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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________.
Commission file number 0-25982
METRO DISPLAY ADVERTISING, INC.
(Name of small business issuer in its charter)
California 33-0093323
(State of incorporation) (I.R.S. Employer Identification No.)
15265 Alton Parkway, Suite 100, Irvine, California 92618
(Address of principal executive offices) (zip code)
Issuer's telephone number: (714) 727-3333
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to filing requirements for the past 90 days.
YES __X__ NO _____
Check mark indicates that disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $7,658,806.
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 1997 was approximately $8,799,162. No public
trading market exists for the issuer's voting stock, and no bid or asked prices
are quoted. The foregoing estimated value represents the book value of the
issuer's voting stock, based on the registrant's December 31, 1996 audited
financial statements, held by non-affiliates as of April 12, 1997.
There were 963,030 shares outstanding of registrant's common stock as of
February 28, 1997.
The following documents are incorporated by reference into this report:
None
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<PAGE>
PART I
Item 1. Description of Business.
General
Metro Display Advertising, Inc., a California corporation (the "Company"),
is primarily in the business of renting advertising space on panels located in
bus stop shelters. Each bus stop shelter ("shelter") consists of a covered bus
stop bench and two advertising panels protected by acrylic. The shelters are
owned, installed and maintained by the Company and are currently located in
approximately 60 municipalities throughout Southern California.
The Company also rents advertising space in shelters located in Clark
County, Nevada, including the City of Las Vegas, through Bustop Shelters of
Nevada, Inc., a Nevada corporation ("BSON"), its wholly-owned subsidiary. See
"Item 1. Description of Business - Bustop Shelters of Nevada, Inc."
As of February 28, 1997, 2,126 of the shelters were installed and
maintained by the Company and 584 shelters were installed and maintained in
Nevada by BSON. Advertising sales for the Company's shelters are effected
primarily by Van Wagner Communications, Inc. ("Van Wagner"), an unaffiliated
advertising company, under an advertising and marketing agreement. Local
advertising sales are effected through the Company's in-house advertising staff.
During the fiscal year ended December 31, 1996, approximately 20% of all
advertising revenues were derived from sales effected through the Company's
in-house staff, and the balance was derived from sales made by Van Wagner. The
Company has also entered into a joint venture agreement with Van Wagner for the
purposes of seeking additional franchises and/or licenses for bus stop shelters
throughout California and the United States. See "Item 1. Description of
Business - Marketing."
Background of the Company/Prior Bankruptcy
The Company was incorporated in California in 1984 and subsequently
reincorporated in 1987. Until early in 1992, the Company was controlled and
managed by persons no longer associated with the Company ("Prior Management").
Under Prior Management, the Company was in the business of designing,
manufacturing, selling, installing and maintaining shelters and renting
advertising space in such shelters. In particular, however, until the end of
December 1991, the Company's primary business and source of revenues was the
"sale" of shelters to unaffiliated investors. The shelters were "sold" to
investors by the Company, generally for $10,000 per shelter, and then were
"leased" back by the Company. The Company, in turn, agreed to install and
maintain the shelters on behalf of the owner/investors and to pay the
owner/investors a fixed monthly rental. Prior Management, however, was unable to
derive sufficient advertising revenues from the shelters it leased to make the
promised monthly rent payments to the owner/investors of the shelters. (As of
December 1991, the Company generated approximately $200,000 per month from
shelter advertising revenues, while its monthly obligation to its shelter
owner/investors was approximately $1,300,000.) Accordingly, the Company
attempted to cover the cash shortfall through increased sales of additional
shelters (many of which were never installed).
In 1991, the Securities and Exchange Commission (the "Commission")
commenced an investigation of Prior Management and the Company for the alleged
sale of unregistered securities and other possible causes of action. The
Commission alleged that the sale and leaseback of the shelters constituted an
unlawful sale of securities. In January 1992, the Commission obtained an
injunction in the United States District Court for the Central District of
California against Prior Management to prevent the sale of additional shelters.
In conjunction with the Commission's investigation, the Federal Bureau of
Investigation ("FBI") commenced an investigation of Prior Management.
<PAGE>
On January 22, 1992, the Company and Continental Shelters, Inc., a
California corporation then owned and controlled by Prior Management, filed a
voluntary petition before the United States Bankruptcy Court for the Central
District of California (the "Bankruptcy Court") for relief under Chapter 11 of
Title 11 of the United States Code (the "Bankruptcy Code"). On January 29, 1992,
Prior Management resigned as officers of the Company. On February 1, 1992, the
Company entered into a Consent to Entry of Permanent Injunction with the
Commission which, in general, permanently restrained and enjoined the Company
and its officers from engaging in activities in violation of Section 5 of the
Securities Act of 1933, as amended.
On November 24, 1993, the Bankruptcy Court entered an order confirming the
Company's Sixth Amended Joint Plan of Reorganization (the "Plan"), and on
January 7, 1994, the Company emerged from bankruptcy. The following is a summary
of some of the major aspects of the Plan:
(a) All of the capital stock of the Company outstanding prior to the
filing of the bankruptcy petition (i.e., the capital stock owned by
Prior Management and a small group of other investors) was cancelled.
(b) All of the "leases" with the owner/investors of the shelters were
cancelled, the Company acquired ownership of all of the "leased"
shelters, and the claims of the shelter owner/investors (approximately
$105,000,000 in the aggregate) were exchanged for a total of 820,578
shares of the Company's common stock (the "Common Stock").
(c) Prior to the bankruptcy petition, BSON operated as an independent
company that leased bus stop shelters from the Company. The Plan
stated that BSON owed the Company in excess of $2,500,000, that BSON
had minimal asset value, and that BSON's primary value would be as a
going concern owned by the Company. Accordingly, the Plan permitted
the Company to acquire 88% of the outstanding capital stock of BSON
from Prior Management in exchange for token consideration ($22.00).
The Company also obtained the right to acquire the remaining 12% of
BSON's outstanding capital stock from the other BSON stockholders in
exchange for 46,000 shares of Common Stock. The Company acquired the
remaining 12% interest in BSON in November 1995 in exchange for 5,004
shares of Common Stock. See "Item 1. Description of Business - Bustop
Shelters of Nevada, Inc."
In addition to the foregoing, under the Plan (i) the Company's President
and most of the current members of the Board of Directors were appointed (see
"Item 9. Directors, Executive Officers, Promoters and Control Persons"), (ii)
the Company's current credit facility with Dr. Allan Ross, a Director of the
Company, was authorized and implemented (see "Item 6. Management's Discussion
and Analysis or Plan of Operation"), and (iii) a total of 242 additional shares
of Common Stock were issued to the Company's other creditors. All currently
issued and outstanding shares of Common Stock were issued pursuant to the Plan.
In accordance with the Plan, the Company also acquired the remaining assets of
Continental Shelters, Inc. (consisting primarily of shelters and shelter parts)
in exchange for token consideration ($85.00). Continental Shelters, Inc. had
been in the business of manufacturing and installing shelters exclusively for
the Company until the Company ceased ordering shelters from Continental
Shelters, Inc. in early 1992. Continental Shelters, Inc. no longer conducts any
business and has been dissolved as of June 13, 1996.
2.
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Current Business
Market. Historically, outdoor advertising has consisted primarily of large
painted billboards and a vast array of smaller billboards and placards.
Recently, legislation has been enacted throughout the United States to reduce
the number and size of outdoor billboards. Many municipalities throughout the
United States, including in particular Fountain Valley, Tustin, Mission Viejo,
Lake Forest, Newport Beach and other municipalities within the Company's current
target market area, have prohibited or severely limited the use of outdoor
billboards. As a result of the restrictive legislation, advertisers have been
looking for outdoor advertising alternatives to the billboard. One such
alternative is advertising on bus stop shelters.
While the use of billboards and other forms of outdoor advertising is being
prohibited or restricted in many localities, many municipalities actively
encourage private shelter owners and operators to install shelters in their
localities. As described below, because the shelter owners build, install,
maintain and insure bus stop shelters at their own cost, the municipalities that
allow such bus stop shelters to be installed by private companies are relieved
of the costs related to providing convenient and well-maintained bus stop
shelters for their residents. In addition to the money saved by obtaining bus
stop shelters from private companies at no cost to the municipalities, the
municipalities also profit by receiving a fee from the shelter owners and/or a
percentage of the advertising revenues generated by the shelters. As a result of
the restrictive legislation affecting traditional forms of outdoor advertising
and the benefits derived by municipalities from the installation of bus stop
shelters by private companies, advertising on bus stop shelters has been rapidly
increasing in recent years.
New Business Focus. During the Company's bankruptcy proceedings, the
Bankruptcy Court appointed Mr. Scott Kraft, the current President of the
Company, to manage the Company. While Prior Management's focus was on the sale
of shelters to owner/investors, the Company's new management recognized that, if
properly operated, the sale of advertising space on bus stop shelter advertising
panels could be a viable and profitable business. Accordingly, new management
changed the Company's focus from the sale of shelters to (i) increasing
advertising revenues (the Company's advertising panel occupancy rate was only
10% in January 1992 and its rental rates were 50% of the national rental rate
average), (ii) decreasing the Company's operating costs, and (iii) converting
the Company's un-installed shelters into revenue generating assets (in January
1992, the Company had approximately 1,000 shelters in inventory). The new
business focus instituted by the court appointed managers in 1992 continues to
be the business focus of the Company.
