of the principal of, interest on, or
redemption payment with respect to any Note, (vii) amend, alter, change or
modify the obligation of the Company to make and consummate a Change of Control
Offer in the event of a Change of Control or make and consummate an Excess
Proceeds Offer after such obligation has arisen, or waive any Default in the
performance of any such offers or modify any of the provisions or definitions
with respect to any such offers or (viii) take any other action otherwise
prohibited by the Indenture to be taken without the consent of each holder
affected thereby.
REPORTS TO HOLDERS
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it will continue to furnish the information required thereby
to the Commission and to the holders of the Notes. The Indenture provides that
even if the Company is entitled under the Exchange Act not to furnish such
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information to the Commission or to the holders of the Notes, they will
nonetheless continue to furnish such information to the Commission and holders
of the Notes.
COMPLIANCE CERTIFICATE
The Company will deliver to the Trustee on or before 100 days after the end
of the Company's fiscal year and on or before 50 days after the end of each of
the first, second and third fiscal quarters in each year an Officers'
Certificate stating whether or not the signers know of any Default or Event of
Default that has occurred. If they do, the certificate will describe the Default
or Event of Default and its status.
THE TRUSTEE
The Trustee under the Indenture will be the Registrar and Paying Agent with
regard to the Notes. The Indenture provides that, except during the continuance
of an Event of Default, the Trustee will perform only such duties as are
specifically set forth in the Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
TRANSFER AND EXCHANGE
Holders of the Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar under such Indenture may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indentures. The Registrar
is not required to transfer or exchange any Note selected for redemption. Also,
the Registrar is not required to transfer or exchange any Note for a period of
15 days before selection of the Notes to be redeemed.
The registered holder of a Note may be treated as the owner of it for all
purposes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants contained in the Indenture. Reference is made to the Indenture for the
full definition of all such terms as well as any other capitalized terms used
herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (including an
Unrestricted Subsidiary) existing at the time such Person becomes a Restricted
Subsidiary or assumed in connection with the acquisition of assets from such
Person.
"Adjusted Net Assets" of a Guarantor at any date shall mean the lesser of
the amount by which (x) the fair value of the property of such Guarantor exceeds
the total amount of liabilities, including, without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities),
but excluding liabilities under the Guarantee, of such Guarantor at such date
and (y) the present fair salable value of the assets of such Guarantor at such
date exceeds the amount that will be required to pay the probable liability of
such Guarantor on its debts (after giving effect to all other fixed and
contingent liabilities and after giving effect to any collection from any
Subsidiary of such Guarantor in respect of the obligations of such Subsidiary
under the Guarantee), excluding Indebtedness in respect of the Guarantee, as
they become absolute and matured.
"Advertising Displays" mean all posters, signs, billboards and other
outdoor advertising displays and related sites therefor owned or leased (as
lessee) by the Company and the Restricted Subsidiaries.
"Affiliate" of any specified Person means any other Person which directly
or indirectly through one or more intermediaries controls, or is controlled by,
or is under common control with, such specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, means the
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possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Acquisition" means (i) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be consolidated or merged with the
Company or any Restricted Subsidiary or (ii) the acquisition by the Company or
any Restricted Subsidiary of assets of any Person comprising a division or line
of business of such Person.
"Asset Sale" means the sale, transfer or other disposition (other than to
the Company or any of its Restricted Subsidiaries) in any single transaction or
series of related transactions having a fair market value in excess of $1
million of (a) any Capital Stock of or other equity interest in any Restricted
Subsidiary, (b) all or substantially all of the assets of the Company or of any
Restricted Subsidiary, (c) real property or (d) all or substantially all of the
assets of any business owned by the Company or any Restricted Subsidiary or a
division, line of business or comparable business segment of the Company or any
Restricted Subsidiary thereof; provided that Asset Sales shall not include
sales, leases, conveyances, transfers or other dispositions to the Company or to
a Restricted Subsidiary or to any other Person if after giving effect to such
sale, lease, conveyance, transfer or other disposition such other Person becomes
a Restricted Subsidiary.
"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
received by the Company or any Restricted Subsidiary from such Asset Sale
(including cash received as consideration for the assumption of liabilities
incurred in connection with or in anticipation of such Asset Sale), after (a)
provision for all income or other taxes measured by or resulting from such Asset
Sale, (b) payment of all brokerage commissions, underwriting and other fees and
expenses related to such Asset Sale, (c) provision for minority interest holders
in any Restricted Subsidiary as a result of such Asset Sale and (d) deduction of
appropriate amounts to be provided by the Company or such Restricted Subsidiary
as a reserve, in accordance with GAAP, against any liabilities associated with
the assets sold or disposed of in such Asset Sale and retained by the Company or
such Restricted Subsidiary after such Asset Sale, including, without limitation,
pension and other post employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
the assets sold or disposed of in such Asset Sale, and (ii) promissory notes and
other noncash consideration received by the Company or any Restricted Subsidiary
from such Asset Sale or other disposition upon the liquidation or conversion of
such notes or noncash consideration into cash.
"Attributable Indebtedness" under the Indenture in respect of a Sale and
Lease-Back Transaction means, as at the time of determination, the greater of
(i) the fair value of the property subject to such arrangement (as determined by
the board of directors of the Company) and (ii) the present value of the notes
(discounted at the rate of interest implicit in such transaction) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale and Lease-Back Transaction (including any period for
which such lease has been extended).
"Available Asset Sale Proceeds" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sale that have not been applied in
accordance with clauses (iii)(a) or (iii)(b), and which have not yet been the
basis for an Excess Proceeds Offer in accordance with clause (iii)(c) of the
first paragraph of "Certain Covenants -- Limitation on Certain Asset Sales."
"Capital Stock" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interest in the nature of an equity
interest in such Person or any option, warrant or other security convertible
into any of the foregoing.
"Capitalized Lease Obligations" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof; (ii) the
approval by the holders of Capital
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Stock of the Company of any plan or proposal for the liquidation or dissolution
of the Company; (iii) the Permitted Holders, individually or in the aggregate,
shall cease to beneficially own (within the meaning of Rule 13d-3 under the
Exchange Act), directly or indirectly, Voting Stock representing at least 25% of
the total voting power of all Voting Stock of the Company; (iv) any Person or
Group (other than the Permitted Holders) shall become the owner, directly or
indirectly, beneficially or of record, of Voting Stock representing more than
30% of the total voting power of all Voting Stock of the Company; or (v) the
replacement of a majority of the board of directors of the Company over a
two-year period from the directors who constituted the board of directors of the
Company at the beginning of such period, and such replacement shall not have
been approved by a vote of at least two-thirds of the board of directors of the
Company then still in office who either were members of such board of directors
at the beginning of such period or whose election as a member of such board of
directors was previously so approved.
"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management and policies of such Person.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, the aggregate amount of interest which, in conformity with GAAP, would
be set forth opposite the caption "interest expense" or any like caption on an
income statement for such Person and its Subsidiaries (Restricted Subsidiaries
in the case of the Company) on a consolidated basis (including, but not limited
to, imputed interest included in Capitalized Lease Obligations, all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, the net costs associated with hedging
obligations, the interest portion of any deferred payment obligation,
amortization of discount or premium, if any, and all other non-cash interest
expense (other than interest amortized to cost of sales)) plus, without
duplication, all net capitalized interest for such period and all interest
incurred or paid under any guarantee of Indebtedness (including a guarantee of
principal, interest or any combination thereof) of any Person, plus the amount
of all dividends or distributions paid on Disqualified Capital Stock (other than
dividends paid or payable in shares of Capital Stock of the Company); provided,
however, that, solely for purposes of the calculation of 1.4 times the Company's
Cumulative Consolidated Interest Expense in clause (c) of the "Limitation on
Restricted Payments" covenant, "Consolidated Interest Expense" shall exclude the
amortization of deferred financing fees.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the Net Income of such Person and its Subsidiaries
(Restricted Subsidiaries in the case of the Company) for such period, on a
consolidated basis, determined in accordance with GAAP; provided, however, that
(a) the Net Income of any Person (the "other Person") in which the Person in
question or any of its Subsidiaries (Restricted Subsidiaries in the case of the
Company) has less than a 100% interest (which interest does not cause the net
income of such other Person to be consolidated into the net income of the Person
in question in accordance with GAAP) shall be included only to the extent of the
amount of dividends or distributions paid to the Person in question or such
Subsidiary, (b) the Net Income of any Subsidiary (Restricted Subsidiary in the
case of the Company) of the Person in question that is subject to any
restriction or limitation on the payment of dividends or the making of other
distributions (other than pursuant to the Notes or the Indenture) shall be
excluded to the extent of such restriction or limitation, (c)(i) the Net Income
of any Person acquired in a pooling of interests transaction for any period
prior to the date of such acquisition and (ii) any net gain (but not loss)
resulting from an Asset Sale by the Person in question or any of its
Subsidiaries other than in the ordinary course of business shall be excluded,
and (d) extraordinary gains and losses shall be excluded.
"Cumulative Consolidated Interest Expense" means, as of any date of
determination, Consolidated Interest Expense of the Company from the Issue Date
to the end of the Company's most recently ended full fiscal quarter prior to
such date, taken as a single accounting period.
"Cumulative EBITDA" means, as of any date of determination, EBITDA of the
Company from the Issue Date to the end of the Company's most recently ended full
fiscal quarter prior to such date, taken as a single accounting period.
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"Designated Senior Indebtedness," as to the Company or any Guarantor, as
the case may be, means any Senior Indebtedness (a) under or in respect of the
Senior Credit Facility, or (b) which at the time of determination exceeds $50
million in aggregate principal amount (or accreted value in the case of
Indebtedness issued at a discount) outstanding or available under a committed
facility, and (i) which is specifically designated in the instrument evidencing
such Senior Indebtedness as "Designated Senior Indebtedness" by such Person and
(ii) as to which the Trustee has been given written notice of such designation.
"Disqualified Capital Stock" means any Capital Stock of the Company or any
Restricted Subsidiary which, by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable at the option of the
holder), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
maturity date of the Notes, for cash or securities constituting Indebtedness.
Without limitation of the foregoing, Disqualified Capital Stock shall be deemed
to include any Preferred Stock of the Company with respect to which, under the
terms of such Preferred Stock, by agreement or otherwise, the Company is
obligated to pay current dividends or distributions in cash during the period
prior to the maturity date of the Notes; provided, however, that Preferred Stock
that is issued with the benefit of provisions requiring a change of control
offer to be made for such Preferred Stock in the event of a change of control of
the Company, which provisions have substantially the same effect as the
provisions of the Indenture described under "Change of Control," shall not be
deemed to be Disqualified Capital Stock solely by virtue of such provisions.
"EBITDA" means, for any Person, for any period, an amount equal to (a) the
sum of, without duplication, (i) Consolidated Net Income for such period, plus
(ii) the provision for taxes for such period based on income or profits to the
extent such income or profits were included in computing Consolidated Net Income
and any provision for taxes utilized in computing net loss under clause (i)
hereof, plus (iii) Consolidated Interest Expense for such period (but only
including Redeemable Dividends in the calculation of such Consolidated Interest
Expense to the extent that such Redeemable Dividends have not been excluded in
the calculation of Consolidated Net Income), plus (iv) depreciation for such
period on a consolidated basis, plus (v) amortization of intangibles for such
period on a consolidated basis, plus (vi) any other non-cash items reducing
Consolidated Net Income for such period, minus (b) all non-cash items increasing
Consolidated Net Income for such period, all for such Person and its
Subsidiaries determined in accordance with GAAP, except that with respect to the
Company each of the foregoing items shall be determined on a consolidated basis
with respect to the Company and the Restricted Subsidiaries only; and provided,
however, that, for purposes of calculating EBITDA during any fiscal quarter,
cash income from a particular Investment of such Person shall be included only
(x) if cash income has been received by such Person with respect to such
Investment during each of the previous four fiscal quarters, or (y) if the cash
income derived from such Investment is attributable to Temporary Cash
Investments.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles consistently applied
as in effect in the United States from time to time.
"Houston Disposition" means the sale by the Company of any or all of the
assets representing outdoor advertising assets serving the Houston, Texas
market.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such person (and
"incurrence," "incurred," "incurable," and "incurring" shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Indebtedness shall
not be deemed an incurrence of such Indebtedness.
