-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U1FaCErC9JWlYYRbzas1Vj7trGlDmVs4yKcWKf0OvoHm2bV+8pyX5PkX7KMeEOGJ c+BUafWzGX9VoN5D/YWF8w== 0000950134-98-002575.txt : 19980331 0000950134-98-002575.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950134-98-002575 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAMAR ADVERTISING CO CENTRAL INDEX KEY: 0000899045 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING AGENCIES [7311] IRS NUMBER: 721205791 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12407 FILM NUMBER: 98577297 BUSINESS ADDRESS: STREET 1: 5551 CORPORATE BLVD CITY: BATON ROUGE STATE: LA ZIP: 70808 BUSINESS PHONE: 5049261000 MAIL ADDRESS: STREET 1: 5551 CORPORATE BOULEVARD CITY: BATON ROUGE STATE: LA ZIP: 70808 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 1-12407 LAMAR ADVERTISING COMPANY (Exact name of registrant as specified in its charter) Delaware 72-1205791 (State or other jurisdiction of incorporation or organization I.R.S. Employer Identification No.) 5551 Corporate Blvd., Baton Rouge, LA 70808 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (504) 926-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Senior Subordinated Notes due 2006 Name of each Exchange on which registered: New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Class A Common Stock, $0.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 16, 1998: $815,088,636 The number of shares of the registrant's Class A Common Stock outstanding as of March 16, 1998: 28,692,247 The number of shares of the registrant's Class B Common Stock outstanding as of March 16, 1998: 18,762,912 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's proxy statement for the Annual Meeting of Stockholders to be held on May 21, 1998 are incorporated by reference into Part III of this Form 10-K. 2 NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K of Lamar Advertising Company ("Lamar" or the "Company") contains forward-looking statements concerning, among other things, the Company's expected future revenues, operations and expenditures, competitors or potential competitors, acquisition activity, application for and retention of logo sign franchises and the regulation of the outdoor advertising industry. These forward-looking statements represent the expectations of Lamar's management as of the filing date of this Form 10-K. The Company's actual results could differ materially from those anticipated by the forward- looking statements due to a number of factors, including (i) risks and uncertainties relating to leverage; (ii) the need for additional funds; (iii) the integration of companies acquired by Lamar and the Company's ability to recognize cost savings or operating efficiencies as a result of such acquisitions; (iv) the continued popularity of outdoor advertising as an advertising medium; (v) the regulation of the outdoor advertising industry and (vi) the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" under Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations. PART I ITEM 1. BUSINESS GENERAL Lamar is one of the largest and most experienced owners and operators of outdoor advertising structures in the United States. It conducts a business that has operated under the Lamar name since 1902. As of December 31, 1997, the Company operated approximately 43,000 outdoor advertising displays in 24 states and, after giving effect to the Company's acquisitions of Ragan Outdoor and Derby Outdoor in January 1998 and Pioneer Outdoor in February 1998, the Company operated approximately 47,000 outdoor advertising displays in 26 states. The Company provides a full array of poster and bulletin displays in 59 of the markets in which it currently operates. In its remaining markets, the Company operates high-profile bulletin displays along interstate and other major highways. The Company also operates the largest logo sign business in the United States. Logo signs are erected pursuant to state-awarded franchises on public rights-of-way near highway exits and deliver brand name information on available gas, food, lodging and camping services. The Company currently operates logo sign franchises in 18 of the 22 states that have a privatized logo sign program. As of December 31, 1997, the Company maintained over 22,300 logo sign structures containing over 68,600 logo advertising displays. In addition, the Company operates the tourism signage franchises in four states and the province of Ontario, Canada. The Company has also expanded into the transit advertising business through the operation of displays on bus shelters, bus benches and buses in 13 of its primary markets, three markets in the state of South Carolina, one market in Utah, and one market in the state of Georgia. The Company's strategy is to be the leading provider of outdoor advertising in each of the markets it serves, with a historical emphasis on providing a full range of outdoor advertising services in middle markets. Important elements of the Company's strategy are its decentralized management structure and its focus on providing high quality local sales and service. In order to be more responsive to local market demands, the Company offers a full complement of outdoor advertising services coupled with local production facilities, management and account executives through its local offices. Local advertising constituted approximately 80% of the Company's outdoor advertising net revenues in 1997, which management believes is higher than the industry average. While maintaining its local focus, the Company seeks to expand its operations within existing and contiguous markets. The Company also pursues expansion opportunities, including acquisitions, in additional markets. In the logo sign business, the Company's strategy is to maintain its position as the largest operator of logo signs 2 3 in the U.S. by expanding through the addition of state logo franchises as they are awarded and through possible acquisitions. The Company may also pursue expansion opportunities in transit and other out-of-home media that the Company believes will enable it to leverage its management skills and market position. MARKETS As of December 31, 1997, the Company's 64 primary outdoor advertising markets were: Mobile, Alabama Hattiesburg, Mississippi Montgomery, Alabama Jackson, Mississippi Phoenix, Arizona Kansas City, Missouri Sacramento, California Osage Beach, Missouri Colorado Springs, Colorado Buffalo, New York Denver, Colorado Rochester, New York Daytona Beach, Florida Syracuse, New York Fort Myers, Florida Elizabethtown, North Carolina Fort Walton, Florida Dayton, Ohio Lakeland, Florida Youngstown, Ohio Panama City, Florida Allentown, Pennsylvania Pensacola, Florida Altoona, Pennsylvania Tallahassee, Florida Erie, Pennsylvania Albany, Georgia Reading, Pennsylvania Atlanta, Georgia Williamsport, Pennsylvania Augusta, Georgia York, Pennsylvania Savannah, Georgia Columbia, South Carolina Valdosta, Georgia Clarksville, Tennessee Lexington, Kentucky Knoxville, Tennessee Louisville, Kentucky Nashville, Tennessee Alexandria, Louisiana Beaumont, Texas Baton Rouge, Louisiana Brownsville, Texas Hammond, Louisiana Corpus Christi, Texas Houma, Louisiana Houston, Texas Lafayette, Louisiana Laredo, Texas Lake Charles, Louisiana Wichita Falls, Texas Monroe, Louisiana Richmond, Virginia New Orleans, Louisiana Roanoke, Virginia Shreveport, Louisiana Bluefield, West Virginia Detroit, Michigan Bridgeport, West Virginia Grand Rapids, Michigan Huntington, West Virginia Gulfport, Mississippi Wheeling, West Virginia
In addition, during January 1998 the Company acquired outdoor advertising properties in Rockford, Illinois, Cedar Rapids, Iowa and Quad Cities Illinois-Iowa from Ragan Outdoor and in Rapid City, South Dakota from Derby Outdoor. In February 1998, the Company acquired outdoor advertising displays in two markets in Arkansas and Missouri from Pioneer Outdoor. In March 1998, the Company signed a definitive agreement to purchase the outdoor advertising assets of Northwest Outdoor Advertising, L.L.C., which operates approximately 4,000 displays out of four primary offices located in Spokane, Washington, Boise, Idaho, Casper, Wyoming and Billings, Montana. The acquisition, which the Company expects to complete in April 1998, is subject to regulatory approval and satisfaction of other customary closing conditions. 3 4 As of December 31, 1997, the Company operated the logo sign franchises for the following states: Florida Nevada Georgia New Jersey Kansas Ohio Kentucky Oklahoma Michigan South Carolina Minnesota Tennessee Mississippi Texas Missouri Utah Nebraska Virginia
BUSINESS STRATEGY OUTDOOR ADVERTISING The Company's overall business strategy is to be the leading provider of outdoor advertising in the markets it serves, with a historical emphasis on providing a full range of outdoor advertising services in middle markets. This strategy includes the following elements: OPERATING STRATEGY: HIGH QUALITY LOCAL SALES AND SERVICE. The Company identifies and closely monitors the needs of its customers and seeks to provide them with quality advertising products at a lower cost than competitive media. The Company believes it has a reputation for providing excellent customer service and quality outdoor advertising space and displays. At December 31, 1997, the Company's 231-person sales force was supported by 53 full-service offices. In markets with such offices, the Company has recruited and trained a skilled sales force, placing an emphasis on market research and use of artistic creativity. Each salesperson is compensated under a performance-based compensation system and supervised by a sales manager executing a coordinated marketing plan. Art departments assist local customers in the development and production of creative, effective advertisements. The Company believes repeat sales are evidence that the Company delivers quality products and services. CENTRALIZED CONTROL/DECENTRALIZED MANAGEMENT. Management believes that, in 51 of the 64 markets in which the Company operated at December 31, 1997, the Company is the only outdoor advertising company offering a full complement of outdoor advertising services coupled with local production facilities, management and account executives. Local offices operate in defined geographic areas and function essentially as independent business units, consistent with senior management's philosophy that a decentralized organization is more responsive to particular local market demands. The Company maintains centralized accounting and financial control over its local operations, but local managers are responsible for the day-to-day operations in each local market and are compensated according to that market's financial performance. Each local manager reports to one of six regional managers who in turn report to the Company's Chief Executive Officer. Management believes empowering local management and sales personnel to respond to market conditions has been a major factor in the Company's success. EFFECTIVE INVENTORY MANAGEMENT. The Company believes that the local presence of sales personnel contributes to the Company's ability to increase occupancy rates by attracting and servicing local customers. Additionally, a national sales office at corporate headquarters allows the Company to package inventory effectively to take advantage of national advertising campaigns in the Company's markets. The Company's inventory is managed by state-of-the-art mapping, charting and accounting software. 4 5 MIDDLE MARKET FOCUS. The Company's leading position in 54 of the 64 outdoor advertising markets in which the Company operated at December 31, 1997 is a result of a successful operating strategy dedicated to growth and acquisitions primarily within the target range of markets having a population ranking between 50 and 250. Management believes that operating in these markets provides certain advantages, including the benefits of a diverse and reliable mix of local advertisers, geographic diversification and an ability to package inventory effectively. EFFECTIVE USE OF TECHNOLOGICAL ADVANCES. The Company seeks to capitalize on technological advances that enhance its productivity and increase its ability to effectively respond to its customers' needs. The Company's continued investment in equipment and technology provides for greater ongoing benefits in the areas of sales, production and operations. GROWTH STRATEGY: INTERNAL GROWTH. Within its existing markets, the Company enhances revenue and cash flow growth by employing highly targeted local marketing efforts to improve display occupancy rates and by selectively increasing advertising rates. This strategy is facilitated through its local sales and service offices, which allow management to respond quickly to the demands of its local customer base. In addition, the Company routinely invests in upgrading its existing structures and constructing new display faces in order to provide quality service to its current customers and to attract new advertisers. ACQUISITIONS. Aggressive internal growth is enhanced by focused strategic acquisitions, resulting in increased operating efficiencies, greater geographic diversification and increased market penetration. The Company has demonstrated its ability to grow successfully through acquisitions, having completed over 106 acquisitions since 1983, 24 of which were completed in 1997. In addition to acquiring positions in new markets, the Company purchases smaller outdoor advertising properties within existing or contiguous markets. Acquisitions offer opportunities for inter-market cross-selling and the opportunity to centralize and combine accounting and administrative functions, thereby achieving economies of scale. In addition, the Company leverages its reputation for high quality local sales and service by taking advantage of opportunities to acquire high-profile bulletin displays that may become available in larger markets. The Company believes that there will be future opportunities for implementing the Company's acquisition strategy given the industry's fragmentation and current consolidation trends. During 1997, the Company increased the number of outdoor advertising displays it operates by approximately 47% by completing 24 strategic acquisitions. Certain of the Company's principal acquisitions are described below: PENN ADVERTISING, INC. On April 1, 1997, the Company acquired all of the outstanding capital stock of Penn Advertising, Inc. ("Penn") for a cash purchase price of approximately $167.0 million. Pursuant to the Penn acquisition, the Company acquired a total of 8,500 outdoor advertising displays throughout the states of Maryland, New York and Pennsylvania. On June 3, 1997, the Company sold approximately 1,450 of these displays in Baltimore, Maryland to Universal Outdoor, Inc. for a cash purchase price of approximately $46.5 million. The acquisition of Penn expanded the Company's presence in Pennsylvania and gave the Company an entry into New York. MCWHORTER ADVERTISING, INC. On May 15, 1997, the Company acquired all of the outstanding stock of McWhorter Advertising, Inc. ("McWhorter") for a cash purchase price of $8.5 million. Pursuant to the McWhorter acquisition, the Company acquired approximately 1,050 displays in West Virginia. 5 6 HEADRICK OUTDOOR, INC. On June 4, 1997, the Company acquired substantially all of the assets of Headrick Outdoor, Inc. for a cash purchase price of $76.6 million. Simultaneously with the Headrick acquisition, the Company sold approximately 9% of the outdoor advertising displays acquired from Headrick for $6.0 million in cash. The Headrick acquisition added approximately 3,200 bulletins in ten southeastern and midwestern states. NATIONAL ADVERTISING COMPANY On August 15, 1997, the Company acquired from Outdoor Systems, Inc. ("OSI"), for a cash purchase price of approximately $116.0 million (excluding approximately $2.0 million in capitalized costs), certain outdoor advertising assets that OSI had acquired from National Advertising Company, a wholly-owned subsidiary of Minnesota Mining and Manufacturing Company (the "3M Acquisition"). Pursuant to the 3M Acquisition, the Company acquired approximately 1,745 bulletin displays in the following ten markets: Phoenix, Arizona; Sacramento, California; Denver, Colorado; Atlanta, Georgia; Louisville, Kentucky; New Orleans, Louisiana; Detroit and Grand Rapids, Michigan; Kansas City, Missouri; and Houston, Texas. The acquisition marked the Company's entry into the states of Arizona, California and Michigan and its expansion into the 50 largest U.S. markets. RECENT ACQUISITIONS In January and February of 1998, the Company acquired Ragan Outdoor, Derby Outdoor and Pioneer Outdoor for an aggregate cash purchase price of approximately $50.2 million. In the Ragan acquisition, the Company acquired approximately 1,492 outdoor advertising displays in Rockford, Illinois, Cedar Rapids, Iowa and Quad Cities, Illinois-Iowa. In the Derby acquisition, the Company acquired approximately 455 displays Rapid City, South Dakota, and in the Pioneer acquisition the Company acquired approximately 2,350 outdoor advertising displays in two additional markets in Missouri. These acquisitions extended the Company's operations into the states of Iowa and South Dakota. In addition, in March 1998 the Company signed a definitive agreement to purchase the outdoor advertising assets of Northwest Outdoor Advertising, L.L.C. ("Northwest") for a cash purchase price of approximately $68.5 million. Northwest operates approximately 4,000 displays out of four primary offices located in Spokane, Washington, Boise, Idaho, Casper, Wyoming and Billings, Montana. The acquisition, which the Company expects to complete in April 1998, is subject to receipt of regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and satisfaction of other customary closing conditions. Until such conditions are met, there can be no assurance that the acquisition will be completed as contemplated. LOGO SIGNS The Company entered the business of logo sign advertising in 1988. The Company is now the largest provider of logo sign services in the United States, operating 18 of the 22 privatized state logo sign franchises. The Company's strategy is to continue to be the leading logo sign provider in the country. The Company also operates the tourism signing franchises in four states and the province of Ontario, Canada. Adopting many of the decentralized operational strategies of the outdoor advertising division, the Company's logo sign division maintains contacts and local sales offices in each of the states in which it operates. Relationships with customers are developed and maintained at the state level; accounting, MIS and certain administrative functions are centralized at the Company's headquarters. As the industry leader, the Company has gained significant operating experience and compiled a database of information it believes is unequalled in this industry. The Company shares its knowledge and database information with state highway departments initiating new logo sign programs, and believes this interaction provides significant advantages when seeking new logo sign franchises. 6 7 The Company believes its market-leading position in the logo sign industry will continue to increase as additional states privatize their logo sign programs and recognize the track record and core competency of the Company in building and servicing logo sign programs. The Company plans to pursue additional logo sign franchises, through both new franchise awards and, possibly, the acquisition of other logo sign franchise operators. Logo sign opportunities arise periodically, both from states initiating new logo sign programs and states converting from government owned and operated programs to privately owned and operated programs. Furthermore, the Company plans to pursue additional tourism signing programs in Canada and is seeking to expand into other state-authorized signage programs, such as those involving directional signs providing tourist information. TRANSIT AND OTHER The Company has recently expanded into the transit advertising business through the operation of displays on bus shelters, benches and buses in 13 of its outdoor advertising markets, three markets throughout the state of South Carolina, one market in Utah and one market in the state of Georgia. The Company plans to continue pursuing transit advertising opportunities that arise in its primary markets and to expand into other markets. With the growth in wireless communication, particularly the buildout of personal communications services systems following the recent FCC allocation of radio spectrum, the Company is exploring ways to realize additional revenue by contracting with communications providers for use of the Company's billboard structures to attach transmission and reception devices. The Company has agreements with four of the largest potential wireless communication service providers regarding possible future use of its billboards. COMPANY OPERATIONS OUTDOOR ADVERTISING SALES AND SERVICE: The Company conducts its outdoor advertising operations through local offices in each of the 64 markets in which the Company operated at December 31, 1997. Local offices operate in defined geographic areas and function essentially as independent business units, consistent with senior management's philosophy that a decentralized organization is more responsive to particular local market demands and provides greater incentives to employees. The Company's management policy is one of centralized accounting and financial control coupled with decentralized sales and production. Local managers in 53 of the Company's markets are responsible for the day-to-day operations of their office and are compensated according to the Company's financial performance in that market. Each local manager reports to one of six regional managers who in turn report to the Company's Chief Executive Officer. INVENTORY: The Company operates the following types of outdoor advertising displays: BULLETINS generally are 14 feet high and 48 feet wide (672 square feet) and consist of panels on which advertising copy is displayed. The advertising copy is either handpainted onto the panels at the Company's facilities in accordance with design specifications supplied by the advertiser and attached to the outdoor advertising structure, or printed with computer-generated graphics on a single sheet of vinyl that is "wrapped" around the structure. On occasion, to attract more attention, some of the panels may extend beyond the linear edges of the display face and may include three- dimensional embellishments. Because of their greater impact and higher cost, bulletins are usually located on major highways. 