Current Operations. The Company's bus stop shelters are located at the bus
stops established by cities, counties, and other municipalities along the
regular bus routes in such municipalities and a small number are located at
shopping malls and other private locations. Each shelter contains two or four
advertising panels. Some of the shelters and advertising panels are illuminated
at night. The Company leases the space in each of the panels to advertisers for
an amount of the rent that varies depending on the location of the panel and on
the rating of the shelter. Each shelter is rated based on the municipality in
which the shelter is located, the location of the shelter within the
municipality, and on its visibility and estimated number of patrons likely to
pass the shelter. The higher rated shelters command higher rental prices. In
addition, advertising panels that are illuminated at night are more attractive
to advertisers and typically receive higher rentals. The Company has, to date,
installed 2,126 shelters in 60 municipalities in Southern California and has
approximately 650 shelters in its inventory.
Advertising space is rented to national advertisers whose products are
nationally known (including such household names as Coca Cola, IBM, McDonald's,
AT&T, etc.) and to local advertisers. Local
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advertisers typically rent panels at selected locations (i.e., near their place
of business), whereas national advertisers typically rent advertising space
based on rating points. Under the rating points system, a national advertiser
will specify the minimum number of rating points its advertisements must meet,
without designating the location of the advertisements. Accordingly, for
national advertisers, provided that the national advertiser's overall rating
point requirements are satisfied, the Company selects the shelters in which the
posters will be placed. National advertisers have the right to audit the
placement of their advertisements to confirm compliance with their rating point
requirement. The Company keeps track of the location of each advertisement and
the rating of each shelter location through its computer system. When necessary
or desirable, the Company can, with their permission, move a national
advertiser's poster from one shelter to another shelter, provided that the
rating points requirements continue to be met.
The advertising posters are provided to the Company by the advertiser at
the advertiser's cost. Other than placing the advertisements in the Company's
shelters, the Company is not otherwise involved in the form or content of the
advertisements. Occasionally, the Company will, however, assist smaller, local
advertisers with the development and preparation of advertising posters.
The Company is exploring additional means to increase per shelter
advertising revenues. One method for increasing per shelter revenues is to
increase the shelter's rating points, which can be accomplished by illuminating
the advertising panels. Accordingly, the Company is installing more lighted
panels in its shelters. Another potential method of increasing advertising
revenues is to rent advertising space on shelters in increments of days or even
hours and to charge a different price for the panel depending on the day or hour
of the day. For example, an advertising panel at a busy commercial intersection
could be rented for a certain price on weekends and holidays, for a higher price
during business days, and for an even higher price during the rush hours of such
business days. In addition, the advertisement could be changed to suit the
advertiser or the time period. For example, during business days the panel could
advertise a business product, while on weekends or evenings, the panel could
advertise recreational or leisure-time opportunities or products.
Because of the time required to change an advertising panel and the
employee expense related to changing panels, it currently is not practical or
cost effective to change panels daily or even hourly. In order to overcome this
limitation, the Company has developed and built an automatic, remote controlled
panel changer (the "Remote Panel Changer"). The Remote Panel Changer contains a
number of advertising posters that can be scrolled through the display area of
the panel by means of a small motor located in the panel. The motor can be
actuated to quickly scroll to any of the advertising posters contained on the
scroll at any time. Furthermore, the Remote Panel Changer can be controlled from
the Company's offices via a telephone line hookup. The Company is currently
field testing seven of the Remote Panel Changers.
Marketing. In January 1993, the Company entered into an advertising and
marketing agreement, which was amended as of June 1994 (as amended, the
"Marketing Agreement"), with Van Wagner Communications, Inc. (formerly VW Martin
Company, "Van Wagner"). Pursuant to the Marketing Agreement, the Company
appointed Van Wagner as its exclusive representative for leasing advertising
space to national and regional advertisers. The Marketing Agreement provides the
Company with both a regional and national sales force. The Marketing Agreement's
term expires in March 1999, subject to an automatic five-year renewal. The
Company has the right to not renew the Marketing Agreement if Van Wagner does
not generate net sales (defined as gross sales less advertising agency
commissions) of at least $28,000,000 during the initial five-year term of the
Marketing Agreement or does not generate at least $5,000,000 of net sales during
the period from April 1998 to March 1999. If the Company sells all or
substantially all of its assets, then the Company (or the entity that purchases
the Company's assets) can terminate the Marketing Agreement. Van Wagner has the
right to terminate the Marketing Agreement on
4.
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March 31 of any year if it gives the Company at least 120 days prior written
notice. If the Company defaults on its obligations under either the Plan and/or
the terms of its loan agreement with Dr. Allan Ross (See "Item 2. Management's
Discussion and Analysis or Plan of Operation," below), then Van Wagner also has
the right to terminate the Marketing Agreement.
Under the Marketing Agreement, the Company is obligated to pay Van Wagner
commissions that are based on net sales that it effects during a calendar year.
Until December 31, 1994, the commission rate was 15% of net sales effected by
Van Wagner up to $1,500,000, 20% of net sales between $1,500,000 and $3,000,000,
25% of net sales between $3,000,000 and $5,000,000, and 20% of net sales in
excess of $5,000,000. Effective January 1, 1995, the rate of commissions under
the Van Wagner agreement was changed to a flat rate of 20% of net sales. The
Company has also granted Van Wagner a right of first refusal to purchase the
Company's assets if the Company proposes to sell all or part of its assets.
As of November 18, 1994, the Company and Van Wagner entered into a joint
venture agreement (the "Joint Venture") for the purposes of (i) seeking
additional franchises and/or licenses for bus shelters from municipalities
throughout California and the United States (both through direct negotiations
and by purchasing franchises and/or licenses from competitors) and (ii)
managing, developing and operating all such bus stop shelters and selling
advertising space in connection therewith. The Joint Venture conducts business
under the name "VW-MDA Bus Shelter Co." Van Wagner made an initial capital
contribution of $30,000 to the Joint Venture and the Company agreed to
contribute all fabricated shelters and shelter parts currently in the Company's
inventory as may, from time to time, be requested by the Joint Venture for
installation and ownership by the Joint Venture. As of March 31, 1996, the
Company had in its inventory approximately 700 fabricated bus stop shelters and
parts for approximately an additional 600 bus stop shelters. The Company will be
credited with a $2,800 capital contribution for each full bus stop shelter that
it contributes to the Joint Venture. The Company and Van Wagner each own an
equal one-half interest in all of the assets and property owned by the Joint
Venture. All net cash proceeds generated from the operations of the Joint
Venture, in excess of certain working capital reserves and after repayment of
any loans made to the Joint Venture, are to be distributed (i) first to each
venturer pro rata in accordance with each venturer's capital contribution until
each venturer's capital contribution has been repaid in full, and then (ii)
equally to each of the venturers. Notwithstanding the foregoing, all non-cash
capital contributions made to the Joint Venture shall be returnable ratably over
a five-year period, provided, however, that if the Joint Venture does not have
sufficient excess cash flow to make all such payments in any year, the return of
the unpaid capital contribution shall be cumulated and paid in subsequent years
when excess cash flow is available. The Company will be responsible for
maintaining all of the Joint Venture's bus stop shelters, for which services the
Company will be paid an amount equal to its actual, out-of-pocket maintenance
costs. The Company may decline to provide such maintenance costs without
violating the terms of the joint venture agreement.
The Joint Venture's joint venture agreement provides for a fifteen-year
term, subject to earlier termination by (i) the mutual agreement of the parties,
(ii) a default in the performance of obligations under the joint venture
agreement which is not cured within the time permitted to cure such default or
(iii) the insolvency of either of the parties. The Joint Venture is entitled to
enter into additional franchise agreements with any municipality, city, district
or other entity throughout the United States other than in the State of Nevada
or in those municipalities, towns, districts or entities in which the Company
had, as of November 18, 1994, franchise agreements for bus shelter operations.
In January, 1995, the Joint Venture obtained a contract with the City of La
Habra in which the Joint Venture currently has 19 bus stop shelters.
The Company also markets shelter advertising space to local advertisers
through its in-house sales staff. As of February 28, 1997, the Company's
in-house sales staff consisted of four persons.
5.
<PAGE>
Contracts with Municipalities. The right to install and the obligation to
maintain shelters in any municipality is normally contained in a contract
("Municipal Contracts") entered into between the municipality and the shelter
advertising company or a permit ("Municipal Permits") granted by a municipality
to a shelter advertising company. Under a Municipal Contract, the shelter
operator's rights and obligations are defined by the written contract, whereas
the municipality's ordinances define the operator's rights and obligations under
a Municipal Permit.
Municipalities typically grant Municipal Contracts on the basis of
responses to requests for proposals ("RFPs") that are distributed by the
municipalities to competing shelter owners. The RFPs contain the minimum terms
pursuant to which a municipality is willing to grant a Municipal Contract. Each
competitor is required to submit its bid for the right to install and maintain
shelters in the municipality. Municipal Contracts then are awarded to the bidder
that submits the bid most suitable for the municipality. In considering RFPs,
municipalities evaluate, among other things, the fee that the shelter operator
is willing to pay the municipality, the shelter operator's ability to maintain
the shelter, the design and aesthetic appeal of the shelter proposed to be
installed, and the shelter operator's ability to rent the advertising panels.
The term of Municipal Contracts ordinarily is for a period of five years,
although the term can range from one to ten years. The contracts either grant a
shelter operator the exclusive right to install and maintain bus stop shelters
throughout the municipality or grant the operator rights to certain specified
locations. The Municipal Contracts require the shelter operator, at the
operator's cost and expense, to maintain and repair the shelters, to regularly
clean the shelters, to provide and maintain liability insurance, to include the
municipalities as a named insured on such insurance policy, and various other
terms ordinarily contained in government contracts, such as compliance with
equal opportunity laws and worker safety laws. All Municipal Contracts require
the shelter operator to pay the municipality a fee for the privilege of
maintaining shelters in the municipality. These fees are either fixed minimum
monthly payments, variable payments based on the gross advertising revenues
received by the shelter operator from the shelters located in the municipality,
or a combination of a fixed minimum payment and a percentage payment for
advertising revenues.