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"Indebtedness" means (without duplication), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other accrued liabilities arising in the ordinary
course of business) if and to the extent any of the foregoing indebtedness would
appear as a liability upon a balance sheet of such Person prepared in accordance
with GAAP, and shall also include, to the extent not otherwise included (i) any
Capitalized Lease Obligations, (ii) obligations secured by a lien to which the
property or assets owned or held by such Person is subject, whether or not the
obligation or obligations secured thereby shall have been assumed, (iii)
guarantees of items of other Persons which would be included within this
definition for such other Persons (whether or not such items would appear upon
the balance sheet of the guarantor), (iv) all obligations for the reimbursement
of any obligor on any banker's acceptance or for reimbursement of any obligor on
any letter of credit with respect to drawings made thereunder and not yet
reimbursed, (v) in the case of the Company, Disqualified Capital Stock of the
Company or any Restricted Subsidiary, and (vi) obligations of any such Person
under any Interest Rate Agreement applicable to any of the foregoing (if and to
the extent such Interest Rate Agreement obligations would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP). The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above,
provided (i) that the amount outstanding at any time of any Indebtedness issued
with original issue discount, including the Notes, is the principal amount of
such Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with GAAP
and (ii) that Indebtedness shall not include any liability for federal, state,
local or other taxes. Notwithstanding any other provision of the foregoing
definition, any trade payable arising from the purchase of goods or materials or
for services obtained in the ordinary course of business shall not be deemed to
be "Indebtedness" of the Company or any of the Restricted Subsidiaries for
purposes of this definition. Furthermore, guarantees of (or obligations with
respect to letters of credit supporting) Indebtedness otherwise included in the
determination of such amount shall not also be included.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect the party indicated therein against
fluctuations in interest rates.
"Investments" means, directly or indirectly, any advance, account
receivable (other than an account receivable arising in the ordinary course of
business), loan or capital contribution to (by means of transfers of property to
others, payments for property or services for the account or use of others or
otherwise), the purchase of any stock, bonds, notes, debentures, partnership or
joint venture interests or other securities of, the acquisition, by purchase or
otherwise, of all or substantially all of the business or assets or stock or
other evidence of beneficial ownership of, any Person. Investments shall exclude
extensions of trade credit on commercially reasonable terms in accordance with
normal trade practices.
"Issue Date" means the date the Notes are first issued by the Company and
authenticated by the Trustee under the Indenture.
"Leverage Ratio" means the ratio of (i) the sum of the aggregate
outstanding amount of Indebtedness of the Company and the Restricted
Subsidiaries as of the date of calculation on a consolidated basis in accordance
with GAAP to (ii) the Company's EBITDA for the four full fiscal quarters (the
"Four Quarter Period") ending on or prior to the date of determination for which
financial statements are available. For purposes of this definition, the
Company's "EBITDA" shall be calculated on a pro forma basis after giving effect
to any Asset Sales or Asset Acquisitions (including, without limitation, any
Asset Acquisition giving rise to the need to make such calculation as a result
of the Company or one of the Restricted Subsidiaries (including any Person who
becomes a Restricted Subsidiary as a result of such Asset Acquisition)
incurring, assuming or otherwise becoming liable for Indebtedness) at any time
on or subsequent to the first day of the Four Quarter Period and on or prior to
the date of determination, as if such Asset Sale or Asset Acquisition (including
any EBITDA associated with such Asset Acquisition and including any pro forma
expense and
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cost reductions determined in accordance with Article 11 of Regulation S-X
relating to such Asset Acquisition) occurred on the first day of the Four
Quarter Period.
"Lien" means with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including
without limitation, any Capitalized Lease Obligation, conditional sales, or
other title retention agreement having substantially the same economic effect as
any of the foregoing).
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Investment" means the excess of (i) the aggregate amount of all
Investments in Unrestricted Subsidiaries and joint ventures made by the Company
and the Restricted Subsidiaries on or after the Issue Date (in the case of an
Investment made other than in cash, the amount shall be the fair market value of
such Investment as determined in good faith by the board of directors of the
Company) over (ii) the sum of (A) the aggregate amount returned in cash on such
Investments whether through interest payments, principal payments, dividends or
other distributions, (B) the net cash proceeds received by the Company or any
Restricted Subsidiary from the disposition of all or any portion of such
Investments (other than to a Subsidiary of the Company) and (C) the fair market
value (as determined in good faith by the board of directors of the Company) of
any Unrestricted Subsidiary that subsequently becomes a Wholly-Owned Restricted
Subsidiary; provided, however, that with respect to all Investments made in any
Unrestricted Subsidiary or any joint venture, the sum of clauses (A), (B) and
(C) above with respect to such Investments shall not exceed the aggregate amount
of all such Investments made in such Unrestricted Subsidiary or such joint
venture, as the case may be.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by the
Company, the aggregate net proceeds received by the Company, after payment of
expenses, commissions and the like incurred in connection therewith, whether
such proceeds are in cash or in property (valued at the fair market value
thereof, as determined in good faith by the board of directors, at the time of
receipt) and (b) in the case of any exchange, exercise, conversion or surrender
of outstanding securities of any kind for or into shares of Capital Stock of the
Company which is not Disqualified Capital Stock, the net book value of such
outstanding securities on the date of such exchange, exercise, conversion or
surrender (plus any additional amount required to be paid by the holder to the
Company upon such exchange, exercise, conversion or surrender, less any and all
payments made to the holders, e.g., on account of fractional shares and less all
expenses incurred by the Company in connection therewith).
"Non-Payment Event of Default" means any event (other than a Payment
Default) the occurrence of which entitles one or more Persons to accelerate the
maturity of any Designated Senior Indebtedness.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chief Executive Officer, the President or any Vice President and
the Chief Financial Officer or any Treasurer of such Person that shall comply
with applicable provisions of the Indenture.
"Payment Default" means any default, whether or not any requirement for the
giving of notice, the lapse of time or both, or any other condition to such
default becoming an event of default has occurred, in the payment of principal
of (or premium, if any) or interest on or any other amount payable in connection
with Designated Senior Indebtedness.
"Permitted Asset Swap" means the exchange, in the ordinary course of the
outdoor advertising business, of any interest of the Company or any of the
Restricted Subsidiaries in any Advertising Display or Displays for a similar
interest in an Advertising Display or Displays of a Person other than the
Company or such Restricted Subsidiary; provided that (i) the aggregate fair
market value (as determined in good faith by the board of directors of the
Company) of the Advertising Display or Displays being transferred by the Company
or such Restricted Subsidiary is not greater than the aggregate fair market
value (as determined in good faith by the board of directors of the Company) of
the Advertising Display or Displays received by the Company or such
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<PAGE> 72
Restricted Subsidiary in such exchange and (ii) the aggregate fair market value
(as determined in good faith by the board of directors of the Company) of all
Advertising Displays transferred by the Company and the Restricted Subsidiaries
in connection with exchanges in any period of twelve consecutive months shall
not exceed $10 million.
"Permitted Dividend Encumbrances" means encumbrances or restrictions (a)
existing on the Issue Date, (b) arising by reason of Acquired Indebtedness of
any Restricted Subsidiary existing at the time such Person became a Restricted
Subsidiary; provided that in the case of clause (b) above such encumbrances or
restrictions were not created in anticipation of such Person becoming a
Restricted Subsidiary and are not applicable to the Company or any of the other
Restricted Subsidiaries, (c) arising under the Senior Credit Facility is in
effect on the Issue Date, and refinancings thereof; provided that the
encumbrances and restrictions contained in any such refinancing agreement are no
less favorable to the Holders of Notes than those contained in the Senior Credit
Facility as in effect on the Issue Date, (d) arising under Refinancing
Indebtedness; provided that the terms and conditions of any such restrictions
are no less favorable to the Holders of Notes than those under the Indebtedness
being refinanced and (e) customary provisions restricting the assignment of any
contract or interest of the Company or any Restricted Subsidiary.
"Permitted Holders" means William S. Levine, Arthur R. Moreno, any trust
solely for the benefit of Messrs. Levine and Moreno or their respective
immediate family members, or any partnership all the ownership interests in
which are beneficially owned or controlled by any of the foregoing; provided
that with respect to any such trust or partnership either Mr. Levine or Mr.
Moreno (or in the event of the death or incapacity of Mr. Levine or Mr. Moreno,
as the case may be, an immediate family member or the legal representative)
shall at all times have the exclusive power to direct the voting of the shares
of Voting Stock of the Company held by such trust or partnership.
"Permitted Indebtedness" means:
(i) Indebtedness of the Company or any Restricted Subsidiary pursuant
to the Senior Credit Facility in an amount not to exceed an aggregate of
$515 million plus cdn$83 million (which at the option of the Company may be
$60 million) minus the amount of any such Indebtedness permanently retired
with the Asset Sale Proceeds from any Asset Sale;
(ii) Indebtedness under the Notes and the Guarantees;
(iii) Indebtedness not covered by any other clause of this definition
which is outstanding on the date of the Indenture;
(iv) Indebtedness of the Company to any Wholly-Owned Restricted
Subsidiary and Indebtedness of any Restricted Subsidiary to the Company or
another Restricted Subsidiary;
(v) Purchase Money Indebtedness and Capitalized Lease Obligations
incurred to acquire property in the ordinary course of business which
Purchase Money Indebtedness and Capitalized Lease Obligations do not in the
aggregate exceed 5% of the Company's consolidated total assets;
(vi) Interest Rate Agreements and any guarantees thereof;
(vii) additional Indebtedness of the Company not to exceed $40 million
in principal amount outstanding at any time; and
(viii) Refinancing Indebtedness.
"Permitted Investments" means, for any Person, Investments made on or after
the date of the Indenture consisting of:
a) Investments by the Company or by a Restricted Subsidiary in the
Company or a Wholly-Owned Restricted Subsidiary;
b) Temporary Cash Investments;
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c) Investments by the Company or by a Restricted Subsidiary in a
Person, if as a result of such Investment (a) such Person becomes a
Restricted Subsidiary or (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary;
d) reasonable and customary loans made to employees in connection with
their relocation not to exceed $2 million in the aggregate at any one time
outstanding; and
e) an Investment that is made by the Company or a Restricted
Subsidiary in the form of any stock, bonds, notes, debentures, partnership
or joint venture interests or other securities that are issued by a third
party to the Company or such Restricted Subsidiary solely as partial
consideration for the consummation of an Asset Sale that is otherwise
permitted under the covenant described under "Limitation on Certain Asset
Sales."
"Permitted Liens" means (i) Liens existing on the Issue Date, (ii) Liens on
property or assets of, or any shares of stock of or secured debt of, any
corporation existing at the time such corporation becomes a Restricted
Subsidiary or at the time such corporation is merged into the Company or any of
the Restricted Subsidiaries; provided that such Liens are not incurred in
connection with, or in contemplation of, such corporation becoming a Restricted
Subsidiary or merging into the Company or any of the Restricted Subsidiaries,
(iii) Liens securing Refinancing Indebtedness; provided that any such Lien does
not extend to or cover any Property, shares or debt other than the Property,
shares or debt securing the Indebtedness so refunded, refinanced or extended,
(iv) Liens in favor of the Company or any of the Restricted Subsidiaries, (v)
Liens to secure Purchase Money Indebtedness that is otherwise permitted under
the Indenture; provided that (a) any such Lien is created solely for the purpose
of securing Indebtedness representing, or incurred to finance, refinance or
refund, the cost (including sales and excise taxes, installation and delivery
charges and other direct costs of, and other direct expenses paid or charged in
connection with, such purchase or construction) of such Property, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such costs, and (c) such Lien does not extend to or cover any Property other
than such item of Property and any improvements on such item, (vi) statutory
liens or landlords', carriers', warehouseman's, mechanics', suppliers',
materialmen's, repairmen's or other like Liens arising in the ordinary course of
business which do not secure any Indebtedness and with respect to amounts not
yet delinquent or being contested in good faith by appropriate proceedings, if a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made therefor, (vii) other Liens securing
obligations incurred in the ordinary course of business which obligations do not
exceed $5 million in the aggregate at any one time outstanding, (viii) any
extensions, substitutions, replacements or renewals of the foregoing, (ix) Liens
for taxes, assessments or governmental charges that are being contested in good
faith by appropriate proceedings, (x) Liens securing Capitalized Lease
Obligations permitted to be incurred under clause (v) of the definition of
"Permitted Indebtedness," provided that any such Lien does not extend to any
property other than that subject to the underlying lease and (xi) Liens securing
Senior Indebtedness and Guarantor Senior Indebtedness.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government (including any agency or political subdivision thereof).
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries
(Restricted Subsidiaries in the case of the Company) under GAAP.
"Public Equity Offering" means a public offering by the Company of shares
of its common stock (however designated and whether voting or non-voting) and
any and all rights, warrants or options to acquire such common stock pursuant to
a registration statement registered pursuant to the Act.
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<PAGE> 74
"Purchase Money Indebtedness" means any Indebtedness incurred in the
ordinary course of business by a Person to finance the cost (including the cost
of construction) of an item of property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such Person incurred in connection therewith.