7 8 STANDARDIZED POSTERS generally are 12 feet high by 25 feet wide (300 square feet) and are the most common type of billboard. Advertising copy for these posters consists of lithographed or silk-screened paper sheets supplied by the advertiser that are pasted and applied like wallpaper to the face of the display, or single sheets of vinyl with computer-generated advertising copy that are wrapped around the structure. Standardized posters are concentrated on major traffic arteries. JUNIOR POSTERS usually are 6 feet high by 12 feet wide (72 square feet). Displays are prepared and mounted in the same manner as standardized posters, except that vinyl sheets are not typically used on junior posters. Most junior posters, because of their smaller size, are concentrated on city streets and target pedestrian traffic. For the year ended December 31, 1997, approximately 61% of the Company's outdoor advertising net revenues were derived from bulletin sales and 39% from poster sales. The Company regularly donates unoccupied display space for use by charitable and civic organizations. The physical structures are owned by the Company and are built on locations the Company either owns or leases. In each local office one employee typically performs site leasing activities for the markets served by that office. See Item 2. -- "Properties." Bulletin space is generally sold as individually selected displays, usually located on an interstate highway or other main road, for the duration of the advertising contract. Bulletins may also be sold as part of a rotary plan where advertising copy is periodically rotated from one location to another within a particular market. Poster space is generally sold in packages called "showings," which comprise a given number of displays in a market area. Posters provide advertisers with access either to a specified percentage of the general population or to a specific targeted audience. Displays making up a showing are placed in well-traveled areas and are distributed so as to reach a wide audience in a particular market. Bulletin space is generally sold for 12 month periods. Poster space averages between 30 and 90 days. PRODUCTION: The Company's local production staffs in 53 of its markets perform the full range of activities required to create and install outdoor advertising. Production work includes creating the advertising copy design and layout, painting the design or coordinating its printing and installing the designs on displays. The Company provides its production services to local advertisers and to advertisers that are not represented by advertising agencies, since national advertisers represented by advertising agencies often use preprinted designs that require only installation. The Company's creative and production personnel typically develop new designs or adopt copy from other media for use on billboards. The Company's artists also often assist in the development of marketing presentations, demonstrations and strategies to attract new advertisers. With the increased use of vinyl and pre-printed advertising copy furnished to the outdoor advertising company by the advertiser or its agency, outdoor advertising companies require less labor-intensive production work. In addition, increased use of vinyl and preprinted copy is also attracting more customers to the outdoor advertising medium. The Company believes that this trend over time will reduce operating expenses associated with production activities. CATEGORIES OF BUSINESS: The following table sets forth the top ten categories of business from which the Company derived its outdoor advertising revenues for 1997 and the respective percentages of such revenue. These business categories accounted for approximately 73% of the Company's total outdoor advertising net revenues in the year ended December 31, 1997. No one advertiser accounted for more than 3.0% of the Company's total outdoor advertising net revenues in that period. 8 9
CATEGORIES PERCENTAGE NET ADVERTISING REVENUES Restaurants 13% Retailers 11% Hotels and motels 9% Tobacco products 9% Automotive 7% Hospitals and medical care 6% Service 5% Miscellaneous 5% Gaming 4% Amusement - entertainment and sport 4% ------- Total 73% ===
Beginning in 1992, the leading tobacco companies substantially reduced their domestic advertising expenditures in response to societal and governmental pressure and other factors. Because tobacco advertisers tend to occupy displays in highly desirable locations, the Company historically has been able to attract substitute advertising for space which has become unoccupied as a result of reduced tobacco product advertisements, and management believes that the Company will continue to be able to attract such substitute advertising should tobacco advertisers further reduce their spending in the future. Recent developments in litigation involving the tobacco industry may result in the elimination of tobacco advertising altogether. See "Regulation" below and Item 7. - "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risks Affecting Future Operating Results -- Potential Elimination or Reduction in Tobacco Advertising." LOGO SIGNS The Company is the largest provider of logo sign services in the United States and operates over 22,300 logo sign structures containing over 68,600 logo advertising displays. The Company has been awarded exclusive franchises to erect and operate logo signs in the states of Florida, Georgia, Michigan, Minnesota, Mississippi, Nebraska, New Jersey, Ohio, Oklahoma, South Carolina, Texas, Utah and Virginia, and through a 66.7% owned partnership in the state of Missouri. In addition, the Company has acquired the logo sign franchises in Kansas, Kentucky, Nevada and Tennessee. The Company also operates the tourism signing franchises for the states of Kentucky, Michigan, Nebraska and Ohio as well as for the province of Ontario, Canada. State logo sign franchises represent the exclusive contract right to erect and operate logo signs within a state. The term of the contracts vary, but generally range from ten to twenty years, including renewal terms. The logo sign contracts generally provide for termination by the state prior to the end of the term of the franchise, in most cases with compensation to be paid to the Company. Typically, at the end of the term of the franchise, ownership of the structures is transferred to the state without compensation to the Company. None of the Company's logo sign franchises terminate in the next two years and three are subject to renewal during that period. The Company expects to be able to compete effectively for retention of franchises when their terms expire. The Company also designs and produces logo sign plates for customers throughout the country, including for use in states which have not yet privatized their logo sign programs. EMPLOYEES The Company employed approximately 1,200 persons at December 31, 1997. Of these, 66 were engaged in overall management and general administration at the Company's management headquarters and the remainder were employed in the Company's operating offices. Of these, approximately 231 were direct sales and marketing personnel. 9 10 The Company has five local offices covered by collective bargaining agreements, consisting of painters, billposters and construction personnel. The Company believes that its relations with its employees, including its 53 unionized employees, are good, and the Company has never experienced a strike or other labor dispute. The Company believes its employee retention record evidences its good employee relations. The Company offers most employees a range of benefits including a profit sharing/401(k) plan and life, health and dental insurance. COMPETITION OUTDOOR ADVERTISING The Company competes in each of its markets with other outdoor advertisers as well as other media, including broadcast and cable television, radio, print media and direct mail marketers. In addition, the Company also competes with a wide variety of out-of-home media, including advertising in shopping centers, malls, airports, stadiums, movie theaters and supermarkets, as well as on taxis, trains and buses. Advertisers compare relative costs of available media and cost-per- thousand impressions, particularly when delivering a message to customers with distinct demographic characteristics. In competing with other media, outdoor advertising relies on its relative cost efficiency and its ability to reach a broad segment of the population in a specific market or to target a particular geographic area or population with a particular set of demographic characteristics within that market. The outdoor advertising industry is highly fragmented, consisting of several large outdoor advertising and media companies with operations in multiple markets as well as smaller and local companies operating a limited number of structures in single or a few local markets. Although some consolidation has occurred over the past few years, according to the Outdoor Advertising Association of America ("OAAA") there are approximately 600 companies in the outdoor advertising industry operating approximately 396,000 billboard displays. In several of its markets, the Company encounters direct competition from other major outdoor media companies, including Outdoor Systems, Inc. and Clear Channel Communications, Inc. (formerly Eller Media) both of which have a larger national network and may have greater total resources than the Company. The Company believes that its strong emphasis on sales and customer service and its position as a major provider of advertising services in each of its primary markets enables it to compete effectively with the other outdoor advertising companies, as well as other media, within those markets. LOGO SIGNS The Company faces competition in obtaining new logo sign franchises and in bidding for renewals of expiring franchises. The Company faces competition from two other national providers of logo signs in seeking logo franchises. In addition, local companies within each of the states that solicit bids will compete against the Company in the open-bid process. Competition from these sources is also encountered at the end of each contract period. The Company believes its operations model, which includes local sales offices, comprehensive databases of information and strategic alliances and its knowledge of the industry, should provide a competitive advantage in pursuing future franchises. In marketing logo signs to advertisers, the Company competes with other forms of out-of-home advertising. The Company believes, however, that logo sign advertising offers an effective, low-cost directional advertising service, which makes it attractive to potential advertisers. 10 11 REGULATION Outdoor advertising is subject to governmental regulation at the federal, state and local levels. Federal law, principally the Highway Beautification Act of 1965 (the "HBA") regulates outdoor advertising on federally aided primary and interstate highways. The HBA requires, as a condition to federal highway assistance, states to restrict billboards on such highways to commercial and industrial areas, and requires certain additional size, spacing and other limitations. All states have passed state billboard control statutes and regulations at least as restrictive as the federal requirements, including removal at the owner's expense and without compensation of any illegal signs on such highways. The Company believes that the number of its billboards that may be subject to removal as illegal is immaterial. No state in which the Company operates has banned billboards, but some have adopted standards more restrictive than the federal requirements. Municipal and county governments generally also have sign controls as part of their zoning laws. Some local governments prohibit construction of new billboards and some allow new construction only to replace existing structures, although most allow construction of billboards subject to restrictions on zones, size, spacing and height. Federal law does not require removal of existing lawful billboards, but does require payment of compensation if a state or political subdivision compels the removal of a lawful billboard along a federally aided primary or interstate highway. State governments have purchased and removed legal billboards for beautification in the past, using federal funding for transportation enhancement programs, and may do so in the future. Governmental authorities from time to time use the power of eminent domain to remove billboards. Thus far, the Company has been able to obtain satisfactory compensation for any of its billboards purchased or removed as a result of governmental action, although there is no assurance that this will continue to be the case in the future. Local governments do not generally purchase billboards for beautification, but some have attempted to force removal of legal but nonconforming billboards (billboards which conformed with applicable zoning regulations when built but which do not conform to current zoning regulations) after a period of years under a concept called "amortization," by which the governmental body asserts that just compensation is earned by continued operation over time. Although there is some question as to the legality of amortization under federal and many state laws, amortization has been upheld in some instances. The Company generally has been successful in negotiating settlements with applicable localities for billboards required to be removed. Restrictive regulations also limit the Company's ability to rebuild or replace nonconforming billboards. To date, however, regulations in the Company's markets have not materially adversely affected its operations. However, the outdoor advertising industry is heavily regulated and at various times and in various markets can be expected to be subject to varying degrees of regulatory pressure affecting the operation of advertising displays. Accordingly, although the Company's experience to date is that the regulatory environment can be managed, no assurance can be given that existing or future laws or regulations will not materially and adversely affect the Company. Approximately 9% of the Company's outdoor advertising net revenues and 8% of consolidated net revenues in 1997 came from the tobacco products industry, compared to 10% of outdoor advertising net revenues for fiscal 1996, 9% for fiscal 1995, 7% for fiscal 1994 and 1993 and 12% for fiscal 1992. Manufacturers of tobacco products, principally cigarettes, were historically major users of outdoor advertising displays. Beginning in 1992, the leading tobacco companies substantially reduced their domestic advertising expenditures in response to societal and governmental pressures and other factors. There can be no assurance that the tobacco industry will not further reduce advertising expenditures in the future either voluntarily or as a result of governmental regulation or as to what effect any such reduction may have on the Company. 11 12 In June 1997 several of the major tobacco companies in the United States and numerous state attorneys general reached agreement on a proposed settlement of litigation between such parties. The terms of this proposed settlement include a ban on all outdoor advertising of tobacco products commencing nine months after finalization of the settlement. The settlement, however, is subject to numerous conditions, the most notable of which is the enactment of legislation by the federal government. Such legislation is still pending before Congress. At this time, it is uncertain when a definitive settlement will be reached, if at all, or what the terms of any such settlement will be. An elimination or reduction in billboard advertising by the tobacco industry could cause an immediate reduction in the Company's outdoor advertising revenues and may simultaneously increase the Company's available inventory. An increase in available inventory could result in the Company reducing its rates or limiting its ability to raise rates for some period of time. If the tobacco litigation settlement were to be finalized in its current form and if the Company were unable to replace revenues from tobacco advertising with revenues from other sources, such settlement could have a material adverse effect on the Company's results of operations. While the Company believes that it would be able to replace a substantial portion of revenues from tobacco advertising that would be eliminated due to such a settlement with revenues from other sources, any replacement of tobacco advertising may take time and require a reduction in advertising rates. In addition, the states of Florida, Mississippi and Texas have entered into separate settlements of litigation with the tobacco industry. None of these settlements is conditioned on federal government approval. The Florida and Mississippi settlements provided for the elimination of all outdoor advertising of tobacco products by February 1998 in such states and at such time all of the Company's tobacco billboards were removed. The Texas settlement requires the elimination of all outdoor advertising of tobacco products by June 1998. The Company operates 4,253 outdoor advertising displays in seven markets in Florida and approximately $1.8 million of its approximately $19.2 million in net revenues in Florida during 1997 were attributable to tobacco advertising. In addition, the Company operates 2,532 outdoor advertising displays in three markets in Mississippi and approximately $.8 million of its approximately $10.6 million in net revenues in Mississippi during 1997 were attributable to tobacco advertising. The Company operates approximately 3,300 outdoor advertising displays in six markets in Texas and approximately $.8 million of its approximately $11.0 million in net revenues in Texas during 1997 were attributable to tobacco advertising. Further, the settlement of tobacco-related claims and litigation in other jurisdictions may also adversely affect outdoor advertising revenues. ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title - ---- --- ----- Kevin P. Reilly, Jr. 43 Chairman, President and Chief Executive Officer Keith A. Istre 45 Chief Financial Officer and Treasurer Charles W. Lamar, III 49 General Counsel and Secretary
Each officer's term of office extends until the meeting of the Board of Directors following the next annual meeting of stockholders and until a successor is elected and qualified or until his or her earlier resignation or removal. Kevin P. Reilly, Jr. has served as the Company's President and Chief Executive Officer since February 1989 and as a director of the Company since February 1984. Mr. Reilly served as President of the Company's Outdoor Division from 1984 to 1989. Mr. Reilly, an employee of the Company since 1978, has also served as Assistant and General Manager of the Company's Baton Rouge Region and Vice President and General Manager of the Louisiana Region. Mr. Reilly received a B.A. from Harvard University in 1977. 12 13 Keith A. Istre has been Chief Financial Officer of the Company since February 1989 and a director of the Company since February 1991. Mr. Istre joined the Company as Controller in 1978. Prior to joining the Company, Mr. Istre was employed by a public accounting firm in Baton Rouge from 1975 to 1978. Mr. Istre graduated from the University of Southwestern Louisiana in 1974 with a B.S. in accounting. Charles W. Lamar, III joined the Company in 1982 as General Counsel and has been a director of the Company since 1973. Prior to joining the Company, Mr. Lamar maintained his own law practice and was employed by a law firm in Baton Rouge. Mr. Lamar received a B.A. in Philosophy from Harvard University in 1971, an M.A. in Economics from Tufts University in 1972 and a J.D. from Boston University in 1975. ITEM 2. PROPERTIES The Company's 53,500 square foot management headquarters is located in suburban Baton Rouge, Louisiana. The Company occupies approximately 40% of the space in this facility and leases the remaining space. The Company owns 42 local operating facilities with front office administration and sales office space connected to back-shop poster and bulletin production space, and leases an additional 22 operating facilities at an aggregate lease expense for 1997 of approximately $627,000. The Company owns approximately 964 parcels of property beneath outdoor structures. As of December 31, 1997, the Company had approximately 23,000 active outdoor site leases accounting for a total annual lease expense of $25.2 million. This amount represented 14% of total outdoor advertising net revenues for that period, which is consistent with the Company's historical lease expense experience. The Company's leases are for varying terms ranging from month-to-month to in some cases a term of over ten years, and many provide the Company with renewal options. There is no significant concentration of displays under any one lease or subject to negotiation with any one landlord. The Company believes that an important part of its management activity is to manage its lease portfolio and negotiate suitable lease renewals and extensions. ITEM 3. LEGAL PROCEEDINGS The Company from time to time is involved in litigation in the ordinary course of business, including disputes involving advertising contracts, site leases, employment claims and construction matters. The Company is also involved in routine administrative and judicial proceedings regarding billboard permits, fees and compensation for condemnations. The Company is not a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 13 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since August 2, 1996, the Company's Class A Common Stock has traded on the over-the-counter market and prices have been quoted on the Nasdaq National Market under the symbol "LAMR." Prior to August 2, 1996, the day on which the Class A Common Stock was first publicly traded, there was no public market for the Class A Common Stock. On December 31, 1997, the Company declared a 3-for-2 stock split of shares of Class A Common Stock, which was paid in the form of a 50% stock dividend on February 27, 1998. All share and per share amounts included herein have been restated to reflect this split. As of March 16, 1998, the Class A Common Stock was held by 231 shareholders of record. The Company believes that the actual number of beneficial holders of the Class A Common Stock is substantially greater than the stated number of holders of record because a substantial portion of the Class A Common Stock is held in "street name." The following table sets forth, for the periods indicated, the high and low sale prices for the Class A Common Stock as reported by Nasdaq.