The Municipal Contracts usually require the bus stop shelter operator to
post a performance bond or to pledge a certificate of deposit to the
municipality in an amount sufficient to cover the expected cost of removing any
installed shelters should the shelter owners fail to do so upon the termination
of the Municipal Contracts. The bonds or certificates of deposit are required to
be returned to the shelter operator when the shelters are removed from the
municipalities. As of February 28, 1997, the Company had made cash bond deposits
or had pledged certificates of deposit to municipalities in an aggregate amount
of $637,200.
The Company believes that it has the ability to compete for Municipal
Contracts based on its low overhead and cost structure, on the design of its
shelters, on its prior record of shelter maintenance, and on its ability to
attract national advertisers through Van Wagner. Accordingly, the Company
believes that it will be able to remain competitive in responding to future RFPs
and that it will be able to increase its base of installed shelters. The
Company's reputation has, however, been damaged by the on-going litigation with
certain municipalities, principally the on-going Victorville litigation, and
competitors of the Company using this factors against the Company in responding
to RFPs. The Company believes that it may, in fact, have recently lost certain
Municipal Contracts due to this situation. No assurance can be given that the
Company will be able to successfully compete for Municipal Contracts in the
future due to this currently on-going litigation with municipalities.
Municipal Permits are typically granted to bus stop shelter operators based
on a perceived need by the municipality for a shelter at a particular location
and other factors, such as the ability of the shelter
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operator to build and maintain the shelter. Municipal Permits typically last
only six months, but are automatically renewed unless notice is given prior to
such renewal. Each Municipal Permit grants the shelter operator the right to
install and maintain one shelter at a specified location within the
municipality. As of February 28, 1997, the Company held Municipal Permits in
approximately 12 municipalities in Southern California. The Company has held
permits in some municipalities for more than ten years and believes that it
generally will be able to continue to renew the Municipal Permits because of the
continuing need for shelters in these municipalities.
The following table sets forth the number of Municipal Contracts and
Municipal Permits in effect as of December 31 of each of the following years:
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Municipal Contracts 47 47 48 49 51 53
Municipal Permits 266 265 270 171 162 148
The reduction on Municipal Permits from December 31, 1993 to December 31,
1994 was primarily due to the loss of permits in one municipality, Santa Ana.
Only one Municipal Contract (with the County of Los Angeles) and no Municipal
Permit accounted for more than 10% of the Company's gross revenues during the
fiscal year ended December 31, 1996.
Competition. The Company faces intense competition for both (i) Municipal
Contracts and Municipal Permits, and (ii) advertising to be placed in the
installed shelters.
The Company's principal competitors for Municipal Contracts and Municipal
Permits in Southern California are Outdoor Systems Advertising, Inc. and Clear
Channel Communications, Inc.. Both corporations have significantly greater
financial and marketing resources and name recognition than the Company. The
Company also competes for Municipal Contracts with many other smaller shelter
owner/operators.
The advertising industry is highly competitive, and competition for
advertisers is intense. The Company competes not only with other shelter
owner/operators for advertising revenues, but also with all other forms of
advertising, including outdoor billboards, television, radio, and direct mail.
The Company's ability to compete effectively for national advertisers is
dependent on the abilities of Van Wagner, the Company's national advertising
agreement.
Employees
As of February 28, 1997, the Company employed 31 full-time persons. The
Company believes that its employee relations are good.
7.
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Bustop Shelters of Nevada, Inc.
The Company currently conducts business in Clark County, Nevada, including
the City of Las Vegas, through BSON, its wholly-owned subsidiary. Until March
1992, all of the Company's capital stock was owned by Prior Management (88%) and
by certain others, including Dr. Ross, a director of the Company (12%). In March
1992, in connection with the Company's bankruptcy proceedings, the Company
acquired the 88% of the outstanding shares of capital stock of BSON then owned
by Prior Management. Also in connection with the Company's bankruptcy
proceedings, the Company obtained the right, exercisable at the Company's
option, to acquire the remaining outstanding shares of BSON in exchange for
46,000 shares of Common Stock. Subsequently, in November 1995, the Company was
able to renegotiate the terms of its acquisition of the remaining 12% of BSON
and completed such acquisition for 5,004 shares of Common Stock.
Pursuant to three Municipal Contracts, BSON has the right to install and
maintain bus stop shelters in the State of Nevada in (i) Clark County, (ii) the
City of Las Vegas, including on the "Las Vegas Strip," and (iii) the City of
North Las Vegas. As of February 28, 1997, BSON had 360, 156 and 38 shelters
installed in Clark County, Las Vegas and North Las Vegas, respectively. Except
for one other shelter operator in Clark County, the Company believes that BSON
currently is the exclusive provider of shelters in these three municipalities.
The Clark County agreement expires in February, 2001 and is renewable by BSON,
with the consent of Clark County, for two additional five-year periods. The
Municipal Contract with Las Vegas expired in July, 1996, and the Company has
successfully negotiated a new contract to the City of Las Vegas to extend such
contract for an additional 15 years. See "Item 3. Legal Proceedings," below. The
Municipal Contract with North Las Vegas expires in February, 2000.
Until the Company acquired 100% of the capital stock of BSON, BSON rented
all of its shelters from the Company pursuant to an unwritten lease agreement
that had been in effect since the formation of BSON in 1987. The lease agreement
was terminated when the Company acquired the remaining 12% of BSON's outstanding
capital stock in November 1995.
BSON's headquarters are located in Las Vegas, Nevada. BSON is currently
managed by a general manager who reports to the Company's President. As of
February 28, 1997, BSON had 19 full time employees and 1 part time employee.
Item 2. Description of Property.
The Company's principal executive offices are located at 15265 Alton
Parkway, Suite 100, Irvine, California, where it leases 4,169 square feet of
office space. The lease expires June 30, 1998. However, if the covenants under
the lease are met in a timely fashion, the Company has the option to extend the
lease term until June 30, 2003. The Company currently pays base rent of
approximately $3,174 per month plus its share of certain expenses related to the
operation of the business center in which the office is located.
The Company has also entered into a month-to-month real property lease for
1,903 square feet of storage space at 15273 Alton Parkway, Irvine, California,
which requires payments of approximately $950 per month.
The Company also leases 13,500 square feet of storage space at 16221
Construction Circle East, Irvine, California. Such lease expires October 31,
1998 and obligates the Company to make payments of
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$1,780 per month.
BSON has entered into a real property lease for approximately 3,820 square
feet of office warehouse in Las Vegas, Nevada. Such lease commenced on March 1,
1995 and ends on February 29, 2000, and BSON has an option to extend the term of
the lease for five years. BSON currently pays base rent of $1,910 per month plus
real property taxes, utilities insurance expenses, a share of common area
expenses and maintenance, repairs and alternations. Such lease also provides for
cost of living increases of up to 3% a year beginning in the third year of the
lease.
Item 3. Legal Proceedings.
On November 15, 1995, the Company filed a complaint in the Eighth Judicial
District Court of Nevada against the City of Las Vegas. The Company had entered
into a contract with the City of Las Vegas in July 1985 pursuant to which the
Company was obligated to provide bus stop shelters. As such contract approached
its expiration date of July 1995, the Company and the City of Las Vegas
disagreed as to who would own the shelters upon expiration of such contract.
They agreed to extend the contract while the Company filed an action for
declaratory relief to determine their respective rights with respect to the
shelters. In September, 1996, the City and the Company agreed to a settlement of
their dispute, providing for the Company to retain ownership of the shelters and
the award of a new long-term contract.
In December 1995, the Company filed a complaint against the City of Laguna
Hills. The complaint alleges that (i) in January 1995, the City required the
Company to execute a Memorandum of Understanding that would prohibit certain
types of advertising and (ii) in September 1995, the City of Laguna Hills
decided to eliminate all bus stop shelters and require their removal. The
Company alleges that such actions violated its First Amendment rights and
deprived it of its civil rights. The Company seeks as relief from the court the
following: (i) a declaration that certain actions of the City of Laguna Hills
are unconstitutional, (ii) compensation for the elimination of the bus shelters,
(iii) an injunction against the enforcement of its decision to do away with the
bus shelters and against the Memorandum of Understanding limiting the content of
the ad copy and (iv) $250,000 in general damages, plus attorneys' fees and costs
accrued.
On November 15, 1995, the Company filed a complaint against the City of
Victorville as well as two of its City Council members and one member of the
staff. The Company alleges that the City of Victorville objected to certain
advertising by the UFCW Union relating to a labor dispute with a food
supermarket chain located within the City of Victorville. When the Company did
not remove this advertising at the request of the City of Victorville, the
Company claims that the City of Victorville retaliated by canceling the
Company's contract to operate the shelters. The Company has requested damages in
excess of $1,000,000 as well as punitive damages, attorneys' fees and court
costs.
The Company believes that the outcome of its litigation with the City of
Victorville may be vital to the maintenance of its business. The Company
believes that if municipalities are allowed to regulate the political content of
the Company's advertising, then its business will be adversely affected. The
Company makes its advertising signs available to national and local advertisers
on a non-discriminatory basis in a fashion similar to newspaper, magazine and
broadcast advertising. Although the Company has strived to work with
municipalities to avoid advertising that is offensive in nature, should the
content of its advertising, especially advertising that is political in nature,
become regulated by the municipalities in which it places bus stop shelters, the
Company's ability to provide effective advertising may be compromised.
The Company believes that advertising companies generally avoid placing
advertising in a media
9.