"Redeemable Dividend" means, for any dividend or distribution with regard
to Disqualified Capital Stock, the quotient of the dividend or distribution
divided by the difference between one and the maximum statutory federal income
tax rate (expressed as a decimal number between 1 and 0) then applicable to the
issuer of such Disqualified Capital Stock.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Indebtedness of the Company or the Restricted Subsidiaries
outstanding on the Issue Date or other Indebtedness permitted to be incurred by
the Company or the Restricted Subsidiaries pursuant to the terms of the
Indenture (other than pursuant to clauses (iv), (v), (vi) and (vii) of the
definition of Permitted Indebtedness), but only to the extent that (i) the
Refinancing Indebtedness is subordinated to the Notes to at least the same
extent as the Indebtedness being refunded, refinanced or extended, if at all,
(ii) the Refinancing Indebtedness is scheduled to mature either (a) no earlier
than the Indebtedness being refunded, refinanced or extended, or (b) after the
maturity date of the Notes, (iii) the portion, if any, of the Refinancing
Indebtedness that is scheduled to mature on or prior to the maturity date of the
Notes has a weighted average life to maturity at the time such Refinancing
Indebtedness is incurred that is equal to or greater than the weighted average
life to maturity of the portion of the Indebtedness being refunded, refinanced
or extended that is scheduled to mature on or prior to the maturity date of the
Notes, (iv) such Refinancing Indebtedness is in an aggregate principal amount
that is equal to or less than the sum of (a) the aggregate principal amount then
outstanding under the Indebtedness being refunded, refinanced or extended, (b)
the amount of accrued and unpaid interest, if any, and premiums owed, if any,
not in excess of preexisting prepayment provisions on such Indebtedness being
refunded, refinanced or extended and (c) the amount of customary fees, expenses
and costs related to the incurrence of such Refinancing Indebtedness, and (v)
such Refinancing Indebtedness is incurred by the same Person that initially
incurred the Indebtedness being refunded, refinanced or extended, except that
the Company may incur Refinancing Indebtedness to refund, refinance or extend
Indebtedness of any Wholly-Owned Restricted Subsidiary.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution or payment on Capital Stock of
the Company or any Restricted Subsidiary of the Company or any payment made to
the direct or indirect holders (in their capacities as such) of Capital Stock of
the Company or any Restricted Subsidiary (other than (x) dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) or
in options, warrants or other rights to purchase Capital Stock (other than
Disqualified Stock), and (y) in the case of Restricted Subsidiaries of the
Company, dividends or distributions payable to the Company or to a Wholly-Owned
Restricted Subsidiary), (ii) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company or any of the
Restricted Subsidiaries (other than Capital Stock owned by the Company or a
Wholly-Owned Restricted Subsidiary), (iii) the making of any principal payment
on, or the purchase, defeasance, repurchase, redemption or other acquisition or
retirement for value, prior to any scheduled maturity, scheduled repayment or
scheduled sinking fund payment, of any Indebtedness which is subordinated in
right of payment to the Notes other than subordinated Indebtedness acquired in
anticipation of satisfying a scheduled sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
acquisition), (iv) the making of any Investment or guarantee of any Investment
in any Person other than a Permitted Investment, (v) any designation of a
Restricted Subsidiary as an Unrestricted Subsidiary on the basis of the
Investment by the Company therein and (vi) forgiveness of any Indebtedness of an
Affiliate of the Company (other than a Wholly-Owned Restricted Subsidiary) to
the Company or a Restricted Subsidiary. For purposes of determining the amount
expended for Restricted Payments, cash distributed or invested shall be valued
at the face amount thereof and property other than cash shall be valued at its
fair market value.
"Restricted Subsidiary" means a Subsidiary of the Company other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Company
existing as of the Issue Date. The board of directors of the Company may
designate any Unrestricted Subsidiary or any Person that is to become a
Subsidiary of the
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Company as a Restricted Subsidiary if immediately after giving effect to such
action (and treating any Acquired Indebtedness as having been incurred at the
time of such action), the Company could have incurred at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"Limitation on Additional Indebtedness" covenant.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by the Company or any Restricted Subsidiary of any
real or tangible personal property, which property has been or is to be sold or
transferred by the Company or such Restricted Subsidiary to such Person in
contemplation of such leasing.
"Senior Credit Facility" means the Third Amended and Restated Credit
Agreement dated as of August 22, 1996 among the Company, 3284085 Canada, Inc.,
the several lenders from time to time parties thereto and Canadian Imperial Bank
of Commerce, as administrative agent, together with the documents related
thereto (including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including adding Subsidiaries of the
Company as additional borrowers or guarantors thereunder) all or any portion of
the Indebtedness under such agreement or any successor or replacement agreement
and whether by the same or any other agent, lender or group of lenders.
"Senior Indebtedness" means the principal of and premium, if any, and
interest (including, without limitation, interest accruing or that would have
accrued but for the filing of a bankruptcy, reorganization or other insolvency
proceeding whether or not such interest constitutes an allowable claim in such
proceeding) on, and any and all other fees, charges, expense reimbursement
obligations and other amounts due pursuant to the terms of all agreements,
documents and instruments providing for, creating, securing or evidencing or
otherwise entered into in connection with (a) all obligations of the Company
owed to lenders under the Senior Credit Facility, (b) all obligations of the
Company with respect to any Interest Rate Agreement, (c) all obligations of the
Company to reimburse any bank or other person in respect of amounts paid under
letters of credit, acceptances or other similar instruments, (d) all other
current or future Indebtedness of the Company which does not provide that it is
to rank pari passu with or subordinate to the Notes and (e) all deferrals,
renewals, extensions and refundings of, and amendments, modifications and
supplements to, any of the Senior Indebtedness described above. Notwithstanding
anything to the contrary in the foregoing, Senior Indebtedness will not include
(i) Indebtedness of the Company to any of its Subsidiaries, (ii) Indebtedness
represented by the Notes, (iii) any Indebtedness which by the express terms of
the agreement or instrument creating, evidencing or governing the same is junior
or subordinate in right of payment to any item of Senior Indebtedness, (iv) any
trade payable arising from the purchase of goods or materials or for services
obtained in the ordinary course of business, or (v) that portion of any
Indebtedness (other than Indebtedness described in clause (a) of the immediately
preceding sentence of this definition which relates to reimbursement obligations
(whether in the form of loans or otherwise) under letters of credit with respect
to drawings made thereunder and not yet reimbursed) which is incurred in
violation of the Indenture.
"Subsidiary" of any specified Person means any corporation, partnership,
joint venture, association or other business entity, whether now existing or
hereafter organized or acquired, (i) in the case of a corporation, of which more
than 50% of the total voting power of the Capital Stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
officers or trustees thereof is held by such first-named Person or any of its
Subsidiaries; or (ii) in the case of a partnership, joint venture, association
or other business entity, with respect to which such first-named Person or any
of its Subsidiaries has the power to direct or cause the direction of the
management and policies of such entity by contract or otherwise or if in
accordance with GAAP such entity is consolidated with the first-named Person for
financial statement purposes.
"Temporary Cash Investments" means (i) Investments in marketable, direct
obligations issued or guaranteed by the United States of America, or of any
governmental agency or political subdivision thereof, maturing within 365 days
of the date of purchase; (ii) Investments in certificates of deposit issued by a
bank organized under the laws of the United States of America or any state
thereof or the District of Columbia, in
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each case having capital, surplus and undivided profits totaling more than
$500,000,000 and rated at least A by Standard & Poor's Corporation and A-2 by
Moody's Investors Service, Inc., maturing within 365 days of purchase; or (iii)
Investments not exceeding 365 days in duration in money market funds that invest
substantially all of such funds' assets in the Investments described in the
preceding clauses (i) and (ii).
"Unrestricted Subsidiary" means (a) any Subsidiary of an Unrestricted
Subsidiary and (b) any Subsidiary of the Company which is classified after the
Issue Date as an Unrestricted Subsidiary by a resolution adopted by the board of
directors of the Company; provided that a Subsidiary of the Company organized or
acquired after the Issue Date may be so classified as an Unrestricted Subsidiary
only if such classification is in compliance with the covenant set forth under
"Limitation on Restricted Payments." The Trustee shall be given prompt notice by
the Company of each resolution adopted by the board of directors of the Company
under this provision, together with a copy of each such resolution adopted.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof to vote
under ordinary circumstances in the election of members of the board of
directors or other governing body of such Person.
"Wholly-Owned Restricted Subsidiary" means any Restricted Subsidiary, all
of the outstanding voting securities (other than directors' qualifying shares)
of which are owned, directly or indirectly, by the Company.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each of CIBC Wood Gundy Securities Corp. ("CIBC
Wood Gundy") and Alex. Brown & Sons Incorporated ("Alex. Brown" and collectively
the "Underwriters") has agreed severally, and not jointly, to purchase, and the
Company has agreed to sell, that principal amount of the Notes offered hereby
set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF THE NOTES
--------------------------------------------------------------------- ----------------
<S> <C>
CIBC Wood Gundy Securities Corp. .................................... $
Alex. Brown & Sons Incorporated......................................
----------------
Total...................................................... $150,000,000
=============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes are subject to approval
of certain legal matters by counsel and to certain other conditions. The
Underwriting Agreement also provides that the Company and the Guarantors will
indemnify the Underwriters and their controlling persons against certain
liabilities and expenses, including liabilities under the Securities Act. The
Underwriters are obligated to take and pay for all of the Notes offered hereby
if any such Notes are taken.
The Underwriters propose to offer the Notes directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus. After the initial public offering of the Notes, the offering price
and other selling terms may be changed by the Underwriters.
Prior to the Offering, there has been no public market for the Notes. The
Company does not intend to list any of the Notes on a national securities
exchange or to seek admission thereof for trading in the National Association of
Securities Dealers Automated Quotation System. The Underwriters have advised the
Company that they currently intend to make a market in the Notes, but are not
obligated to do so and may discontinue any such market making at any time
without notice. Accordingly, there can be no assurance as to the liquidity of,
or that an active trading market will develop for, the Notes.
The Underwriters have advised the Company that they will not confirm sales
to discretionary accounts.
Under the Conduct Rules of the National Association of Securities Dealers,
Inc. (the "NASD"), no member of the NASD or an affiliate of a member shall
participate in the distribution of a public offering of debt securities issued
by a company if the member and/or its affiliates have a conflict of interest (as
defined) with the company unless the yield at which such debt securities are to
be distributed to the public is not lower than that recommended by a "qualified
independent underwriter" meeting certain standards. As defined by the NASD, a
"conflict of interest" exists when a member and/or its affiliates in the
aggregate beneficially own 10% or more of the equity or subordinated debt of a
company or when more than 10% of the net offering proceeds are intended to be
paid to a member participating in the distribution and/or its affiliated
persons.
CIBC Wood Gundy is an affiliate of CIBC which is the administrative agent
and a lender under the Senior Credit Facility and the agent under the
Subordinated Credit Facility. CIBC, Inc., an affiliate of CIBC Wood Gundy, holds
approximately $72 million in aggregate principal amount of the loans outstanding
under the Subordinated Credit Facility. The proceeds of the Offering will be
used to repay the amounts outstanding under the Subordinated Credit Facility
and, to the extent any proceeds remain, to repay a portion of the amounts
outstanding under the Senior Credit Facility. CIBC Wood Gundy acted as dealer
manager in connection with the Debt Tender Offer for which it was reimbursed for
its costs and expenses and also provided the Company with financial advisory
services in connection with the Acquisition for which it received customary
fees. The Underwriters also participated as underwriters in the Common Stock
Offering.
Alex. Brown will act as a qualified independent underwriter in connection
with the Offering and the yield at which the Notes will be distributed to the
public will be no less than that recommended by it. Alex. Brown will participate
in the preparation of this Prospectus and the Registration Statement of which
this Prospectus is a part and will exercise the usual standards of due diligence
with respect thereto. Alex. Brown will receive no additional fees in connection
with acting as qualified independent underwriter. The Company and the
75
<PAGE> 78
Guarantors will indemnify Alex. Brown for acting as qualified independent
underwriter against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Powell, Goldstein, Frazer & Murphy, Atlanta, Georgia. Certain legal
matters will be passed upon for the Underwriters by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995 included in this Prospectus and the Registration Statement of which it is a
part have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report appearing elsewhere herein and in the Registration Statement,
and have been so included in reliance upon such reports given upon their
authority as experts in accounting and auditing.
The Consolidated Statement of Operations of Capitol Outdoor Advertising,
Inc. and Subsidiary and its predecessor company, Creative Outdoor Advertising of
Atlanta, Inc. for the seven month period ended July 31, 1993, the five month
period ended December 31, 1993 and the nine month period ended September 30,
1994, included in this Prospectus and Registration Statement of which it is a
part have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report appearing elsewhere herein and in the Registration Statement and
have been so included in reliance upon such reports given upon their authority
as experts in accounting and auditing.
The Gannett Outdoor Combined Statement of Net Assets to be Acquired by
Outdoor Systems, Inc. as of December 31, 1994 and 1995 and the Gannett Outdoor
Combined Statements of Revenues and Direct Expenses of Net Assets to be Acquired
by Outdoor Systems, Inc. for the years ended December 31, 1993, 1994 and 1995
included in this Prospectus and Registration Statement of which it is a part
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing elsewhere herein and in the Registration Statement, and
have been so included in reliance upon such reports given upon their authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission").
The Company has filed with the Commission a Registration Statement (which
term shall include all amendments thereto) on Form S-3 under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the Notes offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. Statements contained in this Prospectus as to the contents of
any contract, agreement or other document referred to herein are not necessarily
complete.
With respect to each report or other information filed with the Commission
pursuant to the Exchange Act, and such contract, agreement or document filed as
an exhibit to the Registration Statement, reference is made to such exhibit for
a more complete description, and each such statement is deemed to be qualified
in all respects by such reference. The Registration Statement may be inspected,
without charge, at the offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its regional offices at Seven World Trade Center,
New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the public
reference section of the Commission at its Washington address upon payment of
the prescribed fee.