HIGH LOW ---- --- Fiscal year ended October 31, 1996: Fourth Quarter (beginning August 2, 1996) $28.33 $13.42 Transition period ended December 31, 1996: $18.67 $15.00 Fiscal year ended December 31, 1997: First Quarter $17.08 $11.83 Second Quarter 19.08 10.67 Third Quarter 21.33 15.83 Fourth Quarter 27.17 17.67
The Company's Class B Common Stock is not publicly traded and is held of record by one person. The Company does not anticipate paying dividends on either class of its common stock in the foreseeable future. The Company's Class A Preferred Stock is entitled to preferential dividends, in an annual aggregate amount of $364,903, before any dividends may be paid on the common stock. Any future determination as to the payment of dividends will be subject to such limitations, will be at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial condition, capital requirements and other factors deemed relevant by the Board of Directors. In September 1997, the Company issued $200 million in principal amount of 8 5/8% Senior Subordinated Notes due 2007 (the "Initial Notes"). The Company believes the sale of the Initial Notes qualified as a transaction by an issuer not involving a public offering within the meaning of Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), based on the manner of offering (a negotiated sale to a limited number of "qualified institutional buyers" as defined in Rule 501 under the Securities Act) and the purchasers' financial status, investment experience and investment intent, as represented to the Company. In December 1997, the Company completed an offer to exchange $200 million in principal amount of 8 5/8% Senior Subordinated Notes due 2007 for a like principal amount of the Initial Notes. The exchange offer was registered under the Securities Act. 14 15 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated statement of operations and balance sheet data presented below are derived from the audited consolidated financial statements of the Company. Effective January 1, 1997, the Company changed its fiscal year from a twelve-month period ending October 31 to a twelve-month period ending December 31. The year end change was made to conform to the predominant year ends within the outdoor advertising industry. The results of operations for the two- month transition period ended December 31, 1996 are presented in the audited consolidated financial statements presented herein. The data presented below should be read in conjunction with the audited consolidated financial statements, related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included herein. STATEMENT OF OPERATIONS DATA:
For the Years Ended (Dollars in thousands) October 31, December 31, ---------------- ------------ 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Revenues: Net advertising revenues $65,365 83,627 101,871 119,900 200,508 Other income 1,159 846 537 702 554 ------- ------- ------- ------- --------- Total net revenues 66,524 84,473 102,408 120,602 201,062 ------- ------- ------- ------- --------- Operating Expenses: Direct advertising expenses 23,830 28,959 34,386 41,184 63,390 General & administrative expenses 19,504 24,239 27,057 29,466 45,368 Depreciation & amortization 8,924 11,352 14,942 16,470 48,037 ------- ------- ------- ------- --------- Total operating expenses 52,258 64,550 76,385 87,120 156,795 ------- ------- ------- ------- --------- Operating Income 14,266 19,923 26,023 33,482 44,267 ------- ------- ------- ------- --------- Non-operating Expense (Income): Interest income (218) (194) (199) (240) (1,723) Interest expense 11,502 13,599 15,783 15,441 38,230 Loss (gain) on disposition of assets 729 675 1,476 91 (15) Other expense 576 616 655 242 280 ------- ------- ------- ------- --------- Total non-operating expense 12,589 14,696 17,715 15,534 36,772 ------- ------- ------- ------- --------- Earnings before income taxes & extraordinary item 1,677 5,227 8,308 17,948 7,495 Income tax expense (benefit) (1) 476 (2,072) (2,390) 7,099 4,654 ------- ------- ------- ------- --------- Extraordinary loss on debt extinguishment, net of income tax benefit of $98 (1,854) --- --- --- --- -------- ------- ------- ------- --------- Net earnings (loss) (653) 7,299 10,698 10,849 2,841 Preferred stock dividends --- --- --- (365) (365) -------- ------- ------- --------- ---------- Net earnings (loss)applicable to common stock (653) 7,299 10,698 10,484 2,476 ======== ======= ======= ======= ========= Earnings per common share before extraordinary item (basic and diluted)(2) 0.02 0.14 0.21 0.25 0.05 ======= ======= ======= ======= ========= Net earnings (loss) per common share (basic and diluted) (2) (0.01) 0.14 0.21 0.25 0.05 ======== ======= ======= ======= ========= Other Data: EBITDA (3) 23,190 31,275 40,965 49,952 92,304 EBITDA margin 35% 37% 40% 41% 46% Cash flows from operating activities (4) 12,411 15,214 25,065 32,493 45,783 Cash flows from investing activities (4) (10,064) (53,569) (17,817) (48,124) (370,228) Cash flows from financing activities (4) 6,802 37,147 (9,378) 18,175 250,684
15 16 BALANCE SHEET DATA (5): Cash & cash equivalents 9,224 8,016 5,886 8,430 7,246 Working capital 7,274 1,691 1,737 1,540 18,662 Total assets 92,041 130,008 133,885 173,189 651,336 Total debt (including current maturities) 115,380 153,929 146,051 131,955 539,200 Total long-term obligations 122,774 147,957 143,944 130,211 551,865 Stockholders' equity (deficit) (43,249) (37,352) (28,154) 19,041 68,713
(1) The benefit of the Company's net operating loss carryforward was fully recognized as of October 31, 1995, resulting in the income tax expense shown for the twelve months ended October 31, 1996 and December 31, 1997 compared to the income tax benefit for the same period in the prior years. (2) After giving effect to the three-for-two split of the Company's Class A and Class B common stock effected in February 1998. (3) "EBITDA" is defined as operating income before depreciation and amortization. It represents a measure which management believes is customarily used to evaluate the financial performance of companies in the media industry. However, EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to operating income or net earnings as an indicator of the Company's operating performance or to net cash provided by operating activities as a measure of its liquidity. (4) Cash flows from operating, investing, and financing activities are obtained from the Company's consolidated statements of cash flows prepared in accordance with generally accepted accounting principles. (5) As of the end of the period. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the consolidated financial condition and results of operations of the Company for the two fiscal years ended October 31, 1996, and for the fiscal year ended December 31, 1997. This discussion should be read in conjunction with the consolidated financial statements of the Company and the related notes. As a result of the change in the Company's fiscal year end from October 31 to December 31, the results of operations set forth in the accompanying financial statements reflect the twelve-month periods ended December 31, 1997 and October 31, 1995 and 1996. As a result, the results of operations do not reflect consecutive periods. As an aid to understanding and comparing the Company's results, the following table sets forth results of operations for the twelve-month periods ended December 31, 1996 and 1997. The discussion that follows compares these two periods and the years ended October 31, 1996 and December 31, 1997. 16 17
Twelve-Month Periods Ended December 31, 1996 December 31, 1997 ----------------- ----------------- (unaudited) Outdoor advertising, net $ 124,540 200,508 Other income 574 554 --------- ------- 125,114 201,062 Direct advertising expenses 41,750 63,390 General and administrative expenses 30,352 45,368 Depreciation and amortization 18,156 48,037 --------- ------- 90,258 156,795 --------- ------- Operating income 34,856 44,267 --------- ------- Other expenses (income): Interest income (447) (1,723) Interest expense 16,718 38,230 Other expenses 219 265 --------- ------- 16,490 36,772 --------- ------- Earnings before income taxes 18,366 7,495 Income tax expense 7,371 4,654 --------- ------- Net income before extraordinary item 10,995 2,841 Extraordinary loss on debt extinguishment (net of taxes) 9,514 --- ---------- -------- Net earnings 1,481 2,841 ========= =======
OVERVIEW The Company's net revenues, which represent gross revenues less commissions paid to advertising agencies that contract for the use of advertising displays on behalf of advertisers, are derived primarily from the sale of advertising on outdoor advertising displays owned and operated by the Company. In recent years, the Company's logo sign business has expanded rapidly and may in the future have an increasing impact on the Company's revenues and operating income. The Company has grown significantly during the last three years, primarily as the result of (i) internal growth in its existing outdoor advertising business resulting from construction of additional outdoor advertising displays, general improvements in occupancy and operating efficiency and increases in advertising rates, (ii) acquisitions of outdoor advertising businesses and structures, and (iii) the rapid expansion of the Company's logo sign business. The Company's net advertising revenues increased by $98.7 million from $102.4 million for the fiscal year ended October 31, 1995 to $201.1 million for the fiscal year ended December 31, 1997, representing a compound annual growth rate of approximately 40%. During the same period, EBITDA increased $51.3 million from $41.0 million for the fiscal year ended October 31, 1995 to $92.3 million for the fiscal year ended December 31, 1997, representing a compound annual growth rate of approximately 50%. The Company plans to continue a strategy of expanding through both internal growth and acquisitions. As a result of acquisitions, the operating performance of individual markets and of the Company as a whole are not necessarily comparable on a year-to-year basis. All recent acquisitions have been accounted for using the purchase method of accounting and, consequently, operating results from acquired operations are included from the respective dates of those acquisitions. 17 18 Since October 31, 1996, the Company has (i) increased the number of outdoor advertising displays it operates by approximately 75% by completing 27 acquisition transactions for an aggregate cash purchase price of approximately $428.6 million and (ii) acquired the logo sign franchises in Kentucky and Nevada for an aggregate cash purchase price of $3.8 million and was awarded the logo sign franchise for Florida and the tourism signing franchise for Ontario, Canada. Subsequent to the end of the Company's fiscal year, the Company acquired Ragan Outdoor, Derby Outdoor and Pioneer Outdoor for an aggregate cash purchase price of approximately $50.2 million. For the twelve months ended December 31, 1997, Ragan Outdoor, Derby Outdoor and Pioneer Outdoor had approximately $11.6 million in aggregate net outdoor advertising revenues. In addition, in March 1998 the Company signed a definitive agreement to purchase the outdoor advertising assets of Northwest Outdoor Advertising, L.L.C. for a cash purchase price of approximately $68.5 million. The acquisition, which the Company expects to complete in April 1998, is subject to receipt of regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and satisfaction of other customary closing conditions. Until such conditions are met, there can be no assurance that the acquisition will be completed as contemplated. The Company has financed its recent acquisitions and intends to finance its acquisition activity from external sources and borrowings under the Senior Credit Facility. See "Liquidity and Capital Resources" below. The Company relies on sales of advertising space for its revenues, and its operating results are therefore affected by general economic conditions, as well as trends in the advertising industry. The Company believes that in recent years outdoor advertising expenditures have increased more rapidly than total U.S. advertising expenditures, but there can be no assurance that this trend will continue or that in the future outdoor advertising will not grow more slowly than the advertising industry as a whole. Manufacturers of tobacco products, primarily cigarettes, were historically major users of outdoor advertising displays. Due to societal and governmental pressures and other factors, leading tobacco manufacturers have substantially reduced their domestic advertising expenditures since the early 1990s. The Company's tobacco revenues, as a percentage of billboard advertising net revenues, declined from 17% in fiscal 1991 to 9% in fiscal 1997. During this period, the Company has replaced the reduced tobacco advertising by diversifying its customer base and increasing sales to local advertisers. Recent developments in litigation involving the tobacco industry may result in the elimination of tobacco advertising altogether. See "Factors Affecting Future Operating Results - Potential Elimination or Reduction in Tobacco Advertising" below. Growth of the Company's business requires capital expenditures for maintenance and capitalized costs associated with new billboard displays and new logo sign franchises. The Company expended $14.0 million in fiscal 1995, $25.9 million in fiscal 1996 and $36.7 million in fiscal 1997 on such expenditures. Of these amounts, $1.6 million, $13.1 million and $10.4 million, respectively, were attributable to the logo sign business. See "Liquidity and Capital Resources." In the fiscal year ended October 31, 1995, the Company recognized an income tax benefit from a net operating loss carryforward. The benefit of the Company's net operating loss carryforward was fully recognized as of October 31, 1995, resulting in the recognition of income tax expense of $7.1 million for the year ended October 31, 1996 and $4.7 million for the year ended December 31, 1997. 18 19 The following table presents certain items in the Consolidated Statements of Earnings (Loss) as a percentage of net revenues for the years ended October 31, 1995 and 1996 and for the year ended December 31, 1997:
Years Ended October 31, Year Ended December 31, ----------------------- -------------------------- 1995 1996 1997 ---- ---- ---- Net revenues 100.0% 100.0% 100.0% Operating expenses: Direct advertising expenses 33.6 34.1 31.5 General & administrative expenses 26.4 24.4 22.6 Operating cash flow 40.0 41.4 45.9 Depreciation and amortization 14.6 13.7 23.9 Operating income 25.4 27.8 22.0 Interest expense 15.4 12.8 19.0 Other expense 17.3 12.9 18.3 Net earnings 10.4 9.0 1.4
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Total revenues increased $75.9 million or 60.7% to $201.1 million for the year ended December 31, 1997 from $125.1 million for the same period in 1996. This increase was predominantly attributable to an increase in billboard net revenues of $68.9 million or 63.6%, of which $57.6 million is attributable to the Company's acquisitions of FKM Outdoor Advertising Co., Outdoor East L.P., Revere National Corporation, Penn Advertising, Inc. ("Penn"), McWhorter Advertising, Inc., Headrick Outdoor, Inc. ("Headrick") and National Advertising Company, with the remaining $11.3 million attributable to existing operations. The increase in outdoor advertising revenues attributable to existing operations was principally due to increases in the number of displays, in advertising rates, and in occupancy rates. Logo sign revenue increased $6.9 million during the year ended December 31, 1997, which represents a 50.0% increase over the prior year. This significant increase was due to the completion of development of the new logo sign franchises awarded and acquired in 1996 and 1997 and the continued expansion of the Company's existing logo sign franchises. Operating expenses, exclusive of depreciation and amortization, increased $36.7 million or 50.8% to $108.8 million for the twelve months ended December 31, 1997 from $72.1 million for the same period in 1996. This increase was the result of an increase in personnel costs, sign site rent and other costs related to the increase in revenue and additional operating expenses related to the Company's recent acquisitions and the continued development of the logo sign business. Depreciation and amortization expense increased $29.9 million or 164.6% from $18.2 million for the year ended December 31, 1996 to $48.0 million for the year ended December 31, 1997 as a result of an increase in capital assets resulting from the Company's recent acquisition activity. Due to the above factors, operating income increased $9.4 million or 27% from $34.9 million for the twelve months ended December 31, 1996 to $44.3 million for the twelve months ended December 31, 1997. Interest income increased $1.3 million as a result of earnings on excess cash investments made during the period. Interest expense increased $21.5 million from $16.7 million for the year ended December 31, 1996 to $38.2 million for the year ended December 31, 1997 as a result of interest expense on the Company's 9 5/8% Senior Subordinated Notes due 2006 (the "1996 Notes"), its 8 5/8% Senior Subordinated Notes due 2007 (the "1997 Notes") and borrowings under the Senior Credit Facility. 