<PAGE>
that may become the target of negative publicity. As a result of the Company's
litigation with Victorville, advertisers may choose to use other advertising
media to avoid being entangled in or associated with a First Amendment conflict.
Furthermore, in entering bids to try to obtain the right to place
additional bus shelters, the Company must now disclose that for the first time
it has had a contract canceled by a municipality because Victorville is the
first municipality to ever have such a dispute with the Company. Unless the
Company is successful in overcoming the negative aspects of a contract
cancellation, the success of the Company's future bids for contracts may be
negatively impacted.
On or about May 23, 1996, the Company filed a complaint against the City of
Lake Forest. The complaint alleges that the City, first demanded that certain
advertising copy be removed by the multiple companies doing business in the City
and later decided to award an exclusive franchise to one of Metro's competitors.
The Company alleges that this action was taken in part to retaliate due to Metro
Display's refusal to remove certain advertising copy which the City found
objectionable and to obtain better content control overall. The complaint seeks
that Metro Display be given the right to continue to do business in the City of
Lake Forest. Furthermore, damages of at least $1,000,000 are sought, as well as
the recovery of attorney fees and court costs which have accrued.
On June 27, 1996, via an order issued by the United States District Court
of Northern California approving a Settlement Plan between Busline Media and its
former shelter owners, Metro Display Advertising, Inc. acquired a 25% interest
in a newly formed Corporation, Bay Area Transit Shelter, with operations in
Northern California. The 25% ownership was in exchange for debt obligations to
Metro Display for cash and services rendered by Metro Display to the Busline
Media Receivership as delineated in the Settlement Plan approved by the court on
June 20, 1996,
Metro Display, through an agreement with Bay Area Transit Shelters, will
operate and manage the affairs of the new corporation, expanding its operations
into this newly acquired advertising market.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the security holders.
10.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
There currently is no public market for the Company's securities, although
the Company has approximately 1,195 holders of record of its Common Stock.
The Company has never declared dividends on its Common Stock and does not
intend to do so in the foreseeable future.
The Company will furnish, without charge, upon the written request of any
stockholder, a copy of the Company's Annual Report on Form 10-KSB, for the
fiscal year ended December 31, 1996, including the financial statements and
schedules thereto. Stockholders wishing to obtain a copy should contact the
Company at (714) 727-3333.
The Company has not, to date, paid any cash dividends upon its Common
Stock. The Company has no current plans to pay dividends on its Common Stock and
intends to retain earnings, if any, for working capital purposes. Any future
determination as to the payment of dividends on the Common Stock will depend
upon the results of operations, capital requirements, the financial condition of
the Company and other relevant factors.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this Form
10-KSB.
General
From January 22, 1992 until January 7, 1994, the Company was in bankruptcy.
In addition, since 1992, management of the Company has been implementing a
revised business plan. See "Item 1 - Business - Background of the Company/Prior
Bankruptcy." The Company's financial statements for each of the fiscal years
ended December 31, 1994 ("fiscal 1994") and December 31 1995 ("fiscal 1995") are
included in this Registration Statement.
During fiscal 1993, the Company's principal focus was on merely maintaining
the Company's existence, on resolving the various bankruptcy claims, and on
confirming the Company's plan of reorganization. During fiscal 1994, the Company
commenced its transition from a company operating under the supervision of the
Bankruptcy Court to a company that had a revised business plan. Accordingly,
during fiscal 1994, the Company reduced its work force, revised its marketing
agreement with Van Wagner, entered into the Joint Venture agreement with Van
Wagner, and turned its focus to renting and maintaining the advertising space
available at the Company's shelters. Other than changing or entering into
agreements with Van Wagner, the Company continued the implementation of its
business plan throughout fiscal 1996. The Company believes that the new business
plan will, in the long turn, increase the Company's revenues, reduce its overall
operating costs, and increase the Company's presence in additional geographic
markets. Accordingly, the enclosed financial statements may not necessarily be
indicative of the Company's expected on-going operating results under its
revised business plan.
11.
<PAGE>
Results of Operations
Revenues during fiscal 1995 and fiscal 1996 were derived from advertising
fees received by the Company from the rental of the advertising panels located
in the Company's installed shelters. Revenues for fiscal 1996 exceeded fiscal
1995 revenues by $221,596, or 3%, due to the implementation of management's new
business plan, which plan was adopted in 1992 and has been incrementally
implemented during fiscal 1995 and fiscal 1996. In accordance with the new
business plan, the Company's objectives were to increase (i) the number of
installed shelters, (ii) the occupancy rate for advertising in the panels of
each shelter, and (iii) the average rental rate paid per advertising panel. The
increased revenues in fiscal 1996 were the result of an increase in the
advertising revenue during fiscal 1996 over fiscal 1995, and an increase in the
per panel rental rate during fiscal 1996 over fiscal 1995.
The Company's total costs of sales in fiscal 1996 increased by $247,626, or
5%, from the total cost of sales in fiscal 1995. Cost of sales as a percentage
of revenues increased slightly from 64% in fiscal 1995 to 66% in fiscal 1996.
Advertising commissions increased in fiscal 1996 as the result of increased
advertising sales. Since the Company pays commissions based on a percentage of
advertising sales, such commissions will increase as advertising sales increase.
Installation and maintenance expenses for fiscal 1996 increased 35%
compared to the prior fiscal year due primarily to new bus shelter
installations. City advertising fees decreased by 14% in fiscal 1996 due to the
decrease in installed shelters. Since the Company pays fees to cities and
municipalities for the right to maintain shelters in the cities and
municipalities, such fees will increase as advertising revenues increase.
The Joint Venture obtained its first city contract in 1995. However, only
minimal revenues were received in fiscal 1995 as the shelter installations were
not completed until late in the year. Revenues for fiscal 1996 were also minimal
due to the lack of market recognition by advertising clients. The Company
believes that the Joint Venture will in the future enter into agreements with
additional municipalities to establish and operate shelters, which operations
will generate additional revenues for the Company. Because the Company has
approximately 650 fabricated bus stop shelters in inventory, the Company will
not have to expend any cash in connection with the establishment of shelters by
the Joint Venture. The amount of revenues, to be generated in the future from
the operation of the Joint Venture is, however, dependent on the future success
of the Joint Venture in obtaining the right to establish shelters, the terms of
the agreements to be entered into with the municipalities, the amount of
advertising revenues generated by the Joint Venture's shelters, and on other
factors. Accordingly, the amount of revenues to be derived by the Company from
its investment in the Joint Venture cannot be predicted.
The Company's total operating expenses increased in fiscal 1996 by $94,756.
The primary reasons for this increase was an increase in professional fees of
$96,342.
In fiscal 1996, the Company incurred $195,411 of interest expense compared
to $180,301 in fiscal 1995. The increase in interest expense is primarily
attributable to an increase in debt.
For the fiscal year ended December 31, 1996, the Company recorded a net
loss of $91,399 compared to a net income of $79,997 for fiscal 1995. This
represents an change of $171,396 in fiscal 1996 over fiscal 1995.
12.
<PAGE>
Liquidity and Capital Resources
As of December 31, 1996, the Company's current liabilities exceeded the
Company's current assets by $393,456. This represents an increase of $117,669 in
fiscal 1996 over fiscal 1995. Approximately $412,155 of the current liability
consists of indebtedness owed to Dr. Ross under the Plan. Dr. Ross is a Director
and principal shareholder of the Company. See "Item 9. Directors, Executive
Officers, Promoters, and Control Persons," and "Item 12. Certain Relationships
and Related Transactions." The Company and Dr. Ross restructured this current
liability in order to allow the Company the opportunity to implement its new
business plan. Under this restructured agreement with Dr. Ross, the Company
believes that it can fund the remaining portion of its working capital deficit
through borrowings under the unused portion of its Credit Facility and through
cash generated from operations. For a description of the Credit Facility, see
"Item 12. Certain Relationships and Related Transactions." The Company is
considering obtaining private financing from unaffiliated investors to pay off
the working capital deficit and to provide the Company with working capital for
the possible future expansion of its business into other geographic markets. No
assurances can, however, be given that the Company will be able to continue to
fund its current working capital deficit. Failure to satisfy its vendors and
other creditors could result in the loss of business with such
vendors/creditors, could cause a change in the terms the Company receives from
such vendors/creditors, and could result in the initiation of bankruptcy
proceedings against the Company.
During fiscal 1996, the Company had a positive cash flow from operating
activities of $976,082. This represents an increase of $341,016 in fiscal 1996
over fiscal 1995. This was primarily due to the increase in cash received from
advertising clients. In addition, the Company used a total of $561,967 to fund
its purchases of new property and equipment and for other investing activities.
At December 31, 1996, the Company's outstanding accounts receivable
decreased the amount of accounts receivable outstanding as of December 31, 1995
by $388,055. The decrease is due to an increase in collections.
Pursuant to the Plan, the Company borrowed $800,000 under the Credit
Facility in January 1994. Under the Credit Facility, the Company was required to
make monthly payments of principal and interest and did not do so until the
Company restructured the Credit Facility effective September 1, 1995. Since
September 1, 1995, the Company has made all required payments of $20,000 per
month and is current under the terms of the Credit Facility. The current balance
as of December 31, 1996 was $317,935.
The Company currently has approximately 650 shelters in its inventory.
Accordingly, the Company's future capital expenditures related to the
installation of additional shelters is expected to be insignificant, and its
marginal cost of maintaining additional shelters is expected to be low. Because
the Company's marginal cost of installing and maintaining additional shelters is
low, the Company could increase its operating cash flow by installing additional
shelters (directly or through the Van Wagner Joint Venture) and by renting the
space on such additional shelters. Based on its currently pending RFPs and on
increased shelter installation in existing municipalities, the Company believes
that it will be able to increase its base of installed shelters during the
current fiscal year.