76
<PAGE> 79
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's (i) Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, as amended by Form 10-K/A and Form 10-K/A2, (ii) Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996,
and (iii) Current Report on Form 8-K dated May 22, 1996, Current Report on Form
8-K dated July 16, 1996, as amended by Form 8-K/A dated July 18, 1996 and Form
8-K/A2 dated July 30, 1996, and Current Report on Form 8-K dated August 27, 1996
have been filed with the Commission and are incorporated in this Prospectus by
reference and made a part hereof.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering shall be deemed to be incorporated by reference
in this Prospectus and to be a part hereof from the respective dates of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document incorporated or
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of this Prospectus.
The Company undertakes to provide without charge to each person, including
any beneficial owner of Common Stock, to whom a copy of this Prospectus has been
delivered, upon written or oral request, a copy of any or all information
incorporated by reference in this Prospectus (not including exhibits to such
information, unless such exhibits are specifically incorporated by reference
into such information). Such requests should be directed to Outdoor Systems,
Inc., Attention: Bill M. Beverage, Chief Financial Officer, Treasurer and
Secretary, at 2502 North Black Canyon Highway, Phoenix, Arizona 85009, telephone
number (602) 246-9569.
77
<PAGE> 80
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE COMPANY:
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June
30, 1996............................................................ F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995 and the six months ended June 30, 1995 and
1996................................................................ F-4
Consolidated Statements of Common Stockholders' Equity (Deficiency)
for the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1996.......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and the six months ended June 30, 1995 and
1996................................................................ F-6
Notes to Consolidated Financial Statements............................ F-7
CAPITOL OUTDOOR ADVERTISING, INC. AND SUBSIDIARY:
Independent Auditors' Report.......................................... F-18
Consolidated Statements of Operations for the Periods ended July 30,
1993, December 31, 1993 and September 30, 1994...................... F-19
Notes to Consolidated Statements of Operations........................ F-20
GANNETT OUTDOOR:
Independent Auditors' Report.......................................... F-23
Combined Statements of Net Assets to be Acquired as of December 31,
1994 and 1995 and June 30, 1996..................................... F-24
Combined Statements of Revenues and Direct Expenses of Net Assets to
be Acquired for the years ended December 31, 1993, 1994 and 1995 and
six months ended June 30, 1995 and 1996............................. F-25
Notes to Combined Financial Statements................................ F-26
</TABLE>
F-1
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
Board of Directors
Outdoor Systems, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Outdoor
Systems, Inc. and subsidiaries (the "Company") as of December 31, 1995 and 1994,
and the related consolidated statements of operations, common stockholders'
equity (deficiency) and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Outdoor Systems, Inc. and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
January 31, 1996, except as to Note 12, the date of which is April 17, 1996
and as to Note 13, the date of which is July 22, 1996
F-2
<PAGE> 82
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 3,658 $ 1,739 $ 2,655
Accounts receivable, less allowance for doubtful accounts of $1,016,
$1,010 and $1,057.................................................... 16,271 10,971 9,649
Other current assets, principally prepaid land leases, including
amounts due from related parties of $59, $62 and $36 (Note 10)....... 3,691 2,304 2,351
Deferred income taxes (Note 8)......................................... 421 415 415
-------- -------- --------
Total current assets............................................ 24,041 15,429 15,070
PROPERTY AND EQUIPMENT -- Net (Notes 3 and 4)............................ 114,923 111,729 112,457
PERPETUAL LAND EASEMENT LEASED TO OUTDOOR ADVERTISING COMPANIES (Note
13).................................................................... 23,674
PREPAID LAND LEASES AND OTHER ASSETS..................................... 1,545 1,525 1,597
DEFERRED FINANCING COSTS -- Net.......................................... 5,411 4,275 3,920
DEFERRED INCOME TAXES (Note 8)........................................... 5,340 5,255 3,827
-------- -------- --------
$151,260 $138,213 $ 160,545
======== ======== ========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable....................................................... $ 1,338 $ 642 $ 193
Accrued interest....................................................... 4,927 4,843 4,714
Accrued commissions.................................................... 1,489 483 413
Unearned revenue....................................................... -- -- 739
Accrued expenses and other liabilities................................. 1,139 690 956
Current maturities of long-term debt (Note 4).......................... 126 550 173
-------- -------- --------
Total current liabilities....................................... 9,019 7,208 7,188
LONG-TERM DEBT (Note 4).................................................. 155,078 141,719 138,460
OTHER LONG-TERM OBLIGATIONS (Notes 7 and 12)............................. 757 984 4,473
-------- -------- --------
Total liabilities............................................... 164,854 149,911 150,121
-------- -------- --------
COMMON STOCK -- Subject to put option (estimated redemption value $4,758
in 1998) (Notes 9 and 12).............................................. 2,756 3,420 --
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9):
REDEEMABLE PREFERRED STOCK (Notes 2, 5 and 12):
Exchangeable preferred stock -- 10% cumulative, $1 par value,
authorized, issued and outstanding, 24,235 shares (redemption value
$4,000).............................................................. 3,422 3,504 --
Class A preferred stock -- $1 par value, authorized, issued and
outstanding, 40,000 shares (redemption value $8,000)................. 4,683 5,526 --
Class B preferred stock -- 9% cumulative, $1 par value, authorized
5,000 shares; issued and outstanding, 4,619 shares................... 4,619 4,619 --
-------- -------- --------
Total redeemable preferred stock................................ 12,724 13,649 --
-------- -------- --------
COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) (Notes 2, 4,
5, 6 and 13):
Common stock -- $.01 par value, authorized, 60,000,000 shares; issued,
21,714,566 shares; outstanding, 14,064,269 (1994 and 1995)........... 4 4 180
Additional Paid in Capital............................................. -- -- 33,987
Accumulated deficit.................................................... (25,025) (24,718) (19,690)
Treasury stock at cost, 5,100,198 shares............................... (4,053) (4,053) (4,053)
-------- -------- --------
Total common stockholders' equity (deficiency).................. (29,074) (28,767) 10,424
-------- -------- --------
$151,260 $138,213 $ 160,545
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 83
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Outdoor advertising.................... $ 56,622 $ 59,150 $ 74,690 $ 34,209 $ 41,929
Less agency commissions................ 7,471 8,073 10,294 4,471 5,700
---------- ---------- ---------- ---------- ----------
49,151 51,077 64,396 29,738 36,229
Other income (Note 11)................. -- 1,000 417 -- 298
---------- ---------- ---------- ---------- ----------
Net revenues................... 49,151 52,077 64,813 29,738 36,527
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Direct advertising, including $140,
$139, $139, $70 and $70 to related
parties (Note 10)................... 23,721 24,433 30,462 14,596 16,151
General and administrative, including
$34, $59, $261, $124 and $225 to
related parties
(Note 10)........................... 2,777 3,357 4,096 2,007 2,213
Depreciation and amortization.......... 10,421 9,165 9,970 4,958 5,259
---------- ---------- ---------- ---------- ----------
Total operating expenses....... 36,919 36,955 44,528 21,561 23,623
---------- ---------- ---------- ---------- ----------
GAIN ON 1994 DISPOSAL (Notes 2 and 13)... -- 4,325 -- -- --
---------- ---------- ---------- ---------- ----------
OPERATING INCOME......................... 12,232 19,447 20,285 8,177 12,904
INTEREST EXPENSE......................... 11,894 16,393 17,199 9,017 7,929
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE ITEMS SET FORTH
BELOW.................................. 338 3,054 3,086 (840) 4,975
INCOME TAX PROVISION
(Note 8)............................... 227 1,721 318 -- 1,990
---------- ---------- ---------- ---------- ----------
INCOME (LOSS)BEFORE EXTRAORDINARY LOSS... 111 1,333 2,768 (840) 2,985
EXTRAORDINARY LOSS (Note 2).............. 3,287 -- -- -- 844
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)........................ $ (3,176) $ 1,333 $ 2,768 $ (840) $ 2,141
========== ========== ========== ========== ==========
LESS STOCK DIVIDENDS, ACCRETIONS AND
DISCOUNTS ON REDEMPTION (Note 13)...... 2,572 1,596 2,461 1,195 3,461
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS........................... $ (5,748) $ (263) $ 307 $ (2,035) $ (1,320)
========== ========== ========== ========== ==========
NET INCOME (LOSS) PER COMMON AND
EQUIVALENT SHARE
(Notes 1 and 13)
Income (loss) before extraordinary
loss................................ $ (.17) $ (.02) $ .02 $ (.12) $ (.03)
Extraordinary loss..................... (.22) -- -- -- (.05)
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share..... $ (.39) $ (.02) $ .02 $ (.12) $ (.08)
========== ========== ========== ========== ==========
Weighted average number of
shares.............................. 14,819,223 14,064,269 16,949,385 16,834,464 15,573,117
========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 84
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
---------------------------------- ENDED
1993 1994 1995 JUNE 30, 1996
-------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
COMMON STOCK:
Balance, beginning of year...................... $ 1 $ 4 $ 4 $ 4
Additional common shares issued in stock
exchange (Note 2)............................ 3 -- -- --
Stock split..................................... -- -- -- 150
Initial public offering......................... -- -- -- 26
-------- -------- -------- --------
Balance, end of year............................ 4 4 4 180
-------- -------- -------- --------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of year...................... -- -- -- --
Stock split..................................... -- -- -- (150)
Initial public offering......................... -- -- -- 36,616
Preferred stock accretion and discount on
redemption (Note 13)......................... -- -- -- (2,479)
-------- -------- -------- --------
Balance, end of year............................ -- -- -- 33,987
-------- -------- -------- --------
ACCUMULATED DEFICIT:
Balance, beginning of year...................... (19,717) (24,762) (25,025) (24,718)
Net income (loss)............................... (3,176) 1,333 2,768 2,141
Common and preferred stock accretion (Notes 2, 5
and 9)....................................... (545) (714) (1,507) (689)
Redemption of warrants, increasing rate
redeemable preferred stock and exchange of
common stock in connection with refinancing
(Notes 2, 5 and 9)........................... 703 -- -- --
Preferred stock dividends....................... (2,027) (882) (954) (293)
Redemption of common stock subject to put
option....................................... -- -- -- 3,869
-------- -------- -------- --------
Balance, end of year............................ (24,762) (25,025) (24,718) (19,690)
-------- -------- -------- --------
COMMON STOCK IN TREASURY:
Balance, beginning of year...................... (4,053) (4,053) (4,053) (4,053)
-------- -------- -------- --------
Balance, end of year............................ (4,053) (4,053) (4,053) (4,053)
-------- -------- -------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY (DEFICIENCY).... $(28,811) $(29,074) $(28,767) $10,424
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 85
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- --------------------
1993 1994 1995 1995 1996
--------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................... $ (3,176) $ 1,333 $ 2,768 $ (840) $ 2,141
Gain on sale of land................................................ -- -- (417) -- --
Gain on 1994 Disposal............................................... -- (4,325) -- -- --
Extraordinary loss.................................................. 3,287 -- -- -- 844
Decrease in deferred taxes.......................................... -- 1,324 90 -- 1,428
Amortization of discounts on notes payable.......................... 420 383 363 177 912
Increase in obligations under warrants.............................. 133 -- -- -- --
Depreciation and amortization....................................... 10,421 9,165 9,970 4,958 5,259
Changes in assets and liabilities, net of effects from acquisitions
and disposal (Note 2):
(Increase) decrease in accounts receivable.......................... (3,247) 1,884 5,300 3,697 1,322
Decrease in prepaid expenses and other.............................. 668 704 2,486 196 210
Increase (decrease) in accrued interest............................. 3,028 187 (84) 7 (123)
Increase (decrease) in accounts payable and other liabilities....... 350 850 (1,924) (1,078) 566
Decrease in due to related parties.................................. (351) -- -- -- --
--------- -------- -------- -------- --------
Net cash provided by operating activities..................... 11,533 11,505 18,552 7,117 12,559
--------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Investment in bus benches........................................... -- -- -- -- (1,817)
Capital expenditures................................................ (4,387) (4,924) (7,070) (4,251) (2,891)
Proceeds from sale of land.......................................... -- -- 769 -- --
Payments for 1994 Acquisition....................................... -- (44,347) -- -- --
Net Proceeds from 1994 Disposal..................................... -- 21,715 -- -- --
Acquisition of perpetual easements.................................. -- -- -- -- (21,525)
--------- -------- -------- -------- --------
Net cash (used in) investing activities....................... (4,387) (27,556) (6,301) (4,251) (26,233)
--------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt........................................ 125,935 39,252 10,679 5,500 28,353
Principal payments on long-term debt and capital leases............. (104,948) (20,051) (23,977) (10,011) (33,744)
Principal payments on short-term debt............................... -- (675) -- -- --
Redemption of preferred stock and common stock warrants............. (21,328) -- -- -- --
Cash dividends paid on preferred stock.............................. (282) (800) (872) (416) (293)
Transaction fees and expenses relating to refinancing............... (5,408) -- -- -- --
Redemption of preferred and exchangeable preferred stock............ -- -- -- -- (16,369)
Initial public offering............................................. -- -- -- -- 36,643
--------- -------- -------- -------- --------
Net cash (used in) provided by financing activities........... (6,031) 17,726 (14,170) (4,927) 14,590
--------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 1,115 1,675 (1,919) (2,061) 916
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................ 868 1,983 3,658 3,658 1,739
--------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................. $ 1,983 $ 3,658 $ 1,739 $ 1,597 $ 2,655
========= ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --
Cash paid for interest.............................................. $ 7,346 $ 14,095 $ 16,162 $ 8,479 $ 7,616
========= ======== ======== ======== ========
Cash paid for income taxes.......................................... $ 254 $ 343 $ 227 $ 158 $ 244
========= ======== ======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In conjunction with acquisitions described in Note 2, liabilities
were
assumed as follows:
Fair value of assets acquired....................................... $ -- $ 45,696 $ -- -- -- --
Cash paid........................................................... -- (42,636) -- -- --
--------- -------- -------- -------- --------
Liabilities assumed and incurred and issuance of notes payable...... $ -- $ 3,060 $ -- -- --
========= ======== ======== ======== ========
Accretion of common and preferred stock (Notes 2, 5 and 9).......... $ 545 $ 714 $ 1,507 -- $ 689
========= ======== ======== ======== ========
Accrued dividends on exchangeable preferred stock................... $ 31 $ 82 $ 82 94 --
========= ======== ======== ======== ========
Increasing rate redeemable preferred stock dividends
(Note 5).......................................................... $ 1,714 $ -- $ -- -- --
========= ======== ======== ======== ========
Forgiveness of dividends on increasing rate redeemable preferred
stock (Note 5).................................................... $ 2,719 $ -- $ -- -- --
========= ======== ======== ======== ========
Exchange of common stock for Class B preferred stock, charged
to accumulated stockholders capital deficiency (Note 2)........... $ 1,900 $ -- $ -- -- --
========= ======== ======== ======== ========
Additional obligation on CSX transaction (Note 13).................. $ -- $ -- $ -- -- $ 2,198
========= ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 86
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Outdoor Systems, Inc. was incorporated on February 22,
1980, and is engaged principally in the rental of advertising space on outdoor
advertising structures in Houston, Atlanta, Phoenix, Denver, New Orleans,
Louisville, Tucson and Columbus, Ga.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Outdoor Systems, Inc. and its subsidiaries
(collectively, the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Significant accounting policies are as follows:
a. Cash and cash equivalents -- For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid
investments with an initial maturity of three months or less to be cash
equivalents.