19 20 Due to the decrease in earnings before income taxes, income tax expense for the twelve months ended December 31, 1997 decreased $2.7 million over the same period in 1996. An extraordinary loss on debt extinguishment of $9.5 million net of income tax benefit of $5.7 million, was incurred during the twelve months ended December 31, 1996 as a result of the extinguishment of the Company's 11% Senior Secured Notes due 2003 (the "1993 Notes") and termination of the Company's then-existing bank credit facility (the "1993 Credit Agreement"). As a result of the foregoing factors, the Company recognized net earnings for the year ended December 31, 1997 of $2.8 million, as compared to $1.5 million for the same period in 1996. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED OCTOBER 31, 1996 Total revenues increased $80.5 million or 66.7% to $201.1 million for the twelve months ended December 31, 1997 from $120.6 million for the twelve months ended October 31, 1996. This increase was predominantly attributable to an increase in billboard net revenues of $72.2 million or 68.6%, principally due to the Company's acquisitions during 1997. Logo sign revenue increased $8.1 million, which represents a 64.4% increase over the prior fiscal year. This significant increase was due to the completion of development of the new logo sign franchises awarded and acquired in 1996 and 1997 and the continued expansion of the Company's existing logo sign franchises. Operating expenses, exclusive of depreciation and amortization, increased $38.1 million or 53.9% to $108.8 million for the twelve months ended December 31, 1997 from $70.7 million for the twelve months ended October 31, 1996. This increase was the result of an increase in personnel costs, sign site rent and other costs related to the increase in revenue and additional operating expenses related to the Company's recent acquisitions and the continued development of the logo sign business. Depreciation and amortization expense increased $31.6 million or 191.7% from $16.5 million for the year ended October 31, 1996 to $48.0 million for the year ended December 31, 1997. This increase in depreciation and amortization was generated by the assets purchased during fiscal years 1996 and 1997. Due to the above factors, operating income increased $10.8 million or 32.2% from $33.5 million for the twelve months ended October 31, 1996 to $44.3 million for the twelve months ended December 31, 1997. Interest income increased $1.5 million as a result of earnings on excess cash investments made during the period. Interest expense increased $22.8 million from $15.4 million for the year ended October 31, 1996 to $38.2 million for the year ended December 31, 1997 as a result of interest expense on the 1996 Notes, the 1997 Notes and borrowings under the Senior Credit Facility. Due to the decrease in earnings before income taxes, income tax expense for the twelve months ended December 31, 1997 decreased $2.4 million over the year ended October 31, 1996. As a result of the foregoing factors, the Company's net earnings decreased $8.0 million from $10.8 million for the year ended October 31, 1996 to $2.8 million for the year ended December 31, 1997. YEAR ENDED OCTOBER 31, 1996 COMPARED TO YEAR ENDED OCTOBER 31, 1995 Total revenues increased $18.2 million or 17.8% to $120.6 million for the twelve months ended October 31, 1996 from $102.4 million for the same period in 1995. This increase was predominantly attributable to an increase in billboard net revenues of $11.6 million, or 12.1%, principally due to increases in the number of displays and in advertising rates, with occupancy rates remaining relatively steady. Logo sign revenue increased $6.5 million, which represents a 100% increase over the prior fiscal year. 20 21 This significant increase was due to the build-out of the following logo sign franchises awarded in 1995 and 1996: Georgia, Minnesota, South Carolina, Virginia, New Jersey and Michigan. In addition, during this period the Company also acquired the Kansas and Tennessee franchises and was awarded the right to build out and operate logo signs along additional highways in Texas, where it currently has the logo sign franchise. Operating expenses, exclusive of depreciation and amortization, increased $9.2 million or 15.0% to $70.7 million for the twelve months ended October 31, 1996 from $61.4 million for the same period in 1995. This increase was the result of an increase in personnel costs, sign site rent, graphics expense, other costs related to the increase in revenue and additional operating expenses related to outdoor asset acquisitions and the continued development of the logo sign business. Depreciation and amortization expense increased $1.5 million or 10.2% from $14.9 million for the year ended October 31, 1995 to $16.5 million for the year ended October 31, 1996. This increase in depreciation and amortization was generated by the assets purchased during fiscal years 1995 and 1996. Because the Company's operating expenses declined as a percentage of net revenues to 72.2% for fiscal 1996 from 74.6% for fiscal 1995, operating income increased $7.5 million or 28.7% from $26.0 million for the twelve months ended October 31, 1995 to $33.5 million for the twelve months ended October 31, 1996. Interest expense remained relatively constant for both periods as did total outstanding debt until August 1996, when proceeds from the Company's initial public equity offering (the "IPO") were used to retire approximately $43.8 million in outstanding bank debt. Income tax expense for the twelve months ended October 31, 1996 increased $9.5 million over the same period in 1995. For the years prior to 1996, the Company has had a significant net operating loss carryforward. The benefit of the Company's net operating loss carryforward was fully recognized as of October 31, 1995. As a result of the foregoing factors, the Company's net earnings of $10.8 million for the twelve months ended October 31, 1996 remained relatively constant as compared to the same period in 1995. LIQUIDITY AND CAPITAL RESOURCES The Company has historically satisfied its working capital requirements with cash from operations and revolving credit borrowings. Its acquisitions have been financed primarily with borrowed funds. In November and December of 1996, the Company engaged in several transactions which significantly changed its capital structure and positioned it to expand operations through acquisitions. These transactions were: (i) a public offering of 3,795,000 shares of Class A Common Stock at $15.33 per share, (ii) a tender offer that retired approximately $98.8 million of the 1993 Notes, (iii) the offering of $255 million in principal amount of the 1996 Notes, and (iv) entering into the Senior Credit Facility, which consists of a committed $225 million revolving credit facility (the "Revolving Facility") and a $75 million incremental facility funded at the discretion of the lenders (the "Incremental Facility"). The Senior Credit Facility replaced the 1993 Credit Agreement. Net proceeds to the Company, after underwriting discounts, from the equity and 1996 Note offerings were $55.4 million and $248.0 million, respectively. These proceeds were used to extinguish outstanding bank debt of approximately $47 million, fund the tender offer for the 1993 Notes, purchase substantially all of the assets of Outdoor East for $60.5 million and pay investment banking fees as well as other related costs of approximately $12 million related to the above transactions. The balance of approximately $85 million was used for acquisitions and to fund operations. 21 22 The Company has primarily used the Senior Credit Facility to finance its acquisition activity. In this regard, the Company borrowed approximately $48 million and $66 million under the Senior Credit Facility to finance the Penn acquisition and Headrick acquisition, respectively, in each case after giving effect to proceeds received by the Company from the disposition of certain assets acquired in these acquisitions, which were applied to reduce the amount outstanding under the Senior Credit Facility. In addition, the Company completed the 3M Acquisition in August 1997, which was financed with $74 million in borrowings under the Revolving Facility and $40 million of borrowing under the Incremental Facility. In September 1997, the Company completed the offering of $200 million in principal amount of the 1997 Notes, and the Company used the net proceeds of $193.4 million to repay amounts then outstanding under the Senior Credit Facility. In connection with the 1997 Note offering, the Company amended certain financial and other covenants in the Senior Credit Facility, including an increase in permitted capital expenditures from 20% of the Company's EBITDA to 35% of the Company's EBITDA and an increase in the size of permitted acquisitions from $50 million to $100 million. In December 1997, the Company amended additional covenants in the Senior Credit Facility, including an increase in the total debt ratio from 5.25 to 5.50 and a decrease in the interest coverage ratio from 2.10 to 2.00. In January 1998, the Company financed the Ragan Outdoor and Derby Outdoor acquisitions with a $26.0 million draw under the Revolving Facility, and in February 1998 the Company financed the acquisition of Pioneer Outdoor with a $19.0 million draw under the Revolving Facility. Following these acquisitions, the Company currently has $115 million available under the Revolving Facility and $75 million available but not committed under the Incremental Facility. The Company also currently intends to finance the $68.5 million purchase price of the Northwest Outdoor acquisition with a draw under the Revolving Facility. The Company expects to pursue a policy of continued growth through acquisitions. As a result, the Company will be required to raise additional funds to finance additional acquisition activity. The Company's net cash provided by operating activities increased to $45.8 million in fiscal 1997 due primarily to an increase in noncash items of $27.8 million, which includes an increase in depreciation and amortization of $31.6 million offset by a decrease in deferred tax expense of $5.1 million. There was also an increase in accrued expenses of $4.8 million offset by a decrease in net earnings of $8.0 million, an increase in receivables of $5.0 million, a decrease in trade accounts payable of $2.8 million and a decrease in deferred income of $3.1 million. Net cash used in investing activities increased $322.1 million from $48.1 million in fiscal 1996 to $370.2 million in fiscal 1997. This increase was due to a $361.7 million increase in purchase of outdoor advertising assets and a $10.7 million increase in capital expenditures primarily due to the build-out of the Company's new logo sign franchises offset by an increase in proceeds from the sale of property and equipment of $52.4 million, which is primarily cash proceeds received from subsequent sales of certain outdoor displays acquired from Penn and Headrick. Net cash provided by financing activities increased $232.5 million in fiscal 1997 due to a $188.9 million increase in proceeds from issuance of long-term debt due to the proceeds from the 1997 Note offering of $193.9 million, and a $95.9 million increase in principal borrowings under credit agreements. The Company's net cash used in operating activities was $.8 million for the two months ended December 31, 1996 due to the Company's net loss of $8.1 million attributable to debt extinguishment, noncash items of $14.8 million, an increase in receivables of $4.5 million, and a decrease in accrued expenses of $3.1 million. Net cash used in investing activities was $113.4 million for the two months ended December 31, 1996 due to the acquisitions of $104.4 million in outdoor advertising assets from FKM and Outdoor East, capital expenditures of $4.9 million, and purchases of intangible assets of $4.3 million. Net cash provided by financing activities was $186.8 million for the two months ending December 31, 1996 due to the proceeds from the 1996 Note offering of $247.8 million and proceeds from the 22 23 issuance of common stock of $54.9 million, offset by principal payments on long-term debt of $110.1 million resulting from the tender offer for the 1993 Notes. The items described above yield a net increase in cash and cash equivalents of $72.6 million for the two months ended December 31, 1996. The Company's net cash provided by operating activities increased to $32.5 million in fiscal 1996 due primarily to an increase in non-cash items of $5.8 million, which includes an increase in deferred tax expense of $5.6 million due to the extinguishment of the Company's net operating loss carryforward. There was also an increase in deferred income of $1.7 million, and an increase in accrued expenses of $1.2 million offset by an increase in receivables of $1.3 million. Net cash used in investing activities increased $30.3 million from $17.8 million in fiscal 1995 to $48.1 million in fiscal 1996. This increase was due to an $18.3 million increase in purchase of new markets and an $11.9 million increase in capital expenditures primarily due to the build-out of the Company's new logo sign franchises. Net cash provided by financing activities increased $27.6 million in fiscal 1996 due to a $63.1 million increase in proceeds from the issuance of common stock in the IPO, a $5.0 million increase in proceeds from issuance of long-term debt, primarily used to finance the new logo sign franchise build-out, offset by a $33.3 million increase in principal payments under credit agreements consisting primarily of the payout of loan obligations under the 1993 Credit Agreement, a $7.0 million increase in redemption of common stock due to the March 1996 stock redemption and additional consideration paid from the proceeds of the IPO to selling stockholders of the December 1995 and March 1996 redemptions, and a $0.2 million increase in dividends. The Company believes that internally generated funds and funds remaining available for borrowing under the Senior Credit Facility will be sufficient for the foreseeable future to satisfy all debt service obligations and to finance its current operations. FACTORS AFFECTING FUTURE OPERATING RESULTS SUBSTANTIAL INDEBTEDNESS OF THE COMPANY The Company presently has substantial indebtedness. As of December 31, 1997 the Company's indebtedness was approximately $541.5 million and the Company had approximately $165.0 million available for borrowing under the Senior Credit Facility (excluding the $75 million available under the Incremental Facility). Additionally, as of December 31, 1997, the Company had $3.6 million of Class A Preferred Stock, $638 par value per share, outstanding which is entitled to a cumulative preferential dividend of $364,903 annually. A substantial part of the Company's cash flow from operations will be dedicated to debt service and will not be available for other purposes. Further, if the Company's net cash provided by operating activities were to decrease from present levels, the Company could experience difficulty in meeting its debt service obligations without additional financing. There can be no assurance that, in the event the Company were to require additional financing, such additional financing would be available or, if available, would be available on favorable terms. In addition, any such additional financing may require the consent of lenders under the Senior Credit Facility or holders of other debt of the Company. Certain of the Company's competitors operate on a less leveraged basis and may have greater operating and financial flexibility than the Company. RESTRICTIVE COVENANTS IN DEBT INSTRUMENTS The Senior Credit Facility and the Company's indentures relating to the 1996 Notes and 1997 Notes contain covenants that restrict, among other things, the ability of the Company to dispose of assets, incur or repay debt, create liens, and make certain investments. In addition, the Senior Credit Facility requires the Company to maintain specified financial ratios and levels including cash interest coverage, fixed charge coverage, senior debt and total debt ratios. The ability of the Company to comply with the foregoing restrictive covenants will depend on its future performance, which is subject to prevailing economic, financial and business conditions and other factors beyond the Company's control. 