In connection with obtaining additional Municipal Contracts and Municipal
Permits, the Company is typically required to post a performance bond with the
municipality to guarantee the removal of the shelter upon the termination of the
Municipal Contract. Under the Credit Facility, the Company is entitled to obtain
up to $300,000 of irrevocable letters of credit to satisfy future bonding
requirements. The Company has funded all such bonding requirements to date with
operating capital, and as such all $300,000 is available for use for such
bonding. As of the date hereof, the Company believes that the letter of credit
13.
<PAGE>
portion of the Credit Facility is sufficient to satisfy the Company's needs for
at least 12 months.
Item 7. Financial Statements.
The following financial statements of Metro Display Advertising, Inc. are
included in this report:
o Consolidated Balance Sheets -- December 31, 1995 and 1996
o Consolidated Statements of Income -- Years ended December 31, 1995 and
1996
o Statement of Stockholders' Equity -- Year ended December 31, 1996
o Consolidated Statements of Cash Flows -- Years ended December 31, 1995
and 1996
o Notes to Financial Statements
Item 8. Changes In and Disagreement With Accountants on Accounting and Financial
Disclosure.
On December 10, 1996, the Board of Directors of Metro Display Advertising
adopted a resolution appointing Peck & Lopez, Certified Public Accountants, as
the independent auditors for calendar years 1996 and 1997, subject to
ratification by the Shareholders at the next Annual Stockholder's Meeting.
14.
<PAGE>
LETTERHEAD OF PECK & LOPEZ
================================================================================
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Metro Display Advertising, Inc.
We have audited the accompanying consolidated balance sheets of Metro Display
Advertising, Inc., (a California corporation) and subsidiary as of December 31,
1996 and the related consolidated statements of income, stockholders' equity,
and cash flows for the year then ended. The consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the consolidated financial statements based on our audits.
The financial statements of Metro Display Advertising, Inc. and subsidiary as of
December 31, 1995, were audited by other auditors whose report dated April 15,
1996, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metro Display
Advertising, Inc. and the subsidiary as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Peck & Lopez
Certified Public Accountants
Newport Beach, CA
April 14, 1997
1400 Bristol Street North, Suite 170, Newport Beach, CA 92660
714 225-7010 Fax 714 222-0481
Member of the American Institute of CPAs California Society of CPAs
15.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 74,947 $ 225,524
Accounts receivable, net of allowances
of $143,539 and $117,775 (Note 1) 989,804 1,377,859
Prepaid expenses and other assets (Note 7) 226,844 39,330
Deferred taxes - current portion (Note 5) 227,000 235,000
------------ ------------
TOTAL CURRENT ASSETS 1,518,595 1,877,713
------------ ------------
PROPERTY AND EQUIPMENT: (Note 1 and 4)
Office furniture and equipment 343,473 282,230
Leasehold improvements 24,279 24,280
Machinery and equipment 82,588 70,500
Vehicles 463,470 397,305
Bus stop shelters 7,940,283 7,813,534
------------ ------------
8,854,093 8,587,849
Less: accumulated depreciation (2,649,509) (1,821,408)
------------ ------------
6,204,584 6,766,441
------------ ------------
OTHER ASSETS:
Performance bond deposits ( Note 3) 734,722 694,722
Deferred taxes - less current portion (Note 5) 2,944,000 2,924,000
Other assets (Note 2) 182,477 102,033
------------ ------------
3,861,199 3,720,755
------------ ------------
$ 11,584,378 $ 12,364,909
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4) $ 685,473 $ 751,622
Accounts payable and other accrued liabilities 293,069 372,237
Due to municipalities 629,661 757,569
Accrued payroll and related taxes 77,781 57,954
Advanced payments 226,067 214,118
------------ ------------
TOTAL CURRENT LIABILITIES 1,912,051 2,153,500
LONG TERM LIABILITIES:
Long term debt - less current portion (Note 4) 873,165 1,320,848
COMMITMENTS AND CONTINGENCIES (Note 7 and 8)
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized,
no par value, no shares issued
Common stock, 5,000,000 shares authorized,
no par value, 823,030 shares issued 9,504,532 9,504,532
Accumulated deficit (705,370) (613,971)
------------ ------------
8,799,162 8,890,561
------------ ------------
$ 11,584,378 $ 12,364,909
============ ============
</TABLE>
See notes to consolidated financial statements
16.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1996 1995
----------- -----------
REVENUES: $ 7,658,806 $ 7,437,210
COST OF SALES:
City fees (Note 7) 1,553,941 1,805,548
Advertising commissions and expenses 2,192,772 2,101,507
Installation and maintenance 1,099,513 913,700
Other costs 198,675 73,188
----------- -----------
TOTAL COST OF SALES 5,044,901 4,893,943
----------- -----------
GROSS PROFIT 2,613,905 2,543,267
----------- -----------
OPERATING EXPENSES:
Wages and related expenses 589,873 558,124
Professional fees 163,425 67,083
Bad debts 62,814 72,500
Office expenses 218,769 192,314
Depreciation (Note 1) 948,809 911,332
Other operating expenses 502,484 493,397
----------- -----------
TOTAL OPERATING EXPENSES 2,486,174 2,294,750
----------- -----------
INCOME FROM OPERATIONS 127,731 248,517
----------- -----------
OTHER INCOME (EXPENSE):
Gain (Loss) on sale of assets (73,897) 2,060
Interest income 20,638 11,033
Other income 17,540 45,688
Interest expense (195,411) (180,301)
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (231,130) (121,520)
INCOME (LOSS) BEFORE TAXES (103,399) 126,997
PROVISION (BENEFIT) FOR INCOME TAXES (NOTE 5) (12,000) 47,000
----------- -----------
NET INCOME (LOSS) $ (91,399) $ 79,997
=========== ===========
NET INCOME (LOSS) PER SHARE $ (0.09) $ 0.09
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 963,030 906,364
=========== ===========
See notes to consolidated financial statements
17.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
----------- ----------- -----------
Balance at January 1, 1995 $ 4,027,358 $ (693,968) $ 3,333,390
Net Income -- 79,997 79,997
Exchange for Minority Interest 19,139 -- 19,139
Stock Options (Note 9) 79,880 -- 79,880
Deferred tax adjustment (Note 5) 5,378,155 -- 5,378,155
----------- ----------- -----------
Balance at January 1, 1996 $ 9,504,532 $ (613,971) $ 8,890,561
Net Income -- (91,399) (91,399)
----------- ----------- -----------
Balance at December 31, 1996 $ 9,504,532 $ (705,370) $ 8,799,162
=========== =========== ===========
See notes to consolidated financial statements
18.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 8,007,469 $ 7,044,080
Cash paid to suppliers and employees (6,857,240) (6,280,225)
Interest received 20,638 11,798
Interest paid (193,985) (139,787)
Franchise tax paid (800) (800)
----------- -----------
Net cash provided by operating activities 976,082 635,066
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 158,646 --
Purchase of property and equipment (570,061) (361,251)
Performance bond deposits (71,500) (25,000)
Investment in joint venture (20,000) --
Loans made (59,052) --
----------- -----------
Net cash used in investing activities (561,967) (386,251)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans -- 360,000
Payments on notes payable (564,692) (504,559)
----------- -----------
Net cash used in financing activities (564,692) (144,559)
----------- -----------
NET INCREASE IN CASH (150,577) 104,256
CASH AT BEGINNING OF YEAR 225,524 121,268
----------- -----------
CASH AT END OF YEAR $ 74,947 $ 225,524
=========== ===========
SUPPLEMMENTAL DISCLOSURE SCHEDULE OF
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicle in exchange for debt $ 30,000 $ --
=========== ===========
Issuance of common stock options in exchange for loan
and debt service costs $ -- $ 79,880
=========== ===========
Increased deferred tax asset due to a change in tax attributes (Note 5) $ -- $ 3,205,200
=========== ===========
Decrease deferred tax liability due to a change in tax attributes (Note5) $ -- $ 2,172,155
=========== ===========
Exchange of minority interest for common stock of parent $ -- $ 19,139
=========== ===========
</TABLE>
See notes to consolidated financial statements
19.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
STATEMENT OF CASH FLOWS - SUPPLEMENTAL SCHEDULE
<TABLE>
<CAPTION>
Years Ended December 31,
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH 1996 1995
PROVIDED (USED) BY OPERATING ACTIVITIES --------- ---------
<S> <C> <C>
NET INCOME (LOSS) $ (91,399) $ 79,997
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED
(USED) BY OPERATING ACTIVITIES
Depreciation 948,809 911,332
(Gain) loss on sale of assets 73,897 (2,060)
(Increase) decrease in accounts receivable 388,055 (370,568)
Decrease/(Increase) in other assets (182,839) 44,373
(Increase) decrease in joint venture (6,067) --
(Decrease) increase accounts payable & accrued liabilities (207,076) (155,237)
(Decrease) increase in accrued payroll 19,827 --
Increase (decrease) in advance payments 11,949 4,250
(Increase) decrease in deferred tax (12,000) 46,200
Increase in accrued interest 1,426 41,279
Bonds paid to cities 31,500 35,500
--------- ---------
Net cash provided by operating activities $ 976,082 $ 635,066
========= =========
</TABLE>
See notes to consolidated financial statements
20.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Metro Display Advertising, Inc., "the Company", incorporated
in California in 1984. The Company has agreements with
municipalities to install and maintain bus stop shelters and
benches. Revenue is generated by renting advertising space on
the installed shelters. The shelters are owned, installed and
maintained by the Company and are currently located in
approximately 63 municipalities throughout Southern
California. The Company also rents advertising space in
shelters located in Clark County, Nevada, including the City
of Las Vegas, through its wholly owned subsidiary.