b. Property and equipment are recorded at cost. Normal maintenance and
repair costs are expensed. Improvements which extend the life or usefulness
of an asset are capitalized. Depreciation is computed principally on a
straight-line method based upon the following useful lives:
<TABLE>
<S> <C>
Buildings............................................. 25 to 32 years
Advertising structures................................ 5 to 15 years
Vehicles.............................................. 3 to 5 years
Furniture and fixtures................................ 5 years
</TABLE>
c. Deferred financing costs are amortized using the effective interest
method over the terms of the related loans.
d. Intangibles include the excess purchase price over net assets
acquired and are amortized over a 15 year period. Amortization expense was
$435, $47, and $47 in 1993, 1994 and 1995, respectively.
e. Revenue recognition -- The Company recognizes revenue from
advertising contracts when billed, which is on a straight-line pro rata
monthly basis in accordance with contract terms. Costs associated with
providing service for specific contracts are expensed as incurred, although
such contracts generally extend beyond one month.
f. Net income (loss) per share -- Primary income (loss) per common and
common equivalent share is computed on the weighted average number of
common shares outstanding during each year and includes shares issuable
upon exercise of stock options when the effect of such issuance is
dilutive. Such amounts have been adjusted to reflect the 36.4535-for-1
stock split as discussed in Note 12 and the three for two stock split
discussed in Note 13.
g. New accounting pronouncements -- In March 1995, the Financial
Accounting Standards Board issued SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The Company has not completed the process of evaluating the impact
that will result from adopting this Statement. However, management does not
believe the adoption will have a significant impact on the Company's
financial position and results of operations. SFAS No. 121 is required to
be adopted in the first quarter of 1996. In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123 "Accounting for Stock Based
Compensation". The Company has determined that it will not change to the
fair value method and will continue to use Accounting Principles Board
Opinion No. 25 for measurement and recognition of employee stock based
compensation. SFAS No. 123 will require additional disclosures in the 1996
financial statements.
F-7
<PAGE> 87
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
h. Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles necessarily
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 reported period.
Actual results could differ from these estimates.
2. REFINANCING, ACQUISITIONS AND DISPOSALS
1994 ACQUISITION
On December 19, 1994, the Company acquired the assets of Capitol Outdoor
Advertising, Inc. (the "1994 Acquisition") located in Atlanta, Georgia. This
acquisition has been accounted for using the purchase method of accounting, and
the results of operations have been included in the consolidated financial
statements subsequent to the acquisition. Consideration for this transaction
consisted of the following:
<TABLE>
<S> <C>
Cash paid.................................................................. $42,636
Liabilities assumed........................................................ 1,345
-------
Total............................................................ 43,981
Acquisition costs.......................................................... 1,715
-------
Total cost of acquisition........................................ $45,696
=======
The Company has recorded the assets acquired as shown below:
Current assets........................................................... $ 2,789
Property and equipment, principally advertising structures............... 42,626
Other long-term assets................................................... 281
-------
Total............................................................ $45,696
=======
</TABLE>
1994 DISPOSAL
As a condition of allowing the 1994 Acquisition, the United States Justice
Department required the Company to sell substantially all the operating assets
of its business then operating in Atlanta (the "1994 Disposal"). This disposal
was effective December 19, 1994. Assets sold included billboards, certain other
depreciable assets and certain non-cash current assets. These assets were sold
for $22,000 plus a short-term note receivable of $1,355 for the non-cash current
assets. The resulting gain on sale of $4,325 is included in income for 1994.
The following table summarizes unaudited pro forma operating results for
the Company for the two years in the two-year period ended December 31, 1994,
assuming that the 1994 Acquisition and 1994 Disposal had occurred at the
beginning of the applicable year and after giving effect to financing costs and
purchase accounting adjustments.
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Consolidated gross revenues....................................... $66,704 $70,324
======= =======
Income (loss) before extraordinary loss........................... $ 308 $ (563)
======= =======
Net income (loss)................................................. $ 185 $ (338)
======= =======
</TABLE>
REFINANCING
On August 17, 1993, the Company issued $115.0 million of Senior Notes due
2003 (the "Senior Notes"). The Company used the net proceeds of the Senior Notes
and borrowings under a New Credit Facility (Note 4) (which under certain
circumstances may be up to $40.0 million), to (i) repay all
F-8
<PAGE> 88
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding borrowings under the Revolving Credit Agreement, (ii) redeem all
outstanding shares of the Company's Increasing Rate Redeemable Preferred Stock,
(iii) retire the 10% Subordinated Notes and purchase all of the Warrants related
thereto and (iv) pay associated transaction fees and expenses. The redemption of
the Increasing Rate Redeemable Preferred Stock resulted in the Company issuing
shares of a new series of redeemable preferred stock designated Class B
Preferred Stock (Note 5) for 50% of the accrued and unpaid dividends. The
balance of the accrued and unpaid dividends have been credited to accumulated
deficit. The Class B Preferred Stock will be redeemable on December 31, 2003 and
will pay dividends at the rate of 9.0% per annum. In connection with the
refinancing the Company: (i) issued Class B Preferred Stock in exchange for
certain shares of Common Stock owned by one stockholder; (ii) exchanged a
portion of the Junior Subordinated Exchange Notes for Exchangeable Preferred
Stock (Note 4), the redemption date of which will be July 1, 2004; (iii)
modified the 1990 Subordinated Notes to extend their respective maturities to
December 31, 2003, to accrue interest at 7.9% until March 2000 and at 18.0%
thereafter and to amend certain covenants relating thereto; (iv) amended the
terms of its Series A Preferred Stock (which was redesignated as "Class A
Preferred Stock"); and (v) issued to the holders of Common Stock approximately
353 shares of Common Stock for every share of outstanding Common Stock.
Deferred financing costs of $3,287, associated with borrowings which were
retired or redeemed, have been charged as an extraordinary loss as of December
31, 1993.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Advertising structures......................................... $148,107 $153,080
Vehicles....................................................... 1,560 1,832
Furniture and fixtures......................................... 2,406 2,654
Buildings...................................................... 4,674 4,747
Other.......................................................... 148 481
Land........................................................... 5,834 6,628
-------- --------
Total................................................ 162,729 169,422
Less accumulated depreciation.................................. 47,806 57,693
-------- --------
Property and equipment -- net................................ $114,923 $111,729
======== ========
</TABLE>
The Company has granted a security interest in substantially all of its
assets to lenders in connection with its existing credit facility.
F-9
<PAGE> 89
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
10.75% Senior Notes............................................ $115,000 $114,670
Credit Facility, interest at 8.75% as of December 31, 1995..... 33,777 21,000
1990 Subordinated Notes, due through December, 2003, net of
unamortized discount of $816 and $517, respectively.......... 5,184 5,483
Junior subordinated exchange notes, net of unamortized discount
of $348 and $284, respectively............................... 877 941
Other notes payable, interest at 9.5% as of December 31,
1995......................................................... 366 175
-------- --------
Total................................................ 155,204 142,269
Less current maturities...................................... 126 550
-------- --------
Total long-term debt -- net.......................... $155,078 $141,719
======== ========
</TABLE>
Future maturities of long-term debt as of December 31 are as follows:
<TABLE>
<CAPTION>
1995
--------
<S> <C>
1996.............................................................. $ 550
1997.............................................................. 750
1998.............................................................. 6,598
1999.............................................................. 16,750
2000.............................................................. --
Thereafter........................................................ 117,621
--------
Total................................................... $142,269
========
</TABLE>
At December 31, 1995, the Company was in compliance with the covenants of
its debt agreements.
10.75% SENIOR NOTES
In connection with the refinancing discussed in Note 2, on August 17, 1993,
the Company issued the Senior Notes which mature on August 17, 2003. The Senior
Notes are senior, unsecured obligations of the Company ranking pari passu with
all other present and future indebtedness of the Company and prior in right of
payment to all present subordinated indebtedness of the Company and any future
indebtedness of the Company that by its terms is subordinated in right of
payment to the Senior Notes. The Company's obligations under the Credit Facility
(discussed below) are secured by substantially all the Company's assets and, as
a consequence thereof, the holders of such indebtedness will have a prior claim
upon those assets.
The Senior Notes require the Company to comply with certain restrictive
covenants which limit, among other things, the amount of additional indebtedness
the Company or any of its subsidiaries may incur and the payment of dividends
and include other payment restrictions affecting subsidiaries, and prohibits the
Company from incurring transactions with affiliates which are less favorable to
the Company than if conducted with a third party. Under the Indenture, dividends
on Common Stock can be paid when Cumulative Cash Flow (as defined in the
Indenture), exceeds specified multiples of interest expense. As of December 31,
1995, the Company is not able to pay dividends on its Common Stock under this
restriction.
CREDIT FACILITY
In connection with the refinancing discussed in Note 2, the Company entered
into a Credit Facility, due December 1999, which consists of a revolving line of
credit facility, providing for (i) up to $40.0 million in
F-10
<PAGE> 90
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
borrowings that may be used for general corporate purposes, including working
capital requirements and acquisitions and (ii) a $1.5 million letter of credit
subfacility.
The commitments of the lenders under the Credit Facility will be reduced by
20% on each December 31, commencing December 31, 1996 through December 31, 1998
and by the remaining 40% on December 31, 1999. The Company is required to repay
any borrowings to the extent the aggregate amount outstanding under the Credit
Facility exceeds the aggregate commitments in effect from time to time. The
Company may prepay borrowings under the Credit Facility.
At the Company's option, the revolving loans bear interest at a rate per
annum based upon moving CD rates or LIBOR. LIBOR loans are available for
interest periods of one, two, three, six or twelve months. The applicable margin
will vary depending on the Leverage Ratio at the time loans are made.
The Company's obligations under the Credit Facility are secured by first
priority liens (subject to certain permitted encumbrances) on substantially all
the assets of the Company.
The Credit Facility restricts the Company and its subsidiaries other than
Unrestricted Subsidiaries (as defined) from, among other things, (i) incurring
additional indebtedness and contingent liabilities, (ii) creating liens, (iii)
entering into sale and leaseback transactions, (iv) paying dividends (other than
to the Company) in excess of certain amounts and effecting certain other
transactions involving the capital stock of the Company, and (v) amending the
Notes and other material agreements of the Company.
Moreover, conditions of default arise if tobacco advertisement revenues
exceed 20% of the Company's net revenues in 1994 and 15% in any year thereafter.