23 24 FLUCTUATIONS IN ECONOMIC AND ADVERTISING TRENDS The Company relies on sales of advertising space for its revenues, and its operating results are therefore affected by general economic conditions, as well as trends in the advertising industry. A reduction in advertising expenditures available for the Company's displays could result from a general decline in economic conditions, a decline in economic conditions in particular markets where the Company conducts business or a reallocation of advertising expenditures to other available media by significant users of the Company's displays. Although the Company believes that in recent years outdoor advertising expenditures have increased more rapidly than total U.S. advertising expenditures, there can be no assurance that this trend will continue or that in the future outdoor advertising expenditures will not grow more slowly than the advertising industry as a whole. POTENTIAL ELIMINATION OR REDUCTION OF TOBACCO ADVERTISING Approximately 9% of the Company's outdoor advertising net revenues and 8% of consolidated net revenues in fiscal 1997 came from the tobacco products industry, compared to 10% of outdoor advertising net revenues for fiscal 1996, 9% for fiscal 1995, 7% for fiscal 1994 and 1993, and 12% for fiscal 1992. Manufacturers of tobacco products, principally cigarettes, were historically major users of outdoor advertising displays. Beginning in 1992, the leading tobacco companies substantially reduced their domestic advertising expenditures in response to societal and governmental pressures and other factors. There can be no assurance that the tobacco industry will not further reduce advertising expenditures in the future either voluntarily or as a result of governmental regulation or as to what affect any such reduction may have on the Company. In June 1997 several of the major tobacco companies in the United States and numerous state attorneys general reached agreement on a proposed settlement of litigation between such parties. The terms of this proposed settlement include a ban on all outdoor advertising of tobacco products commencing nine months after finalization of the settlement. The settlement, however, is subject to numerous conditions, the most notable of which is the enactment of legislation by the federal government. Such legislation is still pending before Congress. At this time, it is uncertain when a definitive settlement will be reached, if at all, or what the terms of any such settlement will be. An elimination or reduction in billboard advertising by the tobacco industry could cause an immediate reduction in the Company's outdoor advertising revenues and may simultaneously increase the Company's available inventory. An increase in available inventory could result in the Company reducing its rates or limiting its ability to raise rates for some period of time. If the tobacco litigation settlement were to be finalized in its current form and if the Company were unable to replace revenues from tobacco advertising with revenues from other sources, such settlement could have a material adverse effect on the Company's results of operations. While the Company believes that it would be able to replace a substantial portion of revenues from tobacco advertising that would be eliminated due to such a settlement with revenues from other sources, any replacement of tobacco advertising may take time and require a reduction in advertising rates. In addition, the states of Florida, Mississippi and Texas have entered into separate settlements of litigation with the tobacco industry. None of these settlements is conditioned on federal government approval. The Florida and Mississippi settlements provided for the elimination of all outdoor advertising of tobacco products by February 1998 in such states and at such time all of the Company's tobacco billboards were removed. The Texas settlement requires the elimination of all outdoor advertising of tobacco products by June 1998. The Company operates 4,253 outdoor advertising displays in seven markets in Florida and approximately $1.8 million of its approximately $19.2 million in net revenues in Florida during 1997 were attributable to tobacco advertising. The Company operates 2,532 outdoor advertising displays in three markets in Mississippi and approximately $0.8 million of its approximately $10.6 million in net revenues in Mississippi during 1997 were attributable to tobacco 24 25 advertising. The Company operates 3,300 outdoor advertising displays in six markets in Texas and approximately $.8 million of its approximately $11.0 million in net revenues in Texas during 1997 were attributable to tobacco advertising. Further, the settlement of tobacco-related claims and litigation in other jurisdictions may also adversely affect outdoor advertising revenues. REGULATION OF OUTDOOR ADVERTISING The outdoor advertising business is subject to regulation by federal, state and local governments. Federal law requires states, as a condition to federal highway assistance, to restrict billboards on federally-aided primary and interstate highways to commercial and industrial areas and imposes certain additional size, spacing and other limitations on billboards. Some states have adopted standards more restrictive than the federal requirements. Local governments generally control billboards as part of their zoning regulations, and some local governments prohibit construction of new billboards and reconstruction of substantially damaged billboards or allow new construction only to replace existing structures. In addition, some jurisdictions (including certain of those within the Company's markets) have adopted amortization ordinances under which owners and operators of outdoor advertising displays are required to remove existing structures at some future date, often without condemnation proceeds being available. Federal and corresponding state outdoor advertising statutes require payment of compensation for removal by governmental order in some circumstances. Ordinances requiring the removal of a billboard without compensation, whether through amortization or otherwise, have been challenged in various state and federal courts on both statutory and constitutional grounds, with conflicting results. Although the Company has been successful in the past in negotiating acceptable arrangements in circumstances in which its displays have been subject to removal or amortization, there can be no assurance that the Company will be successful in the future and what effect, if any, such regulations may have on the Company's operations. In addition, the Company is unable to predict what additional regulation may be imposed on outdoor advertising in the future. Legislation regulating the content of billboard advertisements has been introduced in Congress from time to time in the past, although no laws which, in the opinion of management, would materially and adversely affect the Company's business have been enacted to date. Changes in laws and regulations affecting outdoor advertising at any level of government may have a material adverse effect on the Company's results of operations. See "- Potential Elimination or Reduction of Tobacco Advertising" for a discussion of recent developments concerning tobacco advertising. ACQUISITION AND GROWTH STRATEGY RISKS The Company's growth has been enhanced materially by strategic acquisitions that have substantially increased the Company's inventory of advertising displays. One element of the Company's operating strategy is to make strategic acquisitions in markets in which it currently competes as well as in new markets. While the Company believes that the outdoor advertising industry is highly fragmented and that significant acquisition opportunities are available, there can be no assurance that suitable acquisition candidates can continue to be found, and the Company is likely to face increased competition from other outdoor advertising companies for available acquisition opportunities. In addition, if the prices sought by sellers of outdoor advertising displays continue to rise, as management believes may happen, the Company may find fewer acceptable acquisition opportunities. There can be no assurance that the Company will have sufficient capital resources to complete acquisitions or be able to obtain any required consents of its bank lenders or that acquisitions can be completed on terms acceptable to the Company. In addition, the Company recently has entered into the transit advertising business and, while the Company believes that it will be able to utilize its expertise in outdoor advertising to operate this business, it has had limited experience in transit advertising and there is no assurance that it will be successful. 25 26 Since October 31, 1996, the Company has completed the acquisition of 27 complementary businesses. The process of integrating these businesses into the Company's operations may result in unforeseen operating difficulties and could require significant management attention that would otherwise be available for the development of the Company's existing business. Moreover, there can be no assurance that the Company will realize anticipated benefits and cost savings or that any future acquisitions will be consummated. COMPETITION In addition to competition from other forms of media, including television, radio, newspapers and direct mail advertising, the Company faces competition in its markets from other outdoor advertising companies, some of which may be larger and better capitalized than the Company. The Company also competes with a wide variety of other out-of-home advertising media, the range and diversity of which have increased substantially over the past several years to include advertising displays in shopping centers, malls, airports, stadiums, movie theaters and supermarkets, and on taxis, trains and buses. The Company believes that its local orientation, including the maintenance of local offices, has enabled it to compete successfully in its markets to date. However, there can be no assurance that the Company will be able to continue to compete successfully against current and future sources of outdoor advertising competition and competition from other media or that the competitive pressures faced by the Company will not adversely affect its profitability or financial performance. In its logo sign business, the Company currently faces competition for state franchises from two other logo sign providers as well as local companies. Competition from these sources is encountered both when a franchise is first privatized and upon renewal thereafter. POTENTIAL LOSSES FROM HURRICANES A significant portion of the Company's structures are located in the mid-Atlantic and Gulf Coast regions of the United States. These areas are highly susceptible to hurricanes during the late summer and early fall. In the past, severe storms have caused the Company to incur material losses resulting from structural damage, overtime compensation, loss of billboards that could not legally be replaced and reduced occupancy because billboards are out of service. The Company has determined that it is not economical to obtain insurance against losses from hurricanes and other storms. The Company has developed contingency plans to deal with the threat of hurricanes, including plans for early removal of advertising faces to permit the structures to better withstand high winds and the replacement of such faces after storms have passed. As a result of these contingency plans, the Company has experienced lower levels of losses from recent storms and hurricanes. Structural damage attributable to Hurricane Andrew in 1992 was less than $500,000, and the Company suffered no significant structural damage due to hurricanes in 1996 or 1997. There can be no assurance, however, that the Company's contingency plans will continue to be effective. RISKS IN OBTAINING AND RETAINING LOGO SIGN FRANCHISES Logo sign franchises represent a growing portion of the Company's revenues and operating income. The Company cannot predict the number of remaining states, if any, that will initiate logo sign programs or convert state-run logo sign programs to privately operated programs. Competition for new state logo sign franchises is intense and, even after a favorable award, franchises may be subject to challenge under state contract bidding requirements, resulting in delays and litigation costs. In addition, state logo sign franchises are generally, with renewal options, ten to twenty-year franchises subject to earlier termination by the state, in most cases upon payment of compensation. Typically, at the end of the term of the franchise, ownership of the structures is transferred to the state without compensation to the Company. Although none of the Company's logo sign franchises is due to terminate in the next two years, three are subject to renewal during that period. There can be no assurance that the 26 27 Company will be successful in obtaining new logo sign franchises or renewing existing franchises. Furthermore, following the receipt by the Company of a new state logo sign franchise, the Company generally incurs significant start-up capital expenditures and there can be no assurance that the Company will continue to have access to capital to fund such expenditures. RELIANCE ON KEY EXECUTIVES The Company's success depends to a significant extent upon the continued services of its executive officers and other key management and sales personnel, in particular Kevin P. Reilly, Jr., the Company's Chief Executive Officer, the Company's six regional managers and the manager of its logo sign business. Although the Company believes it has incentive and compensation programs designed to retain key employees, the Company has no employment contracts with any of its employees, and none of its executive officers are bound by non-compete agreements. The Company does not maintain key man insurance on its executives. The unavailability of the continuing services of any of its executive officers and other key management and sales personnel could have an adverse effect on the Company's business. INFLATION In the last three years, inflation has not had a significant impact on the Company. SEASONALITY The Company's revenues and operating results have exhibited some degree of seasonality in past periods. Typically, the Company experiences its strongest financial performance in the summer and its lowest in the winter. The Company expects this trend to continue in the future. Because a significant portion of the Company's expenses are fixed, a reduction in revenues in any quarter is likely to result in a period to period decline in operating performance and net earnings. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued SFAS No. 130 "Reporting Comprehensive Income," which will require the Company to disclose, in financial statement format, all non-owner changes in equity. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Adoption of this statement will require the presentation of comprehensive income, which includes the unrealized gain or loss on investment securities. The Financial Accounting Standards Board also issued SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information," which established a new accounting principle for reporting information about operating segments in annual financial statements and interim financial reports. It also established standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company is currently evaluating the applicability of this standard, but the Company does not expect it to have a material impact on disclosures in its financial statements. IMPACT OF YEAR 2000 The Company has conducted an assessment of its software and related systems and believes they are year 2000 compliant. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS (FOLLOWING ON NEXT PAGE) 27 28 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Consolidated Balance Sheets as of October 31, 1996 and December 31, 1997 . . . . . . 30 Consolidated Statements of Earnings for the years ended October 31, 1995 and 1996, the two-months ended December 31, 1996 and the year ended December 31, 1997 . . . . 32 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended October 31, 1995 and 1996 and the two-months ended December 31, 1996 and the year ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Consolidated Statements of Cash Flows for the years ended October 31, 1995 and 1996 and the two-months ended December 31, 1996 and the year ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . 35
28 29 Independent Auditors' Report Board of Directors Lamar Advertising Company: We have audited the accompanying consolidated balance sheets of Lamar Advertising Company and subsidiaries as of October 31, 1996 and December 31, 1997, and the related consolidated statements of earnings, stockholders' equity (deficit) and cash flows for the years ended October 31, 1995 and 1996, the two months ended December 31, 1996, and the year ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lamar Advertising Company and subsidiaries as of October 31, 1996 and December 31, 1997, and the results of their operations and their cash flows for the years ended October 31, 1995 and 1996, the two months ended December 31, 1996, and the year ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP New Orleans, Louisiana February 6, 1998, except as to Note 18, which is as of February 27, 1998 29 30 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share and per share data) October 31, 1996 and December 31, 1997
October 31, December 31, Assets 1996 1997 ------ ---- ---- Current assets: Cash and cash equivalents $ 8,430 7,246 Receivables: Trade accounts, less allowance for doubtful accounts of $551 in 1996 and $1,311 in 1997 12,855 29,854 Affiliates, related parties and employees 348 788 Other 327 1,284 -------- --------- 13,530 31,926 Prepaid expenses 1,973 9,112 Other current assets 1,544 1,136 -------- --------- Total current assets 25,477 49,420 -------- --------- Property, plant and equipment (note 5) 207,071 429,615 Less accumulated depreciation and amortization (87,343) (113,477) -------- --------- 119,728 316,138 -------- --------- Investment securities (note 1) 4,414 679 Intangible assets (note 6) 18,223 278,923 Receivables-noncurrent 737 1,625 Deferred income taxes (note 10) 2,463 -- Other assets 2,147 4,551 -------- -------- Total assets $ 173,189 651,336 ========== ========
(Continued) 30 31 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Consolidated Balance Sheets, Continued (In thousands, except share and per share data)
October 31, December 31, Liabilities and Stockholders' Equity 1996 1997 ------------------------------------ ---- ---- Current liabilities: Trade accounts payable $ 3,263 3,308 Current maturities of long-term debt (note 9) 3,815 5,109 Accrued expenses (note 8) 11,066 14,804 Deferred income 5,793 7,537 ------------ ----------- Total current liabilities 23,937 30,758 Long-term debt (note 9) 128,140 534,091 Deferred income taxes (note 10) -- 14,687 Deferred income 811 837 Other liabilities 1,260 2,250 ------------ ----------- 154,148 582,623 ------------ ----------- Stockholders' equity (notes 12 and 18): Class A preferred stock, par value $638, $63.80 cumulative dividends, 10,000 shares authorized, 5,719 shares issued and outstanding 3,649 3,649 Class A common stock, par value $.001, 75,000,000 shares authorized, 22,506,510 and 28,453,805 shares issued and outstanding at 1996 and 1997, respectively 15 28 Class B common stock, par value $.001, 37,500,000 shares authorized, 20,687,080 and 18,762,909 shares issued and outstanding at 1996 and 1997, respectively 14 19 Additional paid-in capital 38,060 95,691 Accumulated deficit (24,681) (30,320) Unrealized gain (loss) on investment securities 1,984 (354) ----------- ---------- Stockholders' equity 19,041 68,713 ----------- ---------- Total liabilities and stockholders' equity $ 173,189 651,336 =========== ==========