Advertising sales for the Company's shelters are effected
primarily by a national outdoor advertising agency under an
advertising and marketing agreement dated January 1993. The
marketing agreement provides the Company with both regional
and national advertisers. The marketing agreement term expires
March 1999, subject to an automatic five-year renewal.
Approximately 80 percent of the Company's sales are generated
though this marketing and sales agreement.
The Company and its wholly owned subsidiary Continental
Shelters, Inc., a California Corporation, filed a consolidated
voluntary petition for relief under Chapter 11 of Title 11 of
the United States Code on January 22, 1992. Continental
Shelters, Inc., in the business of manufacturing and
installing bus stop shelters exclusively for the Company,
ceased operations February of 1992. All assets and liabilities
of the subsidiary were transferred to the Company. On November
19, 1993, the Bankruptcy Court confirmed the Company's plan of
reorganization, effective January 7, 1994. The accounting for
the bankruptcy and the forgiveness of debt and adjustment to
assets were recorded on a fresh start reporting basis for the
year ending December 31, 1993.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements present the consolidated
accounts of the Company and its wholly-owned subsidiary,
Bustop Shelters of Nevada, Inc., a Nevada Corporation. All
significant inter-company transactions and balances have been
eliminated.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing
financial statements in accordance with generally accepted
accounting principles. Those estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities, and the reported
revenues and expenses. Actual results could vary from the
estimates that were assumed in preparing the financial
statements.
REVENUE RECOGNITION
The Company's revenue is derived primarily from providing
advertising services under contract arrangements. The company
prepares its financial statements on the accrual basis of
accounting in accordance with generally accepted accounting
principles. Advertising revenue is recognized when earned, and
expenses are recorded when incurred.
See accountants' report
21.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company has adopted the allowance for doubtful accounts
method of accounting for losses from uncollectible accounts.
Under this method, an allowance is provided based on
historical experience and management's evaluation of
outstanding accounts receivable at the end of each year.
PROPERTY AND EQUIPMENT
Property and equipment were re-stated at their estimated fair
market value at January 7, 1994, the effective date of the
Company's plan of reorganization, in accordance with
fresh-start reporting. For year ended December 31, 1995 and
1996, property and equipment are depreciated over the
remaining estimated useful lives, (generally one to seven
years), of the related assets using the straight-line method.
The bus stop shelters are depreciated over ten years, using
the straight-line method.
NET INCOME PER SHARE
Net income per common and common share equivalent share is
computed on the basis of the weighted average number of common
shares outstanding and dilutive common equivalent shares.
Common stock equivalent shares include dilutive stock options.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade
accounts receivable. The company performs ongoing credit
evaluations of its customers' financial condition and limits
its exposure to accounting losses by limiting the amount of
credit extended whenever deemed necessary and generally does
not require collateral. Reserves are maintained for potential
credit losses, and such losses have been within management's
expectations.
INCOME TAXES
Effective January 1, 1993, the Company adopted statement of
Financial Accounting Standards No. 109, the objective of
accounting for income taxes is to recognize the amount of
current and deferred taxes payable (or refundable) at the date
of the financial statements as measured by the provision of
the enacted tax laws.
Deferred income taxes have been provided for the future tax
effects of temporary differences between financial reporting
and tax basis of assets, liabilities, and operating loss
carryforwards.
RECLASSIFICATIONS
Certain reclassifications to the December 31, 1995 income
statement have been made for consistent presentation.
NOTE 2 - OTHER ASSETS
The Company entered into an agreement with Busline Media to
provide administrative services and support. Busline Media is
a sole proprietorship that became subject to a receivership
by order of the United States District Court on or about July
1993. As part of this agreement, the Company agreed to make
operating expense advances to Busline Media. As of December
31, 1996, the Company advanced $156,410 to Busline Media. On
June 20, 1996, the plan was approved, a new corporation
called Bay Area Transit Shelters, Inc. ("BATS"), was formed.
See accountants' report
22.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 2 - OTHER ASSETS, CONTINUED
The Company is expected to receive 25 percent of the new issue
common stock of BATS in exchange for services and the amount
owed. The stock will be issued May 1997.
In October 1996, the Company entered into a partnership, which
is primarily involved in operating, maintaining, and managing
aircraft transportation used by each partner. The investment
represents a 50 percent ownership in the partnership. The
investment value in the partnership - income tax basis at
December 31, 1996 is $26,067.
NOTE 3 - PERFORMANCE BOND DEPOSITS
The Company, under terms of its agreements with various
municipalities, is required to maintain either cash bond
deposits or certificates of deposit pledged to municipalities,
which guarantee the removal of shelters. The bond deposits are
required for the duration of the agreements, generally five to
ten years.
NOTE 4 - LONG TERM DEBT
The long term debt at December 31, 1996, consists of the
following:
<TABLE>
<CAPTION>
Current Long Term Total
------- --------- -----
<S> <C> <C> <C>
Notes payable to bank, secured by vehicle, payable in
monthly installments of $944, including interest at 8
percent maturing
October 1999. $ 9,378 $ 19,224 $ 28,602
Note payable to National Display Advertising, Inc., secured
by 124 bus stop shelters, payable in monthly installments of
$8,067, including interest at 10%, maturing January 1997.
7,992 0 7,992
Unsecured note payable to National Display Advertising,
Inc., payable in monthly installments of $12,000, including
interest at 7 percent maturing November 1997. See Note 7 for
contingent liability
relating to this loan. 119,361 0 119,361
Line of credit provided by a related
party. See Note 9 and 10. 201,022 116,913 317,935
</TABLE>
See accountants' report
23.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 4 - LONG TERM DEBT, CONTINUED
<TABLE>
<CAPTION>
Current Long Term Total
------- --------- -----
<S> <C> <C> <C>
Note payable secured by corporate assets.
Interest only at 10 percent for four
years, thereafter monthly installments of
$9,130, maturing September, 2003. See Note
9 and 10. $ 0 326,351 $ 326,351
Trade and other miscellaneous obligations, payable in
monthly installments of $1,689, discounted at 7 percent,
maturing,
January, 1998. 19,486 1,679 21,165
Trade obligations due to a related party payable in monthly
installments of $11,237, discounted at 7 percent through
January 1998. See Note 10 for additional
information. 211,133 312,438 523,571
Obligations to municipalities, payable in monthly
installments of $7,944, discounted at 7 percent, maturing
1998 and 1999.
83,187 96,560 179,747
--------- ---------- ----------
$ 685,473 $ 873,165 $1,558,638
========= ========== ==========
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
<S> <C>
1998 $ 305,026
1999 134,806
2000 184,562
2001 82,260
2002 and after 166,511
-----------
$ 873,165
===========
</TABLE>
NOTE 5 - INCOME TAXES
Under SFAS 109, deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes and operating loss
carryforwards.
See accountants' report
24.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 5 - INCOME TAXES, CONTINUED
The tax effects of significant items composing the Company's
net deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Difference between book and tax basis liabilities $ 0 $ (22,780)
Difference between book and tax basis property (376,090) (456,180)
----------- -----------
(376,090) (478,960)
----------- -----------
Deferred tax assets:
Doubtful accounts allowance not currently
deductible 57,410 62,390
Shareholder interest not currently deductible 27,495 25,130
Federal net operating loss carryforward 3,930,000 3,991,970
State net operating loss carryforward 361,000 389,000
Other 16,185 14,470
----------- -----------
4,392,090 4,482,960
----------- -----------
Valuation allowance (845,000) (845,000)
----------- -----------
Net deferred tax asset $ 3,171,000 $ 3,159,000
=========== ===========
</TABLE>
The income tax components of the provision (benefit) for income taxes
consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
-------- --------
<S> <C> <C>
Current:
State $ 800 $ 800
Deferred:
Federal (9,600) 38,000
State (3,200) 8,200
-------- --------
$(12,800) $ 46,200
-------- --------
$(12,000) $ 47,000
======== ========
</TABLE>
The Company has a federal net operating loss carryforward of
approximately $12 million and a state net operating loss
carryforward of approximately $4 million. The federal net
operating loss carryforward expires beginning 2004 through
2009 and the state net operating loss carryforward expires
beginning 2000 through 2004.
Due to additional information regarding the bankruptcy and
treatment of the leasehold creditors, the Company, on the
advice of counsel, is applying Internal Revenue Code Section
108 and 382. Based upon the rule of Section 108, the exchange
of stock for debt by the corporation does not result in any
recognition of income for the Company, therefore there is no
reduction in tax attributes from that exchange. Section 382
requires the Company to reduce it's net operating loss
carryforwards by 50 percent. This resulted in an increase to
deferred tax asset of $3,205,200 and a decrease to deferred
tax liability of $2,172,955 providing a total tax benefit of
$5,378,155 to common stock for year ended December 31, 1995.
See accountants' report
25.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 6 - JOINT VENTURE AGREEMENT
On November 18, 1994, the Company and a national outdoor
advertising agency entered into a joint venture agreement (
the "Joint Venture") for the purpose of seeking additional
franchises and/or licenses for bus shelters advertising from
municipalities throughout the United States, and to manage,
develop, and operate all such bus stop shelters and sell
advertising space in connection therewith. The national
outdoor advertising agency made an initial capital
contribution of $30,000 to the Joint Venture while the Company
will contribute all fabricated shelters and shelter parts
needed by the Joint Venture. Under a separate marketing
agreement, the agency also provides sales support for the
Company.