The Credit Facility also restricts the Company's ability to make capital
expenditures, investments or consummate acquisitions and requires the Company to
comply with financial covenants concerning cash interest coverage and leverage.
1990 SUBORDINATED NOTES
The Company has the right to prepay the 1990 Subordinated Notes provided
that the Company also redeems, pro rata based on face amount outstanding, the
Class A Preferred shares (Note 5) at the same time. The 1990 Subordinated Notes
pay interest on a cash basis, subject to a deferral provision, at 7.9% of the
$6,000 principal amount and were recorded at a discount from the face amount
using an imputed interest rate of 16%. The 1990 Subordinated Notes are
subordinated and junior in right of payment to the borrowings under the Credit
Facility and Senior Notes and are subject to various covenants and restrictions.
FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments". The carrying amounts
and estimated fair values of the Company's financial instruments are as follows:
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair values due to the short-term
maturities of these instruments. Variable rate long-term debt instruments are
estimated to approximate fair values as rates are tied to short-term indices.
The Senior Notes are estimated to approximate market value as the trade
price of those notes approximates par value at December 31, 1995. Other fixed
rate long-term debt instruments are estimated to approximate fair values as
actual rates are consistent with rates estimated to be currently available for
debt of similar terms and remaining maturities.
F-11
<PAGE> 91
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. REDEEMABLE PREFERRED STOCK
Redeemable preferred stock at December 31 consists of the following:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Exchangeable Preferred Stock, 10% cumulative dividend, $1 par
value -- authorized, issued and outstanding, 24,235 shares..... $ 3,422 $ 3,504
Class A Preferred Stock, $1 par value -- authorized, issued and
outstanding 40,000 shares...................................... 4,683 5,526
Class B Preferred Stock, 9% cumulative, $1 par
value -- authorized, 5,000 shares; issued and outstanding,
4,619 shares................................................... 4,619 4,619
------- -------
Total redeemable preferred stock....................... $12,724 $13,649
======= =======
</TABLE>
Exchangeable Preferred Stock has a required redemption in 2004 at a par
value of $4,000 and has a dividend rate of 10%. The Company has the option to
exchange such preferred stock for Junior Subordinated Exchange Notes.
Class A Preferred Stock has a mandatory redemption date of December 31,
2003, at a par value of $200 per share or $8,000 plus all accrued and unpaid
dividends through the redemption date. The Class A Preferred Stock has been
recorded at a discount of 16% which is being accreted through March 31, 1998 by
a charge to accumulated deficit. Dividends are declared and paid at the
discretion of the Company's Board of Directors. As of December 31, 1994 and
1995, no dividends have been declared or paid. The Company has the option to
redeem any or all shares of the Class A Preferred Stock prior to the mandatory
redemption date at the redemption rate plus declared and unpaid dividends, if
any. The preferred stock also requires mandatory redemption at specified amounts
prior to maturity upon the occurrence of the Company's early repayment of its
1990 Subordinated Notes, a significant change in the Company's common
stockholders, or a substantial asset transfer. The mandatory redemption price is
the greater of the redemption value or the alternative redemption price, as
defined in the Company's Articles of Incorporation. The Company is subject to
several negative covenants under the Class A Preferred Stock purchase agreement,
which limits the Company regarding the subsequent issuances of capital stock. In
addition, the holder of the Class A Preferred Stock has the right to elect one
member of the Company's Board of Directors.
Class B Preferred Stock is redeemable in 2003 at a par value of $4,619 plus
all accrued and unpaid dividends through the redemption date, and was issued by
the Company in connection with the refinancing discussed in Note 2.
6. STOCK OPTIONS
The Company has issued options to purchase shares of the Company's common
stock at values believed to represent the fair value of such shares at date of
grant. No options were issued during 1994 or 1995. As of December 31, 1994 and
1995, outstanding options were 2,984,132 shares (2,309,804 at $.07 and 674,328
at $1.24 per share).
The options outstanding are fully exercisable and have no expiration date.
As of December 31, 1995, no options have been exercised.
7. BENEFIT PLANS
The Company has established an Incentive Plan (the "Plan") covering certain
managers and key employees. Incentive Awards ("Awards") made under the Plan in
the form of shares of phantom stock are at the discretion of the Board of
Directors and are based on the individual's performance. Awards are valued
F-12
<PAGE> 92
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
each year based upon the estimated value of the Company. The awards are vested
at the date of grant and any increases in value vest over a four year period.
Distributions are made over a ten year period, which begins upon termination of
employment. For the years ended December 31, 1993, 1994 and 1995, the Company
charged earnings for compensation expense of $134, $218 and $304, respectively.
The Company has a 401(k) savings plan under which it has the discretion of
making contributions as a percentage of employee contributions. For the years
ended December 31, 1993, 1994 and 1995, the Company's contributions to the
401(k) plan were $43, $49 and $56, respectively.
8. INCOME TAXES
The provision (benefit) for income taxes is composed of the following for
the years ended December 31,
<TABLE>
<CAPTION>
1993 1994 1995
---- ------ ----
<S> <C> <C> <C>
Current
Federal................................................... $ -- $ 179 $ 50
State -- including franchise taxes........................ 227 218 177
---- ------ ----
Total current............................................... 227 397 227
Deferred.................................................. -- 1,324 91
---- ------ ----
Total income tax provision........................ $227 $1,721 $318
==== ====== ====
</TABLE>
The Company has federal net operating loss carryforwards of approximately
$17,457 as of December 31, 1995. These net operating loss carryforwards expire
as follows: $1,047 (2003), $3,494 (2004), $4,308 (2005), $4,104 (2006), $1,193
(2007), $3,243 (2008), and $68 (2009).
On January 1, 1992, the Company experienced a change in ownership, as
defined, under Section 382 of the Internal Revenue Code. The effect of this is
to place an annual limit of $4,500 on the use of historic net operating losses
through December 31, 1991. To the extent that this limit exceeds the actual loss
used in any taxable year, such excess may be carried forward to the following
year.
The Company believes, based on operating results in 1995, and its
expectations for the future, that taxable income of the Company will more likely
than not be sufficient to utilize all of the $17,457 net operating loss
carryforwards prior to their ultimate expiration in the year 2009. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
The tax effected temporary differences and carryforwards comprising
deferred taxes at December 31, are as follows:
<TABLE>
<CAPTION>
1994 1995
------- ----------
<S> <C> <C>
Current:
Financial statement expenses not currently deductible for
income tax purposes......................................... $ 421 $ 415
------- -------
Non-current:
Financial statement expenses not currently deductible for
income tax purposes......................................... 181 393
Excess of tax over book depreciation........................... (1,184) (1,992)
Tax loss and other credit carryforwards........................ 7,428 6,854
Valuation allowance............................................ (1,085) --
------- -------
5,340 5,255
------- -------
Total deferred tax asset............................... $ 5,761 $ 5,670
======= =======
</TABLE>
F-13
<PAGE> 93
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of the income taxes to the statutory
rates:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate.................................................. 34% 34% 34%
Impact of adjustment to valuation allowance..................... -- -- (34)
Impact of the net operating losses.............................. (34) -- --
State income taxes, franchise tax............................... 67 20 7
Other........................................................... -- 2 3
--
--- ---
Reported rate................................................... 67% 56% 10%
=== == ===
</TABLE>
9. COMMITMENTS AND OTHER
COMMON STOCK SUBJECT TO PUT OPTION
In 1990, the Company issued 1,072,662 shares of common stock in connection
with the financing of an acquisition. Under certain circumstances, the Company
has the option to redeem the common stock at any time prior to March 1998;
however, subsequent to March 1998, at the request of the holder, the Company is
required to redeem the common stock at a redemption price based upon the
appraised value of the common stock as of the redemption date.
Because this common stock is subject to redemption at the option of the
holder, the Company is accreting the stock to its estimated appraised value over
the redemption period based upon annual estimates of value determined as a
multiple of cash flow. Accretion is calculated on a straight-line basis and is
charged directly to stockholders' deficit. Annual changes in value are reflected
retroactively.
LEASES
The Company leases land and equipment under operating leases with various
terms expiring at various dates. Certain of the land leases provide for periodic
rental increases. At December 31, 1995, minimum annual rentals under all
operating leases for the next five years are as follows:
<TABLE>
<S> <C>
1996............................................................... $12,659
1997............................................................... 8,418
1998............................................................... 5,128
1999............................................................... 2,347
2000............................................................... 799
Thereafter......................................................... 4,660
-------
Total.................................................... $34,011
=======
</TABLE>
Operating lease expense was $9,757, $9,969 and $13,533 for 1993, 1994 and
1995, respectively.
LITIGATION
The Company is involved in various legal matters that management considers
to be in the normal course of business. In management's opinion, based upon the
advice of legal counsel, such matters will be settled without material effect on
the Company's financial position or results of operations.
10. TRANSACTIONS WITH RELATED PARTIES
During 1993, 1994 and 1995, the Company entered into a number of
transactions with officers and/or stockholders of the Company, affiliated
companies and affiliated partnerships.
F-14
<PAGE> 94
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes those transactions as of and for the years ended
December 31:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Due from employees and related parties, included in other
current assets.............................................. $101 $ 59 $ 62
==== ==== ====
Rental income from affiliated company......................... $ 60 $ 45 $ 24
==== ==== ====
Land rent paid to affiliated company and related parties...... $140 $139 $139
==== ==== ====
Administrative services agreement............................. $ 94 $104 $ 35
==== ==== ====
Services agreement............................................ $351 $250 $350
==== ==== ====
</TABLE>
11. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
1994:
Net revenues..................................... $ 10,502 $ 12,798 $ 13,457 $ 15,320
Operating income................................. 1,661 3,891 4,308 5,262
Gain on 1994 Disposal............................ -- -- -- 4,325
Net income (loss)................................ (1,397) (5) (546) 3,281
Net income (loss) per common share............... (.14) (.04) (.08) .24
</TABLE>
The fourth quarter of 1994 includes other income of $1.0 million relating
to cash payments received from the early termination of agreements made in
connection with an acquisition in 1992.
<TABLE>
<S> <C> <C> <C> <C>
1995:
Net revenues..................................... $ 13,758 $ 15,979 $ 16,886 $ 18,190
Operating income................................. 3,048 5,128 5,586 6,523
Net income (loss)................................ (1,265) 425 1,400 2,208
Net income (loss) per common share............... (.11) (.01) .04 .10
</TABLE>
12. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
In February 1996, the Company reached an agreement with the holders of the
Common Stock Subject to Put Option (Note 9) under which such stockholders will
sell these shares at the time the Company completes an initial public offering
("IPO") if the IPO occurs in 1996. The Company will utilize a portion of the net
proceeds from the IPO to redeem at par or face value all of the outstanding
Class A Preferred Stock and the 1990 Subordinated Notes which are also held by
these shareholders.
The Company is preparing for an IPO of its common stock, which if
successful will result in the removal of the put option as discussed above. The
removal of the put option will result in the liability representing the Common
Stock Subject to Put Option to be credited to stockholders' equity.
In connection with the IPO contemplated during 1996, the Company's Board of
Directors adopted a resolution which on April 17, 1996 increased the authorized
number of common shares to 60,000,000 and split the common stock 36.4535 for 1.
In addition, the Board of Directors authorized the issuance of 12,000,000 shares
of preferred stock, the terms of which will be designated at the time of
issuance. All per share information in these financial statements has been
adjusted to give effect to this split.
In connection with the IPO, effective January 1, 1996, the Company ceased
allocating amounts to the accounts maintained under the Incentive Plan (Note 7).
The Company is offering to each current employee
F-15
<PAGE> 95
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
who is a participant in the Incentive Plan the alternative of having their
account settled in cash, in shares of the Common Stock of the Company, or both,
with actual distributions of cash or Common Stock subject to both vesting
requirements and terms and conditions similar to those under which distributions
would have been made under the Incentive Plan. To the extent participants elect
to settle their accounts in Common Stock, the Company would issue (subject to
the vesting requirements and distribution terms and conditions) to such
participants Common Stock at the initial public offering price. As of December
31, 1995, approximately $1.0 million has been previously charged to expense and
is accrued as a liability. Those portions of accounts under the Incentive Plan
that were not vested as of January 1, 1996 aggregating $0.6 million will vest
and will be charged to expense over a four-year period under a new vesting
schedule following the settlement.
Upon completion of the IPO, the Company will issue options for 1,216,049
common shares to key employees at an exercise price equal to the IPO price. Such
options will vest over a four year period.
13. UNAUDITED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
applicable to interim financial statements. Accordingly, they do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments and reclassifications considered necessary for a fair and comparable
presentation have been included and are of a normal recurring nature. Operating
results for the six months ended June 30, 1996, are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996.
COMPLETION OF INITIAL PUBLIC OFFERING
On April 24, 1996, the Company completed its IPO by selling 4,016,088
shares of its Common Stock. The Company received approximately $37.4 million net
of underwriting discounts and commissions.