See accompanying notes to consolidated financial statements. 31 32 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Consolidated Statements of Earnings (In thousands, except per share data) Years ended October 31, 1995 and 1996, the two months ended December 31, 1996 and the year ended December 31, 1997
Years Ended Two Months Ended Year Ended October 31, December 31, December 31, 1995 1996 1996 1997 ---- ---- ---- ---- Revenues: Outdoor advertising, net $ 101,871 119,900 23,212 200,508 Other income 537 702 50 554 ---------- ------------ ------------ ---------- 102,408 120,602 23,262 201,062 ---------- ------------ ------------ ---------- Operating expenses: Direct advertising expenses 34,386 41,184 7,975 63,390 General and administrative expenses 27,057 29,466 5,034 45,368 Depreciation and amortization 14,942 16,470 3,928 48,037 ---------- ------------ ------------ ---------- 76,385 87,120 16,937 156,795 ---------- ------------ ------------ ---------- Operating income 26,023 33,482 6,325 44,267 ---------- ------------ ------------ ---------- Other expense (income): Interest income (199) (240) (243) (1,723) Interest expense 15,783 15,441 3,803 38,230 Loss (gain) on disposition of assets 1,476 91 76 (15) Other expenses 655 242 30 280 ---------- ------------ ------------ ---------- 17,715 15,534 3,666 36,772 ---------- ------------ ------------ ---------- Earnings before income taxes and extraordinary item 8,308 17,948 2,659 7,495 Income tax expense (benefit) - (note 10) (2,390) 7,099 1,199 4,654 ---------- ------------ ------------ ---------- Earnings before extraordinary item 10,698 10,849 1,460 2,841 Extraordinary item-Loss on debt extinguishment net of income tax benefit of $5,660 -- -- 9,514 -- ---------- ------------ ------------ ---------- Net earnings (loss) 10,698 10,849 (8,054) 2,841 Preferred stock dividends -- (365) (61) (365) ---------- ------------ ------------- ---------- Net earnings (loss)applicable to common stock $ 10,698 10,484 (8,115) 2,476 ========== ============ ============ ========== Earnings before extraordinary item per common share (basic and diluted) .21 .25 .03 .05 ========== ============ ============ ========== Extraordinary item -- -- (.21) -- ========== ============ ============ ========== Net earnings (loss) per common share (basic) $ .21 .25 (.18) .05 ========== ============ ============ ========== Net earnings (loss) per common share (diluted) $ .21 .25 (.18) .05 ========== ============ ============ ========== Weighted average common shares outstanding 50,658,161 41,134,476 45,520,784 47,037,497 Incremental common shares from dilutive stock options -- 114,057 -- 363,483 ---------- ------------ ------------ ---------- Weighted average common shares assuming dilution 50,658,161 41,248,533 45,520,784 47,400,980 ========== ============ ============ ==========
See accompanying notes to consolidated financial statements. 32 33 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) (In thousands, except share and per share data) Years ended October 31, 1995 and 1996, the two months ended December 31, 1996 and the year ended December 31, 1997
Unrealized Gain (Loss) Class A Class A Class B Additional On Preferred Common Common Paid-in Accumulated Investment Stock Stock Stock Capital Deficit Securities Total ----- ----- ----- ------- ------- ---------- ----- Balance, October 31, 1994 $ -- 17 17 -- (37,386) -- (37,352) Redemption of 1,830,750 shares of common stock -- (1) -- -- (999) -- (1,000) Net earnings -- -- -- -- 10,698 -- 10,698 Dividends ($.0067 per share) -- -- -- -- (500) -- (500) -------- ------- -------- --------- ---------- ----------- --------- Balance, October 31, 1995 -- 16 17 -- (28,187) -- (28,154) Conversion of 6,682,169 shares of common stock to 5,719.49 shares of preferred stock 3,649 (2) (2) -- (3,645) -- -- Redemption of 5,427,305 shares of common stock -- (4) -- -- (2,958) -- (2,962) Issuance of 6,441,062 shares of common stock -- 4 -- 62,745 -- -- 62,749 Conversion of 765,225 shares of Class B common stock to Class A common stock -- 1 (1) -- -- -- -- Additional consideration for redemption of common stock -- -- -- (25,000) -- -- (25,000) Exercise of stock options -- -- -- 315 -- -- 315 Unrealized gain on investment securities, net of deferred taxes of $1,180 -- -- -- -- -- 1,984 1,984 Net earnings -- -- -- -- 10,849 -- 10,849 Dividends ($.006 per common share and $63.80 per preferred share) -- -- -- -- (740) -- (740) -------- ------- -------- --------- ---------- ---------- --------- Balance, October 31, 1996 3,649 15 14 38,060 (24,681) 1,984 19,041 Issuance of 3,795,000 shares of common stock -- 3 -- 54,168 -- -- 54,171 Exercise of stock options -- -- -- 30 -- -- 30 Net loss -- -- -- -- (8,054) -- (8,054) Dividends (10.63 per preferred share) -- -- -- -- (61) -- (61) Unrealized loss on investment securities, net of deferred taxes of $801 -- -- -- -- -- (1,364) (1,364) -------- ------- -------- --------- ---------- ----------- --------- Balance, December 31, 1996 3,649 18 14 92,258 (32,796) 620 63,763 Exercise of stock options -- -- -- 3,448 -- -- 3,448 Conversion of 1,811,552 shares of Class B common stock to to Class A common stock -- 1 (1) -- -- -- -- Net earnings -- -- -- -- 2,841 -- 2,841 Dividends ($63.80 per preferred share) -- -- -- -- (365) -- (365) Unrealized loss on investment securities, net of deferred taxes of $596 -- -- -- -- -- (974) (974) Three-for-two stock split (Note 18) -- 9 6 (15) -- -- -- -------- ------- -------- --------- ---------- ----------- --------- Balance, December 31, 1997 $ 3,649 28 19 95,691 (30,320) (354) 68,713 ========== ======= ======== ========= ========== =========== =========
See accompanying notes to consolidated financial statements. 33 34 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Years ended October 31, 1995 and 1996, the two months ended December 31, 1996 and the year ended December 31, 1997
Years Ended Two Months Ended Year Ended October 31, December 31, December 31, 1995 1996 1996 1997 ---- ---- ---- ---- Cash flows from operating activities: Net earnings (loss) $ 10,698 10,849 (8,054) 2,841 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 14,942 16,470 3,928 48,037 Loss (gain) on disposition of assets 1,476 91 76 (15) Loss on debt extinguishment, net of tax -- -- 9,514 -- Deferred tax expense (benefit) (3,301) 2,308 1,055 (2,839) Provision for doubtful accounts 502 580 256 2,098 Changes in operating assets and liabilities: (Increase)decrease in: Receivables (1,344) (2,677) (4,524) (7,646) Prepaid expenses (47) 9 (28) (367) Other assets (418) (594) (180) 29 Increase (decrease) in: Trade accounts payable 1,312 828 249 (1,951) Accrued expenses 86 1,302 (3,121) 6,063 Deferred income 950 2,690 (38) (425) Other liabilities 209 637 18 (42) --------- ------- ---------- ---------- Net cash provided by (used in) operating activities 25,065 32,493 (849) 45,783 --------- ------- ---------- ---------- Cash flows from investing activities: Capital expenditures (14,046) (25,944) (4,877) (36,654) Purchase of new markets (2,885) (21,200) (104,426) (382,930) Proceeds from sale of property and equipment 717 849 225 53,268 Purchase of intangible assets (1,603) (1,829) (4,320) (3,912) --------- ------- ---------- ---------- Net cash used in investing activities (17,817) (48,124) (113,398) (370,228) --------- ------- ---------- ---------- Cash flows from financing activities: Net proceeds from issuance of common stock -- 63,064 54,927 2,403 Proceeds from issuance of long-term debt -- 5,000 247,813 193,926 Principal payments on long-term debt -- -- (110,143) -- Net borrowing (payments) under credit agreements (7,878) (41,187) (5,773) 54,720 Redemption of common stock (1,000) (7,962) -- -- Dividends (500) (740) -- (365) --------- ------- ---------- ---------- Net cash provided by (used in) financing activities (9,378) 18,175 186,824 250,684 --------- ------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (2,130) 2,544 72,577 (73,761) Cash and cash equivalents at beginning of period 8,016 5,886 8,430 81,007 --------- ------- ---------- ---------- Cash and cash equivalents at end of period $ 5,886 8,430 81,007 7,246 ========= ======= ========== ========== Supplemental disclosures of cash flow information: Cash paid for interest $ 15,825 15,659 6,573 33,284 ========= ======== ========== ========== Cash paid for income taxes $ 1,028 3,756 15 8,792 ========= ======== ========== ==========
See accompanying notes to consolidated financial statements. 34 35 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) October 31, 1995 and 1996 and December 31, 1997 (1) Significant Accounting Policies (a) Nature of Business Lamar Advertising Company ("LAC" or the "Company") is engaged in the outdoor advertising business operating approximately 43,000 outdoor advertising displays in 24 states. The Company's operating strategy is to be the leading provider of outdoor advertising services in each of the markets it serves, with a historical emphasis on providing a full range of outdoor advertising services in middle markets with a population ranking between 50 and 250 in the United States. In addition, the Company operates a logo sign business in 18 states throughout the United States and in 1 province of Canada. Logo signs are erected pursuant to state-awarded franchises on public rights-of-way near highway exits and deliver brand name information on available gas, food, lodging and camping services. Included in the Company's logo sign business are the tourism signing franchises. Revenues of the logo sign business contributed approximately 6%, 10% and 10% of the Company's net revenues for the years ended October 31, 1995 and 1996 and December 31, 1997, respectively. (b) Principles of Consolidation The accompanying consolidated financial statements include Lamar Advertising Company, its wholly-owned subsidiary, The Lamar Corporation (TLC), and their majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. (c) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is calculated using accelerated and straight-line methods over the estimated useful lives of the assets. In November 1996, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. (Continued) 35 36 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) (d) Intangible Assets Intangible assets, consisting primarily of goodwill, customer lists and contracts, and non-competition agreements are amortized using the straight-line method over the assets estimated useful lives, generally from 5 to 15 years. Debt issuance costs are deferred and amortized over the terms of the related credit facilities using the interest method. (e) Investment Securities Investment securities consist of the Company's investment in approximately 340,000 shares of common stock of Wireless One, Inc., a publicly-held company in the wireless cable business. The former Chief Executive Officer of Wireless One, Inc. is an employee and principal shareholder of the Company. The Wireless One, Inc. shares are classified as available-for-sale at October 31, 1996 and December 31, 1997 and are carried at fair value with the unrealized gain or loss, net of the related tax effect, reported as a separate component of stockholders' equity. The cost of the Wireless One, Inc. shares owned by the Company is $1,250, and the market value was $679 and $4,414 at December 31, 1997 and October 31, 1996, respectively. (f) Deferred Income Deferred income consists principally of advertising revenue received in advance and gains resulting from the sale of certain assets to related parties. Deferred advertising revenue is recognized in income as services are provided over the term of the contract. Deferred gains are recognized in income in the consolidated financial statements at the time the assets are sold to an unrelated party or otherwise disposed of. (g) Revenue Recognition The Company recognizes revenue from outdoor and logo sign advertising contracts, net of agency commissions, on an accrual basis ratably over the term of the contracts, as advertising services are provided. (h) Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (Continued) 37 36 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) (i) Earnings Per Share Earnings per share are computed in accordance with SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires the replacement of previously reported primary and fully diluted earnings per share required by Accounting Principles Board Opinion No. 15 with earnings per share and diluted earnings per share. The calculation of earnings per share excludes any dilutive effect of stock options, while diluted earnings per share includes the dilutive effect of stock options. Per share amounts for all periods presented have been restated to conform to the requirements of SFAS No. 128. (j) Stock Option Plan The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for Stock- Based Compensation", permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 has been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (k) Cash and Cash Equivalents The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. (l) Reclassification of Prior Year Amounts Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net earnings. (m) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (Continued) 37 38 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) (2) Change in Fiscal Year End Effective January 1, 1997, the Company changed its fiscal year from a twelve-month period ending October 31 to a twelve-month period ending December 31. The year end change was made to conform to the predominant year ends within the outdoor advertising industry. The consolidated Statements of Earnings, Stockholders' Equity (Deficit) and Cash Flows are presented for the twelve months ended December 31, 1997, the two months ended December 31, 1996 and for the twelve-month periods ended October 31, 1995 and 1996. (3) Acquisitions During the year ended October 31, 1996, the Company completed twelve acquisitions of outdoor advertising businesses, none of which were individually significant, for an aggregate purchase price of $24,010. Each purchase was accounted for under the purchase method of accounting, and, accordingly, the accompanying financial statements include the results of operations of each acquired entity from the date of acquisition. The Company recorded an aggregate of approximately $6,100 of intangible assets as a result of these acquisitions. Proforma net revenues, assuming these acquisitions had occurred on November 1, 1995, would have been approximately $123,000. The effect on net earnings and net earnings per share would not have been material. Effective November 1, 1996, the Company acquired all of the outstanding capital stock of FKM Advertising, Co., Inc. for a cash purchase price of approximately $40,000, and on December 10, 1996, the Company purchased substantially all of the assets of Outdoor East, L.P. for a total cash purchase price of approximately $60,500. Effective April 1, 1997, the Company acquired all of the outstanding capital stock of Penn Advertising, Inc. for a cash purchase price of approximately $167,000. The Company subsequently sold approximately 16% of the outdoor displays acquired to Universal Outdoor, Inc. for a cash purchase price of $46,500. On June 3, 1997, the Company purchased substantially all of the assets of Headrick Outdoor, Inc. for a cash purchase price of approximately $76,600. Simultaneous with the acquisition, the Company sold approximately 9% of the outdoor displays acquired for a total purchase price of $6,000. On August 15, 1997, the Company purchased from Outdoor Systems, Inc. ("OSI") for a cash purchase price of approximately $116,000 (excluding approximately $2,000 in capitalized costs), certain outdoor advertising assets that OSI had acquired from National Advertising Company, a division of Minnesota Mining and Manufacturing Company. During the year ended December 31, 1997, the Company completed 22 additional acquisitions of outdoor advertising assets, none of which were individually significant, for an aggregate cash purchase price of approximately $21,000. (Continued) 38 39 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) Each of these acquisitions were accounted for under the purchase method of accounting, and, accordingly, the accompanying financial statements include the results of operations of each acquired entity from the date of acquisition. The acquisition costs have been allocated to assets acquired and liabilities assumed based on fair market value at the dates of acquisition. The following is a summary of the allocation of the acquisition costs in the above transactions. Current assets $ 14,394 Property, plant and equipment 186,462 Customer lists and contracts 67,156 Goodwill 182,139 Other intangible assets 14,831 Current liabilities (4,152) Deferred tax liabilities (25,991) Other long-term liabilities (3,155)
The following unaudited pro forma financial information for the Company gives effect to the above acquisitions as if they had occurred at the beginning of fiscal years 1996 and 1997. These pro forma results do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on such date, or to project the Company's results of operations for any future period.