The Joint Venture's joint agreement provides for a
fifteen-year term, subject to earlier termination by mutual
consent of the parties, a default in the performance of
obligations under the joint venture agreement which is not
cured within the time to cure such default or the insolvency
of one of the parties. The Joint Venture will include all new
agreements with municipalities and will also include the
assignment of the Company's agreement with the city La Habra
to the extent that such city permits the assignment of such
contract. All other territories under pre-existing contracts
that the Company has entered into shall remain outside of the
Joint Venture.
NOTE 7 - COMMITMENTS
The future minimum rental payments required by operating
leases that have non-cancelable lease terms beyond the balance
sheet date are as follows:
Fiscal year ended
-----------------
1997 $ 81,918
1998 37,374
1999 23,604
2000 3,934
---------
Total $ 146,830
=========
The Company's lease for the office in Irvine, California,
expires June 30, 1998. The subsidiary's lease for an office in
Las Vegas, Nevada expires February 29, 2000. The Company also
rents storage space on a month-to-month basis.
Rent expense for the year ended December 31, 1996, was
approximately $101,708.
The Company has entered into an agreement, pursuant to the
terms of a settlement and compromise in the plan of
reorganization, with National Display Advertising, Inc. Under
the terms of the settlement, the debt will increase by at most
$500,000 if $250,000 is not paid against principal on or
before January 1998. The Company is currently making payments
and expects to have the loan paid off prior to its maturity
date to avoid any further liability. See Note 4 for loan
balance.
MUNICIPAL CONTRACTS
The Company and its subsidiary have contracts with various
municipalities in southern California and Nevada for the
installation and maintenance of bus shelters. Many of these
contracts provide exclusive rights to operate advertising bus
shelters, while others allow other bus shelter companies to
share the area.
See accountants' report
26.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 7 - COMMITMENTS, CONTINUED
The municipalities receive a guarantee fee and/or a percentage
of the advertising revenue depending on the respective
agreement. The contracts extend three to ten years, with
options to renew upon approval by both parties. The guaranteed
payments for the next five years, according to current
contracts, are approximately $1,410,000 per year. The
guaranteed payments, included in city fees, for year ended
December 31, 1996, were approximately $1,400,000.
The Company recorded estimated city fee overpayments of
$113,046 to Clark County for payments made for the periods
1994 through 1996.
NOTE 8 - CONTINGENCIES
The Company was the plaintiff in an action filed against the
City of Las Vegas, filed November 15, 1995. The Company
provided shelters located in the City pursuant to a contract
entered into July 3, 1985. As the contract approached its
expiration, the City asserted the contract provided for the
City's retention and ownership of the shelters. The Company
asserted the shelters remained property of the Company, and
could be removed by the Company in the event the contract was
not renewed. The matter was resolved through negotiations that
resulted in the signing of a long-term contract. A stipulation
an order dismissing the case without prejudice was filed on
September 20, 1996.
On December 20, 1995, the Company filed a complaint against
the City of Laguna Hills. The complaint involves the Company's
bus shelters located in the City of Laguna Hills. The lawsuit
was commenced as a result of action taken by the City on or
about September 12, 1995, to eliminate all bus shelters within
the City. As a result of this decision, the City has made
demand that the Company remove all of its shelters
immediately.
On May 23, 1996, the Company filed a complaint against the
City of Lake Forest. The complaint was based on the decision
by the City of Lake Forest to terminate the Company's
operations within the City and to grant an exclusive franchise
to a competitor of the Company.
On November 15, 1995, the Company filed a complaint against
the City of Victorville as well as two of its City Council
members and one member of the staff. This dispute arose as a
result of efforts by the City of Victorville to have the
Company's bus shelters removed after a dispute regarding the
Company's display of advertising by the U.F.C.W. Union. The
City officials strongly objected to the Union's advertisement
and placed pressure on the Company to remove such advertising.
The Company presently believes that the resolution of these
matters will not have a material adverse effect on its
financial condition as reported in the accompanying financial
statements.
NOTE 9 - STOCK OPTION PLANS
In February 1995, the Board of Directors approved and in April
1995, the Company's shareholders ratified the Company's 1995
Incentive Stock Option Plan ( the "Option" Plan"). The Option
Plan provides for the grant of options to officers, directors
and other key employees of the Company to purchase up to an
aggregate of 200,000 shares of Common Stock.
See accountants' report
27.
<PAGE>
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 9 - STOCK OPTION PLANS, CONTINUED
The Option Plan is to be administered by the Stock Option
committee of the Board of Directors, which has complete
discretion to select the optionee and to establish the terms
and conditions of each option, subject to the provisions of
the Option Plan. The Stock Option Committee has not yet been
appointed. Options granted under the Option Plan may be
"Incentive Stock Options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended ( the "Code"), or
nonqualified options, and will be designated as such.
As of December 31, 1996, the Board of Directors of the Company
authorized the President to be eligible to participate in an
Incentive Stock Option Plan. Under the Plan, the Company has
offered the President an option to purchase 20,000 shares of
common stock for a price of $5 per share. This option expires
December 31, 1999 one year after expiration of his employment
contract.
In 1994, as part of an exclusive sales representation
agreement, a national outdoor advertising agency received an
option to purchase 20,000 shares of new issue common stock at
$21 per share. The option expires January 1, 1998.
In 1994, as part of the terms of acquiring a line of credit, a
related party received an option to purchase 40,000 shares of
new issue common stock for a total purchase price of $100. On
September 1, 1995, the original loan agreement was modified,
increasing the option to include a total of 80,000 shares of
new issue common stock. See Note 10 for details of the credit
line. A discount of $40,000 was recorded to common stock for
the additional 40,000 stock options to be amortized over the
life of the loan.
As part of the terms of acquiring the $360,000 loan, the
Company has granted the lender a stock option to acquire
40,000 shares of new issue common stock for a total price of
$100. A discount of $39,880 was recorded to common stock for
the 40,000 stock options to be amortized over the life of the
loan. The option expires December 31, 1998.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company had an unsecured debt of $523,571, discounted at 7
percent, payable to a corporate stockholder in 48 equal
installments. The Company has not made the scheduled payments
on the stockholder's unsecured debt as required by the
agreement. The Company modified the loan agreement on April
11, 1996 to allow the Company to either accrue or pay the
stated monthly amount. Accrued payments will accrue interest
at the 8 percent, adjusted on February 1, and August 1, each
year, to 5 percent above the Federal Discount Rate.
Stockholder can demand payments, start at any time, to be paid
over 48 equal installments.
The same stockholder has provided a credit line to finance the
implementation of the bankruptcy plan. On January 7, 1994, the
effective date of the plan, $1,200,000 was made available,
secured by all the assets of the Company, subordinate only to
holders of secured debt. Interest is at an initial rate of 8
percent, adjusted on February 1 and August 1, each year, to 5
percent above the Federal Discount Rate. On September 1, 1995,
the Company modified the terms of its original agreement and
repayment terms. Principal and interest are payable in monthly
installments of $20,000, due on the first day of each month,
until paid in full. The amount utilized at December 31, 1996
was $317,935. Total payments made including interest and
principal was $250,000 for the year ended December 31, 1996.
See accountants' report
28.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Scott A. Kraft 37 Chief Executive Officer and President
Allan L. Ross, M.D. 47 Chairman of the Board of Directors
Mark R. Boileau 33 Director
William M. Slater 59 Director and Secretary
Scott A. Kraft has been the Chief Executive Officer and President of the
Company since January 1993 and its Chief Operating Officer since February 1992.
Prior to joining the Company, Mr. Kraft served as an engineer and manager at
Ferranti Aerospace from July 1987 to February 1992.
Allan L. Ross, M.D., has been the Chairman of the Board of Directors of the
Company since January 1994. Dr. Ross has been a practicing anesthesiologist at
the Sharp Chula Vista Medical Center since 1985 and has been the Chairman of the
Department of Anesthesiology since 1987. Dr. Ross founded the Cardiac Anesthesia
program in 1987, and the obstetrical anesthesia program in 1992. Dr. Ross served
as the director of the surgical intensive care unit from 1990 to 1992. He
founded Anesthesiology Medical Consultants of San Diego (AMCSD), a medial
corporation serving the San Diego area, in 1991 and has been its President since
its inception.
Mark R. Boileau has been a director of the Company since January 1994. Mr.
Boileau has been an engineering manager at Curtis PMC since October 1992. From
June 1987 to October 1992, he was an engineering manager at Marconi Dynamics.
William M. Slater has been a director of the Company since March 1994 and
the Secretary of the Company since July 1994. Mr. Slater has been a real estate
broker associated with CB Commercial Real Estate Group, Inc. from December,
1992, to November,1996. From May 1989 to December 1992, he was a mortgage broker
with American Mortgage Bankers. He is currently a business analyst with Geneva,
Inc.
Compliance With Section 16(a) Of The Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and certain of its officers, and persons who own more than 10% of the
registered class of the Company's equity securities, to file reports of
ownership and changes of ownership with Securities and Exchange Commission at
the time of the registration of such security on a national securities exchange
or by the effective date of a registration statement filed pursuant to Section
12(g) of the Securities Exchange Act of 1934. The Company's Registration
Statement under Section 12(b) became effective on June 30, 1995. None of the
directors or officers filed the required initial report of Form 3, and Dr. Allan
Ross, a director of the Company, failed to file the required notice on Form 4
upon the receipt of options to purchase 80,000 shares of the Company's Common
Stock.
29.
<PAGE>
Item 10. Executive Compensation.