REDEMPTION OF DEBENTURES AND PREFERRED STOCK
As contemplated in the IPO completed April 24, 1996, the Company redeemed
$6,108 of Subordinated Debt and $10,364 of Preferred Stock for cash of $7,514
and $12,619, respectively. These redemptions of the subordinated debt resulted
in an extraordinary loss of $844, net of tax benefit of $562 and the redemption
of the Preferred Stock resulted in a reduction of income attributable to common
share holdings of $2,254, representing the unamortized discount on the Preferred
Stock.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
to be Disposed Of". The adoption of SFAS No. 121 had no effect on these interim
unaudited financial statements.
ACQUISITIONS
On May 22, 1996, the Company completed the acquisition of perpetual
easements from CSX Realty Development Corporation ("CSX") for $21.6 million in
cash and certain future payments in an aggregate amount not to exceed $10.0
million payable over a period of ten years beginning no later than the year 2006
with the exact amount and timing to be determined based upon the results of the
Company's operations of the easements. The perpetual easements are located on
real property interests of CSX for the purpose of licensing
F-16
<PAGE> 96
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rights to operate outdoor advertising displays which are leased to independent
outdoor advertising companies and will be amortized on a straight line basis
over 40 years.
On July 9, 1996, the Company signed a purchase agreement with Gannett Co.,
Inc. under which the Company will acquire Gannett Outdoor for $690.0 million
cash, subject to certain working capital adjustments on the date of closing. The
Company has obtained a commitment for the financing. The completion of the
transaction is subject to a number of conditions, including the expiration or
early termination of the waiting period under the Hart Scott Rodino Anti-Trust
Improvement Act of 1976.
STOCK SPLIT
On June 27, 1996, the Board of Directors authorized a 3 for 2 stock split
in the form of a stock dividend payable on July 22, 1996 to holders of record on
July 8, 1996. All share and per share data in these financial statements have
been adjusted to reflect the split.
F-17
<PAGE> 97
INDEPENDENT AUDITORS' REPORT
Board of Directors
Outdoor Systems, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated statements of operations of
Capitol Outdoor Advertising, Inc. and Subsidiary and its predecessor company,
Creative Outdoor Advertising of Atlanta, Inc. ("historical information")
(together the "Company"), for the seven month period ended July 30, 1993, the
five month period ended December 31, 1993 and the nine month period ended
September 30, 1994. The Company was acquired in December 1994 by Outdoor
Systems, Inc. (Note 1). This historical information is the responsibility of
Company management. Our responsibility is to express an opinion on the
historical information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the historical information is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the historical information. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation of the historical information. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the historical information referred to above presents
fairly, in all material respects, the results of operations of the Company for
the seven month period ended July 30, 1993, the five month period ended December
31, 1993 and the nine month period ended September 30, 1994 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
January 16, 1995
F-18
<PAGE> 98
CAPITOL OUTDOOR ADVERTISING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1993
--------------------------- 1994
SEVEN MONTH FIVE MONTH -------------
PERIOD ENDED PERIOD ENDED NINE MONTH
JULY 30, DECEMBER 31, PERIOD ENDED
1993 1993 SEPTEMBER 30,
------------ ------------ -------------
(000'S OMITTED)
<S> <C> <C> <C>
REVENUES:
Outdoor advertising.................................... $10,516 $8,108 $15,559
Less agency commission................................. (1,461) (1,151) (2,245)
------- ------- -------
Net revenues................................... 9,055 6,957 13,314
------- ------- -------
OPERATING EXPENSES:
Direct advertising..................................... 5,362 3,557 6,838
General and administrative............................. 1,949 1,165 2,233
Depreciation and amortization.......................... 1,464 1,016 1,837
Other -- net........................................... 2 691 966
------- ------- -------
Total operating expenses....................... 8,777 6,429 11,874
------- ------- -------
OPERATING INCOME......................................... 278 528 1,440
INTEREST EXPENSE -- Net.................................. 5,156 1,438 2,733
------- ------- -------
LOSS BEFORE INCOME TAX BENEFIT........................... (4,878) (910) (1,293)
INCOME TAX BENEFIT....................................... -- 318 512
------- ------- -------
NET LOSS................................................. $(4,878) $ (592) $ (781)
======= ======= =======
</TABLE>
See notes to consolidated statements of operations.
F-19
<PAGE> 99
CAPITOL OUTDOOR ADVERTISING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS
SEVEN MONTH PERIOD ENDED JULY 30, 1993,
FIVE MONTH PERIOD ENDED DECEMBER 31, 1993 AND
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1994
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
On December 19, 1994, Outdoor Systems Inc., ("OSI") acquired from a
subsidiary of CIGNA Corporation ("CIGNA") all of the outdoor operating assets of
Capitol Outdoor Advertising, Inc. ("Capitol"), a company engaged in the outdoor
advertising business in Atlanta, Georgia, for $38,750,000 plus additional
consideration for certain working capital assets. This statement of operations
of Capitol, is prepared on the basis set forth below:
During the seven month period ended July 30, 1993, Capitol operated as
Creative Outdoor Advertising of Atlanta, Inc. ("Creative") which was a
subsidiary of Adams Outdoor Advertising ("Adams"). On July 30, 1993, in partial
settlement of amounts owed CIGNA by Adams, a subsidiary of CIGNA acquired from
Adams substantially all of the assets of Creative and assumed its liabilities.
At that date, the name was changed from Creative to Capitol. As a result, during
the period covered by these consolidated financial statements, Capitol was a
subsidiary of two different parent companies with two different cost bases. The
statement of operations for the seven month period ended July 30, 1993, when
Creative was a subsidiary of Adams, is, therefore, not comparable to the
statements of operations for the five and nine month periods ended December 31,
1993 and September 30, 1994, respectively, when Capitol was a subsidiary of
CIGNA.
The consolidated statements of operations includes historical operations of
the operations of Capitol under the ownership discussed above and may not be
representative of the operations under different ownership. Management fees of
$369,700 during the seven month period ended July 30, 1993, have been included
in administrative expenses.
A summary of significant accounting policies:
a. Revenues are recognized from advertising contracts when billed, which is
on a monthly basis in accordance with contract terms. Costs associated with
providing service for specific contracts are charged to expense as incurred,
although such contracts generally extend beyond one month.
b. Depreciation expense is computed using the straight-line method at rates
estimated to depreciate the applicable assets over their estimated useful lives.
c. Barter Transactions -- In the normal course of business, the Company
enters into barter transactions which represent the exchange of advertising for
goods or services recorded generally at the estimated fair value of the products
or services received. Barter revenue is recognized when advertising services are
rendered, and barter expense is recognized when the related product or services
are received.
2. INCOME TAXES
During the five month period ended December 31, 1993 and the nine month
period ended September 30, 1994, the Company was included in the consolidated
United States federal income tax return filed by CIGNA. In accordance with a tax
sharing agreement, the provision for federal income tax expense or benefit
allocated to the Company is computed as if the Company was filing a separate
federal income tax return and includes benefits that were available by virtue of
the Company being included in CIGNA's consolidated tax return filing.
F-20
<PAGE> 100
CAPITOL OUTDOOR ADVERTISING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
The components of the benefit for income taxes are as follows:
<TABLE>
<CAPTION>
FIVE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1994
------------ -------------
(000'S OMITTED)
<S> <C> <C>
Current:
Federal.......................................... -- $ (796)
State............................................ -- (231)
--------
Total current...................................... -- (1,027)
Deferred........................................... $ (318) 515
------- --------
Total benefit for income taxes........... $ (318) $ (512)
======= ========
</TABLE>
A reconciliation of the difference between the benefit for income taxes at
the statutory United States federal income tax rate is as follows for the nine
month period ended September 30, 1994:
<TABLE>
<CAPTION>
FIVE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1994
------------ -------------
(000'S OMITTED)
<S> <C> <C>
Income tax at statutory United States federal
income tax rate.................................. $ (318) $ (440)
(Decrease) increase in taxes:
State taxes -- net............................... -- (76)
Other............................................ -- 4
------- --------
Total.................................... $ (318) $ (512)
======= ========
</TABLE>
Deferred income taxes are generally recognized when assets and liabilities
have different carrying values for financial statement and tax reporting
purposes. These differences result primarily from depreciation
3. INTEREST
Substantially all interest expense reflected in the consolidated statements
of operations for the periods ended December 31, 1993 and September 30, 1994
arose from debt due to affiliates. All such debt was repaid from the proceeds
from the sale to OSI.
Substantially all interest expense for the seven month period ended July
31, 1993 arose from debt due to CIGNA, which as explained in Note 1, was
partially settled through the acquisition of Creative by CIGNA.
4. COMMITMENTS AND CONTINGENCIES
The Company leases signs and space on which to place signs in commercial
and industrial zoned areas along high-traffic routes in cities or close to
highly populated urban areas. The Company also leases a building used in its
operations. These leases have terms ranging from one to fifteen years.
Creative entered into a master lease agreement in 1991 with Adams Outdoor
Leasing Company, Inc. ("AOL"), a company related through common ownership. Lease
rents of approximately $266,000 were paid to AOL in the seven month period ended
July 31, 1993.
F-21
<PAGE> 101
CAPITOL OUTDOOR ADVERTISING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
At September 30, 1994, minimum rental payments under these noncancelable
operating leases having terms greater than one year are approximately as
follows:
<TABLE>
<S> <C>
1994..................................................... $ 792,750
1995..................................................... 2,200,409
1996..................................................... 1,687,344
1997..................................................... 1,337,313
1998..................................................... 929,407
1999..................................................... 637,145
----------
Total.......................................... $ 7,584,368
==========
</TABLE>
In some of the localities in which the Company operates, outdoor
advertising is the object of restrictive, and in some cases, prohibitive zoning
regulations. Management expects federal, state and local regulations to continue
to be a significant factor in the operation of the Company's business. It is not
possible to predict the extent to which such regulations could affect future
earnings.
The Company is the defendant in certain legal matters, the outcome of which
is currently unknown. Management believes the Company's liability, if any, will
not have a material effect in the accompanying consolidated financial
statements.
5. DEFERRED SAVINGS AND PROFIT SHARING PLAN
The Company has a 401(k) deferred savings and profit sharing plan.
Employees must have attained age 21 and completed one year of service to
participate in the Plan. Employees may contribute up to 10% of their salaries,
and the Company matches employee contributions at the rate of 50% (to a maximum
of 3% of the employee's compensation). The Company's expense related to the plan
totaled approximately $27,000, $28,000 and $9,000 for the seven, five and nine
month periods ended September 30, 1994, respectively.
* * * * * *
F-22
<PAGE> 102
INDEPENDENT AUDITORS' REPORT
Gannett Co., Inc.
Arlington, Virginia
We have audited the accompanying combined statements of net assets to be
acquired by Outdoor Systems, Inc. as of December 31, 1995 and 1994, and the
related combined statements of revenues and direct expenses of net assets of
Gannett Outdoor to be acquired by Outdoor Systems, Inc. (collectively, "the
financial statements") for each of the three years in the period ended December
31, 1995, pursuant to the Asset Purchase Agreement among Gannett Co., Inc. and
Outdoor Systems, Inc. dated July 9, 1996, as described in Note 1 to the
financial statements. The financial statements include the accounts of the
entities set forth in Note 1, all of which (collectively "Gannett Outdoor") are
under common ownership and common management of Gannett Co., Inc. These
financial statements are the responsibility of the management of Gannett
Outdoor. Our responsibility is to express an opinion on the 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.
The accompanying financial statements were prepared to present the combined
net assets and the revenues and direct expenses of net assets of Gannett Outdoor
to be acquired by Outdoor Systems, Inc. pursuant to the Asset Purchase Agreement
described in Note 1, and are not intended to be a complete presentation of
Gannett Outdoor's assets and liabilities or revenues and direct expenses.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined net assets of Gannett Outdoor to be acquired by
Outdoor Systems, Inc. pursuant to the Asset Purchase Agreement described in Note
1, as of December 31, 1995 and 1994, and the combined revenues and direct
expenses of net assets of Gannett Outdoor to be acquired by Outdoor Systems,
Inc. for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
July 25, 1996
F-23
<PAGE> 103
GANNETT OUTDOOR
COMBINED STATEMENTS OF NET ASSETS TO BE ACQUIRED BY
OUTDOOR SYSTEMS, INC.