Year ended Year ended October 31, December 31, 1996 1997 ---- ---- Revenues, net $ 207,023 225,903 ========= ======= Net loss applicable to common stock (8,977) (3,520) ========= ======= Net loss per common share (basic and diluted) (.22) (.07) ========= =======
(4) Noncash Financing and Investing Activities A summary of significant noncash financing and investing activities for the years ended October 31, 1995 and 1996 and December 31, 1997 follows:
1995 1996 1997 ---- ---- ---- Disposition of assets $ 3,788 -- 1,300 Acquisitions of assets 4,341 2,104 -- Issuance of preferred stock in exchange for common stock -- 3,649 -- Redemption of common stock for debt -- 20,000 -- Conversion of note receivable to equity investment -- -- 500 Debt issuance costs -- -- 4,750
Significant noncash financing activities during the two months ended December 31, 1996 include approximately $7,000 of debt issuance costs. (Continued) 39 40 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) (5) Property, Plant and Equipment Major categories of property, plant and equipment at October 31, 1996 and December 31, 1997 are as follows:
Estimated life (years) ---------------------- 1996 1997 ---- ---- Land -- $ 8,595 15,185 Building and improvements 10-39 17,169 20,672 Advertising structures 15 166,230 371,491 Automotive and other equipment 3-7 15,077 22,267 --------- -------- $ 207,071 429,615 ========= ========
(6) Intangible Assets The following is a summary of intangible assets at October 31, 1996 and December 31, 1997:
Estimated life (years) ---------------------- 1996 1997 ---- ---- Debt issuance costs and fees 7-10 $ 4,033 14,754 Customer lists and contracts 7-10 8,252 68,185 Non-compete agreements 7-15 2,146 15,313 Goodwill 15 1,566 178,047 Other 5-15 2,226 2,624 --------- -------- $ 18,223 278,923 ========= ======== Cost 28,360 308,621 Accumulated amortization (10,137) (29,698) --------- -------- $ 18,223 278,923 ========= ========
(Continued) 40 41 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) (7) Leases The Company is party to various operating leases for production facilities and sites upon which advertising structures are built. The leases expire at various dates, generally during the next five years, and have varying options to renew and to cancel. The following is a summary of minimum annual rental payments required under those operating leases that have original or remaining lease terms in excess of one year as of December 31: 1998 $ 18,125 1999 19,207 2000 16,345 2001 13,588 2002 11,207
Rental expense related to the Company's operating leases were $17,053, $19,387, and $31,411 for the years ended October 31, 1995 and 1996 and December 31, 1997, respectively. (8) Accrued Expenses The following is a summary of accrued expenses at October 31, 1996 and December 31, 1997:
1996 1997 -------- ------ Payroll $ 2,261 4,390 Interest 5,182 7,357 Insurance benefits 1,510 2,613 Income taxes 1,748 -- Other 365 444 -------- ------ $ 11,066 14,804 ======== ======
(Continued) 41 42 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) (9) Long-term Debt Long-term debt consist of the following at October 31, 1996 and December 31, 1997:
1996 1997 ---- ---- 9-5/8% Senior subordinated notes $ -- 255,000 8-5/8% Senior subordinated notes -- 198,696 11% Senior secured notes 100,000 1,173 Bank Credit Agreement -- 59,000 8% unsecured subordinated notes (see Note 12) 19,667 17,319 8% Series A unsecured subordinated discount debentures, maturing through 2001 (11.5% effective yield) 2,309 1,834 Other notes with various rates and terms 9,979 6,178 --------- -------- 131,955 539,200 Less current maturities (3,815) (5,109) --------- -------- Long-term debt, excluding current maturities $ 128,140 534,091 ========= ========
Long-term debt matures as follows: 1998 $ 5,109 1999 3,784 2000 3,049 2001 3,129 2002 5,141 Later years 518,988
In November 1996, the Company commenced a tender offer for all of its $100,000 outstanding principal amount of 11% Senior Secured Notes due 2003 (the "1993 Notes"). As of December 31, 1997, approximately $98,827 of the 1993 Notes were tendered to the Company and retired. As a result of this tender offer and the extinguishment of other credit facilities, the Company recorded a loss on debt extinguishment of $9,514, net of income tax benefit of $5,660, during the two-months ended December 31, 1996 (see Note 2). (Continued) 42 43 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) Also in November 1996, the Company issued $255,000 in principal amount of 9 5/8% Senior Subordinated Notes due 2006 (the "1996 Notes"), with interest payable semi-annually on June 1 and December 1 of each year. The 1996 Notes are senior subordinated unsecured obligations of the Company and are subordinated in right of payment to all senior indebtedness of the Company, pari passu with the 1997 Notes (as defined below), and are senior to all existing and future subordinated indebtedness of the Company. The 1996 Notes are redeemable at the Company's option at any time on or after December 31, 2001 at redemption prices specified by the indenture covering the 1996 Notes, and are required to be repurchased earlier in the event of a change of control of the Company. The indenture covering the 1996 Notes includes certain restrictive covenants which limit the Company's ability to incur additional debt, pay dividends and make other restricted payments, consummate certain transactions and other matters. In December 1996, the Company entered into a credit facility (the "Bank Credit Agreement") with a syndicate of financial institutions, which replaced the Company's then existing bank credit facilities. The Bank Credit Agreement provides the Company with a committed $225,000 revolving credit facility and a $75,000 incremental term facility to be funded at the discretion of the lenders. Availability of the line under the revolving credit facility is reduced quarterly beginning with the quarter ending March 31, 1999 in the following amounts: March 31, 1999 to December 31, 2000 $ 8,437 March 31, 2001 to December 31, 2001 11,250 March 31, 2002 to December 31, 2003 14,062
The revolving credit facility bears interest at a variable rate of interest based upon an applicable margin over LIBOR or the prime rate. The weighted average interest rate outstanding under the facility at December 31, 1997 is 7.93%. The term loan will begin to amortize quarterly beginning March 31, 1999 or March 31, 2000 dependent on the outstanding balance. For the quarters beginning March 31, 1999 to December 31, 2003, the loans will begin quarterly principal reductions of between 1% to 2% of the outstanding balance at the date the loans begin to amortize. For the quarters beginning March 31, 2004 to December 31, 2004, the loans will have quarterly principal reductions of between 18% and 18.75%. (Continued) 43 44 (10)LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) The Bank Credit Agreement is guaranteed by the Company's subsidiaries and secured by the capital stock of the Company's subsidiaries. The Bank Credit Agreement contains various restrictive covenants, which require that the Company meet certain minimum leverage, and coverage ratios, restrict additional indebtedness, limit dividends and other restricted payments, limit capital expenditures and disposition of assets, and other restrictions. In September 1997, the Company amended certain financial and other covenants in the Bank Credit Facility, including increases in permitted capital expenditures and permitted acquisitions. As of December 31, 1997, there was $59,000 outstanding under the revolving credit facility and there were no borrowings under the incremental term facility. In September 1997, the Company issued $200,000 in principal amount of 8 5/8% Senior Subordinated Notes due 2007 (the "1997 Notes") with interest payable semi-annually on March 15 and September 15 of each year, commencing March 15, 1998. The 1997 Notes were issued at a discount for $198,676. The Company is using the effective interest method to recognize the discount over the life of the 1997 Notes. The 1997 Notes are senior subordinated unsecured obligations of the Company, subordinated in right of payment to all senior indebtedness of the Company, pari passu with the 1996 Notes and are senior to all existing and future subordinated indebtedness of the Company. The 1997 Notes are redeemable at the Company's option at any time on or after September 15, 2002, at redemption prices specified by the indenture covering the 1997 Notes and are required to be purchased earlier in the event of a change of control of the Company. The restrictive covenants contained in the indenture covering the 1997 Notes are identical to those contained in the indenture covering the 1996 Notes. (Continued) 44 45 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) (10) Income Taxes Income tax expense for the years ended October 31, 1995 and 1996, the two months ended December 31, 1996 and the year ended December 31, 1997 consists of:
Current Deferred Total ------- -------- ----- Year ended October 31, 1995: U.S. federal $ 290 (3,301) (3,011) State and local 621 -- 621 ---------- -------- ------- $ 911 (3,301) (2,390) ========== ======== ======== Year ended October 31, 1996: U.S. federal $ 3,991 2,683 6,674 State and local 800 (375) 425 ---------- -------- -------- 4,791 2,308 7,099 Change in deferred tax attributable to unrealized gains on investment securities, included in stockholders' equity -- 1,180 1,180 ---------- ------ ------ $ 4,791 3,488 8,279 ========== ====== ====== Two months ended December 31, 1996: U.S. Federal $ -- 1,028 1,028 State and local 144 27 171 ---------- ------ ------ 144 1,055 1,199 Change in deferred tax attributable to unrealized losses on investment securities, included in stockholders' equity -- (379) (379) ---------- ------ ------ $ 144 676 820 ========== ====== ====== Year ended December 31, 1997: U.S. federal $ 6,108 (2,475) 3,633 State and local 1,385 (364) 1,021 ---------- ------- ------ 7,493 (2,839) 4,654 Change in deferred tax attributable to unrealized losses on investment securities, included in stockholders' equity -- (596) (596) ---------- ------ ------ $ 7,493 (3,435) 4,058 ========== ======== ======
(Continued) 45 46 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) Income tax expense (benefit) for the years ended October 31, 1995 and 1996, the two months ended December 31, 1996 and the year ended December 31, 1997 differs from the amounts computed by applying the U.S. federal income tax rate of 34 percent to earnings before income taxes as follows:
Years Ended Two Months Ended Year Ended October 31, December 31, December 31, ----------- ------------ ------------ 1995 1996 1996 1997 ---- ---- ---- ---- Computed "expected" tax expense $ 2,825 6,102 904 2,548 Increase (reduction) in income taxes resulting from: Change in beginning of the year balance of the valuation allowance for deferred tax assets (5,939) -- -- -- Amortization of non deductible goodwill -- -- -- 1,730 State and local income taxes, net of federal income tax benefit 410 281 113 674 Other differences, net 314 716 182 (298) --------- ------ ------ ------ $ (2,390) 7,099 1,199 4,654 ========= ====== ====== ======
Income taxes in 1995 include an adjustment to the beginning-of-the-year valuation allowance in the Company's deferred tax assets in the amount of $5,939. The improved business conditions and resulting profitability resulted in a change in management's judgement regarding the realizability of the Company's deferred tax assets. (Continued) 46 47 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at October 31, 1996 and December 31, 1997 are presented below:
1996 1997 ---- ---- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation $ (4,002) (3,125) Plant and equipment, due to basis differences on acquisitions -- (15,582) Intangibles, due to differences in amortizable lives -- (5,646) Unrealized gains on investment securities (1,180) -- ---------- ---------- Deferred tax liabilities (5,182) (24,353) Deferred tax assets: Receivables, principally due to allowance for doubtful accounts 205 511 Plant and equipment, due to basis differences on acquisitions and costs capitalized for tax purposes 4,850 4,823 Investment in affiliates and plant and equipment, due to gains recognized for tax purposes and deferred for financial reporting purposes 900 941 Net operating loss carryforward -- 1,673 Minimum tax credit carryforwards 849 -- Unrealized losses on investment securities -- 217 Other, net 841 1,501 ---------- ---------- Deferred tax assets 7,645 9,666 ---------- ---------- Net deferred tax asset (liability) $ 2,463 (14,687) ========== ==========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods, which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. (Continued) 47 48 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) (11) Related Party Transactions Affiliates, as used within these statements, are persons or entities that are affiliated with Lamar Advertising Company or its subsidiaries through common ownership and directorate control. The Company was a party to a consulting agreement with Kevin P. Reilly, Sr., a shareholder and former Chairman of the Company, which expired in January 1996. The agreement provided for annual consulting fees of $120, and an annual bonus of up to $100. The Company continued to pay the consulting fee on a month-to-month basis until July 1, 1996. Effective July 1, 1996, a subsidiary of the Company entered into a replacement consulting agreement with Reilly Consulting Company, LLC., of which Mr. Reilly, Sr. is the manager and, with his wife, are the sole members. The agreement has a ten-year term and provides for annual consulting fees of $120. Consulting fees and bonuses paid under the above agreements during the years ended October 31, 1995 and 1996 and December 31, 1997 were $230, $195 and $120, respectively. As of October 31, 1996 and December 31, 1997, debentures totaling $2,375 and $1,834, respectively, are owned by shareholders, directors and employees, excluding the ten-year subordinated notes discussed in note 12. Interest expense under the debentures and ten year subordinated notes during the years ended October 31, 1995 and 1996 and December 31, 1997 was $296, $494, and $1,719, respectively. (12) Stockholders' Equity During 1995 and 1996, the Company repurchased 3.6% and 12.9%, respectively, of its then outstanding common stock (1,830,750 and 5,427,305 shares, respectively) from certain of its existing stockholders for an aggregate purchase price of approximately $4 million. The terms of such repurchases entitled the selling stockholders to receive additional consideration from the Company in the event that the Company consummated a public offering of its common stock at a higher price within 24 months of the repurchase. In satisfaction of that obligation, upon completion of the Company's initial public equity offering in August 1996, the Company paid the selling stockholders an aggregate of $5.0 million in cash and issued to them ten-year subordinated notes in the aggregate principal amount of $20,000. The notes bear interest at 8% (1% above the ten-year treasury note rate when issued) and are payable in monthly installments of $167, plus interest. The balance outstanding under these notes at October 31, 1996 and December 31, 1997 was $19,667 and $17,319, respectively. (Continued) 48 49 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) The rights of the Class A and Class B common stock are equal in all respects, except holders of Class B common stock have ten votes per share on all matters in which the holders of common stock are entitled to vote and holders of Class A common stock have one vote per share on such matters. The Class B common stock will convert automatically into Class A common stock upon the sale or transfer to persons other than permitted transferees (as defined in the Company's certificate of incorporation, as amended). (13) Stock Option Plan In 1996, the Company adopted the 1996 Equity Incentive Plan (the "1996 Plan"). The purpose of the 1996 Plan is to attract and retain key employees and consultants of the Company. The 1996 Plan authorizes the grant of stock options, stock appreciation rights and restricted stock to employees and consultants of the Company capable of contributing to the Company's performance. The Company has reserved an aggregate of 3,000,000 shares of Class A Common Stock for awards under the 1996 Plan. Options granted under the 1996 Plan generally become exercisable over a five-year period and expire 10 years from the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option grants. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards in 1996 and 1997 consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
Year Ended Two Months Ended Year Ended October 31, December 31, December 31, 1996 1996 1997 ---- ---- ---- Net earnings (loss) applicable to common stock - as reported $ 10,484 (8,115) 2,476 ======== ====== ===== Net earnings (loss) applicable to common stock - pro forma $ 8,891 (8,666) (603) ======== ====== ===== Earnings (loss) per common share - as reported (basic and diluted) $ .25 (.18) .05 ======== ====== ===== Earnings (loss) per common share - pro forma (basic and diluted) $ .22 (.19) (.01) ======== ====== =====
(Continued) 49 50 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997: dividend yield of 0.0%; expected volatility of 40%; risk-free interest rate of 6.0% and expected lives of 6 years. For grants in 1996, the following weighted average assumptions were used: Dividend yield 0.0%; expected volatility of 53%; risk-free interest rate of 6.0% and expected lives of 3 years. Information regarding the 1996 Plan for the years ended October 31, 1996 and December 31, 1997 is as follows:
October 31, 1996 December 31, 1997 ---------------- ----------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------ ----- ------ ----- Outstanding, beginning of year -- $ -- 1,774,890 $ 10.85 Granted 1,772,250 10.67 372,000 15.20 Exercised (29,497) 10.67 (225,273) 10.67 Cancelled -- -- (41,212) 10.67 --------- ----- --------- ----- Outstanding, end of year 1,742,753 $ 10.67 1,880,405 $ 11.74 ========= ======= ========= ======= Price for exercised shares $ 10.67 $ 10.67 Shares available for grant, end of year 1,227,750 853,725 Weighted average fair value of options, granted during the year $ 4.14 $ 7.18
The following table summarizes information about fixed-price stock options outstanding at December 31, 1997:
Weighted Range Number Average Weighted Number Weighted Of Outstanding Remaining Average Exercisable Average Exercise At Contractual Exercise At Exercise Prices December 31, 1997 Life Price December 31, 1997 Price ------ ----------------- ---- ----- ----------------- ----- $ 10.67 1,463,405 8.63 $ 10.67 469,354 $ 10.67 11.17-13.83 190,500 8.67 13.26 13,875 13.17 16.17-20.25 226,500 9.01 17.38 -- --
No stock appreciation rights or restricted stock authorized by the 1996 Plan have been granted. (Continued) 50 51 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) (14) Commitments and Other Contingencies The Company sponsors a partially self-insured group health insurance program. The Company is obligated to pay all claims under the program, which are in excess of premiums, up to program limits of $150 per employee, per claim, per year. The Company is also self-insured with respect to its income disability benefits and against casualty losses on advertising structures. Amounts for expected losses, including a provision for losses incurred but not reported, is included in accrued expenses in the accompanying consolidated financial statements. The Company maintains a $1,000 letter of credit with a bank to meet requirements of the Company's worker's compensation insurance carrier. The Company sponsors The Lamar Corporation Savings and Profit Sharing Plan covering employees who have completed one year of service and are at least 21 years of age. The Company matches 50% of employees' contributions up to 5% of related compensation. Employees can contribute up to 15% of compensation. Full vesting on the Company's matched contributions occurs after five years. The Company contributed $512, $564, and $644 for the years ended October 31, 1995 and 1996 and December 31, 1997, respectively. In 1993, LAC established a Deferred Compensation Plan for the benefit of certain of its senior management who meet specific age and years of service criteria. Employees who have attained the age of 30 and have a minimum of 10 years of service are eligible for annual contributions to the Plan generally ranging from $3 to $8, depending on the employee's length of service. LAC's contributions to the Plan are maintained in a "rabbi" trust and, accordingly, the assets and liabilities of the Plan are reflected in the balance sheet of LAC. Upon termination, death or disability, participating employees are eligible to receive an amount equal to the fair market value of the assets in the employee's deferred compensation account. The Company has contributed $210, $182 and $190 to the Plan during the years ended October 31, 1995 and 1996 and December 31, 1997, respectively. Contributions to the Deferred Compensation Plan are discretionary and are determined by the Board of Directors. The Company is the subject of litigation arising during the normal course of business. In the opinion of management and the general counsel of the Company, those claims will not have a material impact on the financial position, results of operations or liquidity of the Company. (Continued) 51 52 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) (15) Summarized Financial Information of Subsidiaries Except as set forth below, separate financial statements of each of the Company's direct or indirect subsidiaries that have guaranteed the Company's obligations under the 1996 Notes and the 1997 Notes (collectively, the "Guarantors") are not included herein because the Guarantors are jointly and severally liable under the guarantees, and the aggregate assets, liabilities, earnings and equity of the Guarantors are substantially equivalent to the assets, liabilities, earnings and equity of the Company on a consolidated basis. Summarized financial information for Missouri Logos, a Partnership, a 66-2/3% owned subsidiary of the Company and the only subsidiary of the Company that is not a Guarantor, is set forth below:
Balance Sheet Information: 1996 1997 ---- ---- Current assets $ 242 237 Total assets 292 290 Current liabilities -- 7 Total liabilities 225 7 Venturers' equity 67 283
Income Statement Information: 1995 1996 1997 ---- ---- ---- Revenues $ 804 931 991 Net income 540 545 540
(16) Disclosures About Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1997. The fair value of the financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties.