The following table sets forth the compensation paid by the Company for its
fiscal years ended December 31, 1996, December 31, 1995, December 31, 1994 and
December 31, 1993 to its Chief Executive Officer and all other executive
officers (collectively, the "Named Executive Officers") whose total salary and
bonus from the Company exceeded $100,000 in the fiscal year ended December 31,
1996:
Annual Compensation(1)
-------------------------------------------------
Fiscal Year
Name and Ended All Other
Principal Position December 31, Salary Bonus Compensation
------------------ ------------ ------ ----- ------------
Scott Kraft 1996 $115,103 0 --
Chief Executive Officer 1995 $111,293 0 --
and President 1994 $ 75,000 $25,000 --
1993 $ 78,000 0 --
(1) The compensation described in this table does not include medical
insurance, retirement benefits and other benefits received by the foregoing
executive officers which are available generally to all employees of the Company
and certain perquisites and other personal benefits received by the foregoing
executive officers of the Company, the value of which did not exceed the lesser
of $50,000 or 10% of the executive officer's cash compensation in the table.
Stock Option Plan. In February 1995, the Board of Directors approved and in
April 1995, the Company's shareholders ratified the Company's 1995 Incentive
Stock Option Plan (the "Option Plan"). The Option Plan provides for the grant of
options to officers, directors and other key employees of the Company to
purchase up to an aggregate of 200,000 shares of Common Stock. The Option Plan
is to be administered by the Stock Option Committee of the Board of Directors,
which has complete discretion to select the optionee and to establish the terms
and conditions of each option, subject to the provisions of the Option Plan. The
Stock Option Committee has not yet been appointed. Options granted under the
Option Plan may be "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified
options, and will be designated as such.
The exercise price of incentive stock options may not be less than 100% of
the fair market value of the Company's common stock as of the date of grant
(110% of the fair market value if the grant is to an employee who owns more than
10% of the total combined voting power of all classes of capital stock of the
Company). The Code currently limits to $100,000 the aggregate value of common
stock that may be acquired in any one year pursuant to incentive stock options
under the Option Plan or any other option plan adopted by the Company.
Non-qualified options may be granted under the Option Plan at an exercise price
less than the fair market value of the common stock on the date of grant.
Non-qualified options also may be granted without regard to any restrictions on
the amount of common stock that may be acquired pursuant to such options in any
one year.
30.
<PAGE>
In general, upon termination of employment of an optionee, all options
granted to such person which were not exercisable on the date of such
termination would immediately terminate, and any options that are exercisable
would terminate 90 days (one year in the case of termination by reason of
disability) following termination of employment except in the event of
termination for cause. In the event of termination for cause, all unexercised
options would terminate 30 days after termination.
Options may not be exercised more than ten years after the grant (five
years after the grant if the grant is an incentive stock option to any employee
who owns more than 10% of the total combined voting power of all classes of
capital stock of the Company). Options granted under the Option Plan are not
transferable and may be exercised only by the respective grantees during their
lifetime or by their heirs, executors or administrators in the event of death.
Under the Option Plan, shares subject to canceled or terminated options are
reserved for subsequently granted options. The number of options outstanding and
the exercise price thereof are subject to adjustment in the case of certain
transactions such as mergers, recapitalization, stock splits or stock dividends.
The Option Plan is effective for ten years, unless sooner terminated or
suspended.
As of December 31, 1996, the Board of Directors of the Company authorized
the President to be eligible to participate in an Incentive Stock Option Plan.
Under the Plan, the Company has offered the President an option to purchase
20,000 shares of common stock for a price of $5 per share. This option expires
December 31, 1999 one year after expiration of his employment contract.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 28, 1997 by (i) each
person who is known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock; (ii) each of the Company's directors; (iii)
each of the Named Executive Officers; and (iv) officers and directors of the
Company as a group:
Amount and
Nature of Approximate
Beneficial Percent of
Name and Address(1) Ownership(2) Ownership(2)
- -------------------------------------------- ------------ ------------
Dr. Allan Ross(3) .......................... 140,544 14.6%
William M. Slater .......................... 5,456 *
Scott A. Kraft ............................. 704 *
Mark Boileau ............................... 528 *
All executive officers and directors
as a group (4 persons)(3) ................ 147,232 15.3%
- ----------
* Represents less than 1%.
(1) The address of each person is c/o the Company at 15265 Alton Parkway, Suite
100, Irvine, California 92618.
(2) Nature of beneficial ownership of securities is direct and arises from sole
voting power and sole investment power, subject to community property laws
where applicable.
31.
<PAGE>
(3) Includes currently exercisable options to purchase 120,000 shares of Common
Stock (of which 40,000 may be acquired by Dr. Ross from Debolt Enterprises,
Inc.).
Item 12. Certain Relationships and Related Transactions.
On January 6, 1994, Dr. Allan Ross, a Director of the Company, entered into
that certain Loan Agreement with the Company pursuant to which Dr. Ross provided
the Company with a line of credit of up to $1,200,000 and made available to the
Company irrevocable letters of credit in an amount up to $300,000 (the "Credit
Facility"). The initial rate for monies borrowed under the Loan Agreement was 8%
per annum; the interest rate under the Loan Agreement adjusts semi-annually on
February 1 and August 1 to a rate that is equal to 5% above the Federal Discount
Rate in effect on the date of adjustment. The Company is obligated to make equal
monthly payments of principal and interest, which adjust when additional amounts
are borrowed and/or the interest rate changes, sufficient to fully repay the
outstanding balance of amounts borrowed under the Loan Agreement by the end of
December 2000. In addition to the foregoing interest rate, the Company has
agreed to pay Dr. Ross, on each anniversary of the Loan Agreement, an amount
equal to 2% of the difference between the amount borrowed under the credit
facility and the amount available thereunder. In consideration for entering into
the Loan Agreement, the Company agreed to grant Dr. Ross the opportunity,
through stock options or otherwise, to purchase 4% of the capital stock (40,000
shares) of the Company for a total purchase price of $100.
The amounts borrowed under the Loan Agreement are secured by a first lien
on all of the assets of the Company, including without limitation, all of the
BSON stock owned by the Company, and all accounts receivable, inventory, cash,
contract rights and other tangible and intangible assets. The Loan Agreement
also contains certain negative covenants pursuant to which the Company, among
other things, is prohibited from declaring any dividend on its Common Stock
(other than stock dividends), from repurchasing or redeeming its shares, from
incurring additional indebtedness other than in the usual course of its
business, from further encumbering its assets, from selling its assets, or from
expending more than $300,000 for acquisition of fixed or capital assets during
any year. A breach of any of the foregoing covenants would cause all principal
and interest to be immediately due and payable. The Company borrowed $800,000
under its line of credit. The Company had not made any of the monthly payments
that it was required to make pursuant to the Loan Agreement until September 1995
when the Company and Dr. Ross restructured the Credit Facility. The Company and
Dr. Ross entered into a Loan Modification in September 1995 that required the
Company to pay Dr. Ross $360,000 which was treated as a reduction of principal,
reduced the Company's loan payments to $20,000 per month, increased the number
of shares of the Company's Common Stock that Dr. Ross would receive upon
exercise of his option from 40,000 to 80,000 and made the loan current as of
September 1, 1995. The Company has paid the $20,000 monthly payments since the
date of such loan modification.
32.
<PAGE>
The Board of Directors believes that the terms of the Credit Agreement are,
at this time, the most favorable terms that are reasonably available to the
Company. Ordinarily, credit facilities are extended to companies by
institutional lenders based on both the Company's prior operations and on the
amount of assets that can be used as collateral. Unfortunately, because (i) the
Company was in bankruptcy a few years ago, (ii) its business has changed
significantly (i.e., the Company no longer generates cash from the sale of bus
stop shelters to investors), and (iii) its inventory and other assets are not
preferred types of collateral, the Company does not believe that it could
currently obtain a similar loan from an unaffiliated lender. If the Company's
financial condition and credit worthiness improve and, as a result, additional
loan opportunities become available, the Company will evaluate replacing the
Credit Agreement with a credit facility from an unaffiliated lender.
33.
<PAGE>
The Company and Baron LLC, of which Dr. Ross is the managing partner and
majority owner, entered into a Memorandum of Understanding effective as of
January 1, 1994 pursuant to which the Company can accrue the $11,237.17 monthly
payments owed by the Company to Baron LLC. Such accrued amounts bear interest at
the same interest rate as the Credit Facility, and Baron LLC can demand at any
time that the accrued amounts be paid in full over 48 equal monthly payments of
principal and interest.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
No exhibits were filed during the fiscal year covered by this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal year covered by
this report.
34.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Metro Display Advertising, Inc.
April 11, 1997 By /s/ SCOTT KRAFT
------------------------
Scott Kraft
Chief Executive Officer and President
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ SCOTT KRAFT Chief Executive Officer and President April 11, 1997
- ------------------------------- (Principal Executive, Financial and
Scott Kraft Accounting Officer)
/s/ ALLAN L. ROSS, M.D. Chairman of the Board of Directors April 11, 1997
- -------------------------------
Allan L. Ross, M.D.
/s/ MARK R. BOILEAU Director April 11, 1997
- -------------------------------
Mark R. Boileau
Director and Secretary April 11, 1997
- -------------------------------
William M. Slater
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 74,947
<SECURITIES> 0
<RECEIVABLES> 1,133,343
<ALLOWANCES> (143,539)
<INVENTORY> 0
<CURRENT-ASSETS> 1,518,595
<PP&E> 8,854,093
<DEPRECIATION> (2,649,509)
<TOTAL-ASSETS> 11,584,378
<CURRENT-LIABILITIES> 1,912,051
<BONDS> 0
0
0
<COMMON> 9,504,532
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,584,378
<SALES> 0
<TOTAL-REVENUES> 7,658,806
<CGS> 0
<TOTAL-COSTS> 5,044,901
<OTHER-EXPENSES> 2,486,174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195,411
<INCOME-PRETAX> (103,399)
<INCOME-TAX> (12,000)
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<NET-INCOME> (91,399)
<EPS-PRIMARY> (.09)
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</TABLE>