(DOLLARS IN THOUSANDS)
ASSETS TO BE ACQUIRED
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
-------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash............................................................... $ 2,460
Marketable securities.............................................. 12 $ 12
Receivables -- net................................................. 46,598 53,127 $ 60,426
Other current assets -- principally prepaid leases................. 13,843 15,038 20,776
-------- -------- --------
Total current assets........................................ 62,913 68,177 81,202
PROPERTY AND EQUIPMENT -- Net (Note 3)............................... 141,204 136,183 132,636
INTANGIBLES -- Net (Note 3).......................................... 43,841 42,046 41,243
OTHER ASSETS......................................................... 1,235 1,242 1,175
-------- -------- --------
Total assets to be acquired................................. 249,193 247,648 256,256
-------- -------- --------
LIABILITIES TO BE ASSUMED AND NET ASSETS
CURRENT LIABILITIES:
Accounts payable................................................... 8,983 8,042 13,136
Accrued liabilities................................................ 6,757 7,652 8,914
Deferred income.................................................... 1,381 878 1,063
-------- -------- --------
Total current liabilities................................... 17,121 16,572 23,113
DEFERRED TAXES (Note 8).............................................. 6,737 6,853 6,856
OTHER LIABILITIES.................................................... 653 283 349
-------- -------- --------
Total liabilities to be assumed............................. 24,511 23,708 30,318
COMMITMENTS AND CONTINGENCIES (Note 5)
-------- -------- --------
NET ASSETS TO BE ACQUIRED............................................ $224,682 $223,940 $225,938
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-24
<PAGE> 104
GANNETT OUTDOOR
COMBINED STATEMENTS OF REVENUES
AND DIRECT EXPENSES OF NET ASSETS
TO BE ACQUIRED BY OUTDOOR SYSTEMS, INC.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTH PERIODS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net advertising revenues.................. $225,165 $235,236 $247,271 $115,888 $117,733
Other income (loss)....................... 25 (67) 193 266 201
-------- -------- -------- -------- --------
Total revenues.................... 225,190 235,169 247,464 116,154 117,934
-------- -------- -------- -------- --------
DIRECT EXPENSES (Note 6):
Direct advertising........................ 159,927 163,362 171,091 82,955 82,410
General and administrative................ 30,572 33,866 33,101 16,123 17,169
Depreciation and amortization............. 19,669 19,692 17,262 8,743 8,822
-------- -------- -------- -------- --------
Total operating expenses.......... 210,168 216,920 221,454 107,821 108,401
-------- -------- -------- -------- --------
EXCESS OF REVENUES OVER DIRECT EXPENSES..... $ 15,022 $ 18,249 $ 26,010 $ 8,333 $ 9,533
======== ======== ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-25
<PAGE> 105
GANNETT OUTDOOR
NOTES TO COMBINED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
UNAUDITED SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
On July 9, 1996, Gannett Co., Inc. ("Gannett") and Outdoor Systems, Inc.
("Outdoor Systems") signed an agreement under which Outdoor Systems will acquire
substantially all of the outdoor advertising business of Gannett ("the Purchase
Agreement"). The Gannett Outdoor Advertising Business in Houston, Texas is not
reflected in these financial statements because it is not covered by the
Purchase Agreement. Consummation of the Purchase Agreement is subject to a
number of conditions, including the expiration or early termination of the
waiting period under the Hart Scott Rodino Anti-Trust Improvement Act of 1976.
The accompanying combined statements of net assets to be acquired by
Outdoor Systems and the related combined statements of revenues and direct
expenses of net assets to be acquired by Outdoor Systems include the accounts of
the outdoor advertising division of Gannett and the accounts of its outdoor
advertising subsidiaries, Mediacom Inc. and New York Subways Advertising Co.
(referred to collectively as "Gannett Outdoor" or "the Companies"). The
Companies operate the outdoor advertising business of Gannett and have no
separate legal status or existence.
The statement of net assets to be acquired by Outdoor Systems includes the
assets and liabilities of Gannett Outdoor on the historical cost basis of
Gannett. The related statement of revenues and direct expenses includes
historical revenues and direct expenses of the Companies when owned by Gannett
and may not be representative of the revenues and direct expenses when under
different ownership. These financial statements reflect certain direct expenses
that are administered by Gannett and are allocated to Gannett Outdoor (Note 6).
Certain other indirect expenses which are reflected as a part of Outdoor
Advertising operations of Gannett have been excluded from these financial
statements because of their indirect nature. The expenses reflected in these
statements are not necessarily indicative of the costs and expenses that would
have resulted had the Companies been operated by Outdoor Systems. Charges for
interest and taxes have not been included in these financial statements because
they are considered to be corporate expenses of Gannett and not allocable to the
Companies.
Because the financial statements are not those of a separate legal entity
and the related cash flow activities for the years would not be practicable to
obtain or meaningful, a separate statement of cash flows is not presented.
The Companies are engaged principally in the rental of advertising space on
outdoor advertising structures in the New York Tri State area, Michigan,
Chicago, California, Kansas City, St. Louis, Denver, and throughout Canada.
2. SIGNIFICANT ACCOUNTING POLICIES
Revenues -- The Companies recognize revenues when billed, which is on a
monthly straight-line pro rata basis in accordance with contract terms. Costs
associated with providing service for specific contracts are expensed as
incurred, although such contracts generally extend beyond one month.
Property and equipment are recorded at cost. Normal repairs and maintenance
are expensed while improvements which extend the useful life of the asset are
capitalized. Depreciation is computed on a straight-line basis over the
following useful lives:
<TABLE>
<S> <C>
Buildings............................................. 30 to 40 years
Advertising structures................................ 10 to 30 years
Vehicles.............................................. 4 to 15 years
Other equipment....................................... 5 to 10 years
</TABLE>
F-26
<PAGE> 106
GANNETT OUTDOOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Intangibles are principally excess of purchase price over net assets
acquired and those acquired after October 31, 1970 are amortized over 40 years.
The Companies periodically review for changes in circumstances to determine
whether there are conditions that indicate that the carrying amount of such
assets may not be recoverable. If such conditions are deemed to exist, the
Companies will determine whether estimated future undiscounted cash flows are
less than the carrying amount of such assets, in which case the Companies will
calculate an impairment loss. Any impairment loss will be recorded as a
component of the operating expenses.
Foreign Currency assets and liabilities are generally translated into U.S.
dollars using the exchange rates in effect at the statement of net assets date.
Revenue and direct expenses are generally translated using the average exchange
rate throughout the period.
Use of Estimates -- The preparation of these financial statements
necessarily 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 reported period. Actual results
could differ from these estimates.
3. PROPERTY AND EQUIPMENT AND INTANGIBLES
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Advertising structures......................................... $249,971 $253,716
Equipment...................................................... 33,694 35,612
Buildings and improvements..................................... 23,953 24,186
Construction in progress....................................... 2,099 3,816
Land........................................................... 9,936 10,437
-------- --------
Total................................................ 319,653 327,767
Less accumulated depreciation.................................. 178,449 191,584
-------- --------
Property and equipment -- net................................ $141,204 $136,183
======== ========
</TABLE>
Depreciation expense was $16,628, $16,725 and $15,467 for the three years
ended December 31, 1993, 1994 and 1995, respectively.
Intangibles consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Total intangibles.............................................. $ 57,673 $ 57,255
Less accumulated amortization.................................. 13,832 15,209
-------- --------
Intangibles -- net............................................. $ 43,841 $ 42,046
======== ========
</TABLE>
Amortization expense was $3,041, $2,967 and $1,795 for the three years
ended December 31, 1993, 1994 and 1995, respectively.
4. EMPLOYEE BENEFIT PLANS
Substantially all of the Companies' non-union domestic employees are
covered by Gannett's principle defined benefit retirement plan. (Note 6) Under
the terms of the Purchase Agreement, Gannett will retain all domestic pension
obligations and will retain all plan assets.
Mediacom, Inc., Gannett Outdoor's Canadian operation, maintains a
combination of a defined benefit/defined contribution pension plan which
provides retirement benefits for substantially all employees based
F-27
<PAGE> 107
GANNETT OUTDOOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
on length of service and remuneration. Pension obligations are funded with
independent trustees in accordance with legal requirements.
The Plan's funded status at December 31, 1994, the date of the most recent
actuarial valuation, less amounts applicable to the defined contribution plan
and amounts recognized in the combined statement of net assets to be acquired at
December 31, 1995 are as follows:
<TABLE>
<S> <C>
Accumulated benefit obligation..................................... $ 9,512
Effect of projected future compensation increases.................. 4,362
-------
Projected benefit obligation....................................... 13,874
Plan assets at fair value.......................................... 13,540
-------
Plan assets less than projected benefit obligation................. 334
Unrecognized loss.................................................. 67
-------
Accrued pension cost............................................... $ 267
=======
</TABLE>
Assumptions at December 31 used in accounting for the Plan were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Discount or settlement rate............................. 8.0 % 8.0 % 8.0 %
Rate of increase in compensation levels................. 6.5 % 6.5 % 6.5 %
Expected long-term rate of return on Plan assets........ 8.0 % 8.0 % 8.0 %
</TABLE>
The Plan's assets consist of money market accounts and investments in
common stocks, mutual funds, real estate and corporate bonds.
In addition, the Company has 401(k) plans for substantially all United
States employees and certain locations have union sponsored pension plans for
union employees to which the Company makes contractual contributions. The
companies contributed $116, $136 and $153 to these plans for the three years
ended December 31, 1993, 1994 and 1995, respectively.
5. COMMITMENTS AND CONTINGENCIES
Leases -- The Companies lease land, buildings and equipment under operating
leases with various terms expiring at various dates. At December 31, 1995,
minimum annual rentals under all non cancellable operating leases are as
follows:
<TABLE>
<S> <C>
1996............................................................... $ 3,141
1997............................................................... 3,125
1998............................................................... 3,071
1999............................................................... 2,536
2000............................................................... 1,609
Thereafter......................................................... 2,964
-------
Total.................................................... $16,446
=======
</TABLE>
Operating lease expense was $61,553, $61,302 and $62,616 for the three
years ended December 31, 1993, 1994 and 1995. The majority of such leases are
for advertising structures on a month to month basis.
The Companies operate under exclusive sales contracts with various
municipalities including the Department of Transportation ("DOT") in various
cities and the Metropolitan Transit Authority of New York ("MTA") expiring from
1996 through 2009. Such contracts allow for the exclusive right to advertise on
buses, subways and transit shelters within these communities in exchange for a
percentage of the revenues
F-28
<PAGE> 108
GANNETT OUTDOOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
generated under the contracts. Annual consideration on the contract with the MTA
is subject to an annual minimum guarantee of $6,010,000.
Litigation -- The Companies are involved in various legal matters that
management considers to be in the normal course of business. In the Companies
management's opinion, based upon the advice of legal counsel, such matters will
be settled without material effect on the Companies' financial position or
results of operations.
6. TRANSACTIONS WITH GANNETT
During 1993, 1994 and 1995, the Companies received corporate charges from
Gannett for insurance and substantially all employee benefit costs. Such amounts
were allocated to the Companies based upon estimates of the Companies' pro rata
portion of such costs. Amounts included in the statements of revenues and direct
expenses for such items are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Insurance................................................ $3,162 $2,450 $2,862
Employee benefits........................................ $2,897 $3,158 $3,262
</TABLE>
7. CANADIAN OPERATIONS
For the three years ended December 31 amounts included in the combined
financial statements applicable to Canadian operations were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenues.............................................. $56,417 $57,686 $66,380
Excess of revenues over direct expenses............... $ 5,294 $ 5,738 $ 7,712
Assets................................................ $84,376 $47,714 $51,888
</TABLE>
8. OTHER
Deferred taxes are applicable to Mediacom Inc. the Companies' Canadian
subsidiary. Such taxes arise principally from the amortization of advertising
structures for tax purposes over a shorter period than amortized for financial
statement purposes.
9. NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
Basis of Presentation -- The accompanying unaudited interim combined
financial statements have been prepared utilizing generally accepted accounting
principles applicable to interim financial statements. Accordingly, such
financial statements are limited as set forth in Note 1 and also do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments and reclassifications considered necessary for a fair and comparable
presentation have been included and are of a normal recurring nature. Operating
results for the six month period ended June 30, 1996, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996.
Gannett Acquisition -- On July 9, 1996, Gannett signed the Purchase
Agreement with Outdoor Systems under which Outdoor Systems will acquire Gannett
Outdoor for approximately $690,000 cash, subject to certain working capital
adjustments on the date of closing. The completion of the Agreement is subject
to a number of conditions, including the expiration or early termination of the
waiting period under the Hart Scott Rodino Anti-Trust Improvement Act of 1976.
F-29
<PAGE> 109
GANNETT OUTDOOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting Matters -- On January 1, 1996, the Companies adopted Statement
of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed Of. The
adoption of SFAS No. 121 had no effect on these combined financial statements.
F-30
<PAGE> 110
[INSIDE BACK COVER]
[Map of the United States and Canada under the
caption "Outdoor Systems Advertising" showing
state and principal bounderies and
identifying various cities]
<PAGE> 111
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING
THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
The Transactions...................... 9
Risk Factors.......................... 11
Use of Proceeds....................... 17
Capitalization........................ 17
Unaudited Consolidated Pro Forma
Financial Information............... 18
Selected Consolidated Financial and
Other Data.......................... 28
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................. 30
Business.............................. 37
Management............................ 44
Principal Stockholders................ 46
Description of Senior Credit
Facility............................ 48
Description of the Notes.............. 52
Underwriting.......................... 75
Legal Matters......................... 76
Experts............................... 76
Available Information................. 76
Incorporation of Certain Documents by
Reference........................... 77
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
$150,000,000
OUTDOOR SYSTEMS
% SENIOR SUBORDINATED
NOTES DUE 2006
------------------------
P R O S P E C T U S
-----------------------
CIBC WOOD GUNDY SECURITIES CORP.
ALEX. BROWN & SONS
INCORPORATED
, 1996
======================================================