At December 31, 1997 -------------------- Carrying Amount Estimated Fair Value --------------- -------------------- Marketable investment securities $ 679 679 Long-term debt 534,091 575,198
(Continued) 52 53 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies as follows: The carrying amounts of cash and cash equivalents, accounts receivable, other receivables, trade accounts payable, accrued expenses, and deferred income approximate fair value because of the short term nature of these items. The fair value of the Company's marketable investment securities are based on quoted market prices. The fair value of long-term debt is based upon market quotes obtained from dealers where available and by discounting future cash flows at rates currently available to the Company for similar instruments when quoted market rates are not available. Fair value estimates are subject to inherent limitations. Estimates of fair values are made at a specific point in time, based on relevant market information and information about the financial instrument. The estimated fair values of financial instruments presented above are not necessarily indicative of amounts the Company might realize in actual market transactions. Estimates of fair value are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (17) Quarterly Financial Data (Unaudited)
Fiscal Year 1996 Quarters January 31 April 30 July 31 October 31 ---------- -------- ------- ---------- Revenues $ 27,613 29,033 31,520 32,436 Gross profit 16,045 18,894 21,444 23,035 Income applicable to common stock 910 2,169 3,125 4,280 Net earnings per common share (basic) .02 .06 .09 .10 Net earnings per common share (diluted) .02 .06 .09 .10
Fiscal Year 1997 Quarters March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Revenues $ 37,847 50,108 55,485 57,622 Gross profit 24,380 34,625 38,974 39,693 Income (loss) applicable to common stock 1,205 1,402 916 (1,047) Net earnings (loss) per common share (basic) .03 .03 .02 (.02) Net earnings (loss) per common share (diluted) .03 .03 .02 (.02)
(Continued) 53 54 LAMAR ADVERTISING COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data) (18) Subsequent Events Subsequent to December 31, 1997, the Company purchased substantially all of the assets of three outdoor advertising companies for a total purchase price of $50,200 in cash. The acquisitions will be accounted for under the purchase method of accounting. On December 31, 1997, the Board of Directors approved a three-for-two split of its Class A and Class B common stock subject to the approval by the shareholders of an increase in the authorized number of shares of Class A and Class B common stock. On February 26, 1998, the shareholders approved an increase in the authorized number of shares of Class A common stock to 75,000,000 and Class B common stock to 37,500,000. The stock split, which was effected by means of a 50% stock dividend, was paid to shareholders on February 27, 1998. Par value of the common stock will remain unchanged at $.001. Common stock and additional paid in capital have been adjusted to reflect the split as of December 31, 1997. All references to share and per share information in the consolidated financial statements and related footnotes have been restated to reflect the effect of the split for all periods presented. SCHEDULE 2 Lamar Advertising Valuation and Qualifying Accounts The Years Ended October 31, 1995 and 1996, The Two Months Ended December 31, 1996, and the Year Ended December 31, 1997 (in 000's)
Column A Column B Column C Column D Column E - ---------------------------------------------------- ------------- ------------- ------------ --------------- Balance at Charged to Balance at Beginning of Costs and end of Description Period Expenses Deductions period - ---------------------------------------------------- ------------- ------------- ------------ --------------- Year ended December 31, 1997 Deducted in balance sheet from trade accounts receivable: Allowance for doubtful accounts 814 2,098 1,601 1,311 ------ ------ ------ ------ Deducted in balance sheet from intangible assets: Amortization of intangible assets 9,273 20,425 -- 29,698 ------ ------ ------ ------ Two months ended December 31, 1996 Deducted in balance sheet from trade accounts receivable: Allowance for doubtful accounts 551 263 -- 814 ------ ------ ------ ------ Deducted in balance sheet from intangible assets: Amortization of intangible assets 10,137 1,266 2,130 9,273 ------ ------ ------ ------ Year ended October 31, 1996 Deducted in balance sheet from trade accounts receivable: Allowance for doubtful accounts 551 580 580 551 ------ ------ ------ ------ Deducted in balance sheet from intangible assets: Amortization of intangible assets 7,067 3,070 -- 10,137 ------ ------ ------ ------ Year ended October 31, 1995 Deducted in balance sheet from trade accounts receivable: Allowance for doubtful accounts 551 502 502 551 ------ ------ ------ ------ Deducted in balance sheet from intangible assets: Amortization of intangible assets 4,808 2,472 213 7,067 ------ ------ ------ ------
54 55 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The response to this item is contained in part under the caption "Executive Officers of the Registrant" in Part I, Item 1A hereof and the remainder is incorporated herein by reference from the discussion responsive thereto under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement relating to the 1998 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The response to this item is incorporated herein by reference from the discussion responsive thereto under the following captions in the Company's Proxy Statement relating to the 1998 Annual Meeting of Stockholders: "Election of Directors - Director Compensation," "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is incorporated herein by reference from the discussion responsive thereto under the caption "Share Ownership" in the Company's Proxy Statement relating to the 1998 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item is incorporated herein by reference from the discussion responsive thereto under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement relating to the 1998 Annual Meeting of Stockholders. 55 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS The financial statements are listed under Part II, Item 8 of this Report. 2. FINANCIAL STATEMENT SCHEDULES The financial statement schedules are included under Part II, Item 8 of this Report. 3. EXHIBITS The exhibits are listed below under Part IV, Item 14(c) of this Report. (B) REPORTS ON FORM 8-K Reports on Form 8-K were filed with the Commission during the fourth quarter of 1997 to report the following items as of the dates indicated: On October 27, 1997, the Company amended its report on Form 8-K originally filed on August 27, 1997 to present under Item 7 a statement of assets acquired and liabilities assumed, a related statement of revenues and expenses, and pro forma financial information relating to the Company's acquisition from Outdoor Systems, Inc. ("OSI") of certain outdoor advertising assets that OSI had acquired from National Advertising Company, previously a wholly-owned subsidiary of Minnesota Mining and Manufacturing Company. (C) EXHIBITS
INDEX TO EXHIBITS Exhibit No. Description ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company. Filed herewith. 3.3 By-laws of the Company, as amended. Previously filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 4.1 Specimen certificate for the shares of Class A Common Stock of the Company. Previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 4.2 Senior Secured Note dated May 19, 1993. Previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 33-59624), and incorporated herein by reference.
56 57 4.3 Indenture dated May 15, 1993 relating to the Company's 11% Senior Secured Notes due May 15, 2003. Previously filed as Exhibit 4.3 to the Company's Registration Statement on Form S-1 (File No. 33-59624), and incorporated herein by reference. 4.4 First Supplemental Indenture dated July 30, 1996 relating to the Company's 11% Senior Secured Notes due May 15, 2003. Previously filed as Exhibit 4.5 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 4.5 Form of Second Supplemental Indenture in the form of an Amended and Restated Indenture dated November 8, 1996 relating to the Company's 11% Senior Secured Notes due May 15, 2003. Previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on November 15, 1996 (File No. 1-12407), and incorporated herein by reference. 4.6 Notice of Trustee dated November 8, 1996 with respect to the release of the security interest in the Trustee on behalf of the holders of the Company's 11% Senior Secured Notes due May 15, 2003. Previously filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on November 15, 1996 (File No. 1-12407), and incorporated herein by reference. 4.7 Form of Subordinated Note. Previously filed as Exhibit 4.8 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 4.8 Indenture dated as of November 15, 1996 between the Company, certain of its subsidiaries and State Street Bank and Trust Company, as trustee, relating to the Company's 9 5/8% Senior Subordinated Notes due 2006. Previously filed as Exhibit 4.11 to the Company's Registration Statement on Form S-3 (File No. 333-14789), and incorporated herein by reference. 4.9 Form of 9 5/8% Senior Subordinated Note due 2006. Previously filed as Exhibit 4.12 to the Company's Registration Statement on Form S-3 (File No. 333-14789), and incorporated herein by reference. 4.10 Form of 8 5/8% Senior Subordinated Note due 2007. Filed herewith. 4.11 Indenture dated as of September 25, 1997 between the Company, certain of its subsidiaries, and State Street Bank and Trust Company, as trustee, relating to the Company's 8 5/8% Senior Subordinated Notes due 2007. Previously filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on September 30, 1997 (File No. 1-12407), and incorporated herein by reference. 10.1 Consulting Agreement dated July 1, 1996 between the Lamar Texas Limited Partnership and the Reilly Consulting Company, L.L.C., of which Kevin P. Reilly, Sr. is the manager. Previously filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 33- 05479), and incorporated herein by reference.
57 58 10.2 Indenture dated as of September 24, 1986 relating to the Company's 8% Unsecured Subordinated Debentures. Previously filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File No. 33-59624), and incorporated herein by reference. 10.3* The Lamar Savings and Profit Sharing Plan Trust. Previously filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 33-59624), and incorporated herein by reference. 10.4 Trust under The Lamar Corporation, its Affiliates and Subsidiaries Deferred Compensation Plan dated October 3, 1993. Previously filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995 (File No. 33-59624), and incorporated herein by reference. 10.5* 1996 Equity Incentive Plan. Previously filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 10.6 Bank Credit Agreement dated December 18, 1996 between the Company, certain of its subsidiaries, the lenders party thereto and The Chase Manhattan Bank, as administrative agent. Previously filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996 (File No. 1-12407), and incorporated herein by reference. 10.7 Amendment No. 1 to the Bank Credit Agreement dated as of March 31, 1997 between the Company, the Subsidiary Guarantors party thereto, the Lenders party thereto and the Chase Manhattan Bank, as administrative agent. Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File No. 1-12407), and incorporated herein by reference. 10.8 Amendment No. 2 to the Bank Credit Agreement dated as of September 12, 1997 between the Company, certain of its subsidiaries, the lenders party thereto and The Chase Manhattan Bank, as administrative agent. Previously filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on September 30, 1997 (File No. 1-12407), and incorporated herein by reference. 10.9 Amendment No. 3 to the Bank Credit Agreement dated as of December 31, 1997 between the Company, certain of its subsidiaries, the lenders party thereto and The Chase Manhattan Bank, as administrative agent. Filed herewith. 10.10 Contract to Sell and Purchase, dated as of October 9, 1996, between the Company and Outdoor East L.P. Previously filed as Exhibit 10.16 to the Company's Registration Statement on Form S-3 (File No. 333-14677), and incorporated herein by reference. 10.11 Stock Purchase Agreement, dated as of September 25, 1996, between the Company and the shareholders of FKM Advertising, Co., Inc. Previously filed as Exhibit 10.17 to the Company's Registration Statement on Form S-3 (File No. 333-14677), and incorporated herein by reference.
58 59 10.12 Stock Purchase Agreement dated as of February 7, 1997 between the Company and the stockholders of Penn Advertising, Inc. named therein. Previously filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on April 14, 1997 (File No. 1-12407), and incorporated herein by reference. 10.13 Asset Purchase Agreement dated as of August 15, 1997 between The Lamar Corporation and Outdoor Systems, Inc. Previously filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on August 27, 1997 (File No. 1-12407), and incorporated herein by reference. 11.1 Statement regarding computation of per share earnings. Filed herewith. 21.1 Subsidiaries of the Company. Filed herewith. 23.1 Consent of KPMG Peat Marwick LLP. Filed herewith. 27.1 Financial Data Schedule. Filed herewith.
______________ * Management contract or compensatory plan or arrangement in which the executive officers or directors of the Company participate. 59 60 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. LAMAR ADVERTISING COMPANY By: /s/Kevin P. Reilly, Jr. ----------------------- Kevin P. Reilly, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/Kevin P. Reilly, Jr. Chief Executive Officer and Director 3/23/98 ----------------------- Kevin P. Reilly, Jr. /s/Keith A. Istre Chief Financial and Accounting Officer and Director 3/23/98 ----------------- Keith A. Istre /s/Charles W. Lamar, III Director 3/23/98 ------------------------ Charles W. Lamar, III /s/Gerald H. Marchand Director 3/23/98 --------------------- Gerald W. Marchand /s/Jack S. Rome, Jr. Director 3/23/98 -------------------- Jack S. Rome, Jr. /s/William R. Schmidt Director 3/23/98 --------------------- William R. Schmidt /s/T. Everett Stewart, Jr. Director 3/23/98 -------------------------- T. Everett Stewart, Jr.
60 61
INDEX TO EXHIBITS Exhibit No. Description ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company. Filed herewith. 3.3 By-laws of the Company, as amended. Previously filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 4.1 Specimen certificate for the shares of Class A Common Stock of the Company. Previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 4.2 Senior Secured Note dated May 19, 1993. Previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 33-59624), and incorporated herein by reference. 4.3 Indenture dated May 15, 1993 relating to the Company's 11% Senior Secured Notes due May 15, 2003. Previously filed as Exhibit 4.3 to the Company's Registration Statement on Form S-1 (File No. 33-59624), and incorporated herein by reference. 4.4 First Supplemental Indenture dated July 30, 1996 relating to the Company's 11% Senior Secured Notes due May 15, 2003. Previously filed as Exhibit 4.5 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 4.5 Form of Second Supplemental Indenture in the form of an Amended and Restated Indenture dated November 8, 1996 relating to the Company's 11% Senior Secured Notes due May 15, 2003. Previously filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on November 15, 1996 (File No. 1-12407), and incorporated herein by reference. 4.6 Notice of Trustee dated November 8, 1996 with respect to the release of the security interest in the Trustee on behalf of the holders of the Company's 11% Senior Secured Notes due May 15, 2003. Previously filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on November 15, 1996 (File No. 1-12407), and incorporated herein by reference. 4.7 Form of Subordinated Note. Previously filed as Exhibit 4.8 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 4.8 Indenture dated as of November 15, 1996 between the Company, certain of its subsidiaries and State Street Bank and Trust Company, as trustee, relating to the Company's 9 5/8% Senior Subordinated Notes due 2006. Previously filed as Exhibit 4.11 to the Company's Registration Statement on Form S-3 (File No. 333-14789), and incorporated herein by reference. 4.9 Form of 9 5/8% Senior Subordinated Note due 2006. Previously filed as Exhibit 4.12 to the Company's Registration Statement on Form S-3 (File No. 333-14789), and incorporated herein by reference. 4.10 Form of 8 5/8% Senior Subordinated Note due 2007. Filed herewith. 4.11 Indenture dated as of September 25, 1997 between the Company, certain of its subsidiaries, and State Street Bank and Trust Company, as trustee, relating to the Company's 8 5/8% Senior Subordinated Notes due 2007. Previously filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on September 30, 1997 (File No. 1-12407), and incorporated herein by reference. 10.1 Consulting Agreement dated July 1, 1996 between the Lamar Texas Limited Partnership and the Reilly Consulting Company, L.L.C., of which Kevin P. Reilly, Sr. is the manager. Previously filed as Exhibit 10.2 to the Company's Registration Statement on Form S-1 (File No. 33- 05479), and incorporated herein by reference.
62 10.2 Indenture dated as of September 24, 1986 relating to the Company's 8% Unsecured Subordinated Debentures. Previously filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1 (File No. 33-59624), and incorporated herein by reference. 10.3* The Lamar Savings and Profit Sharing Plan Trust. Previously filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File No. 33-59624), and incorporated herein by reference. 10.4 Trust under The Lamar Corporation, its Affiliates and Subsidiaries Deferred Compensation Plan dated October 3, 1993. Previously filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995 (File No. 33-59624), and incorporated herein by reference. 10.5 1996 Equity Incentive Plan. Previously filed as Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 333-05479), and incorporated herein by reference. 10.6 Bank Credit Agreement dated December 18, 1996 between the Company, certain of its subsidiaries, the lenders party thereto and The Chase Manhattan Bank, as administrative agent. Previously filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996 (File No. 1-12407), and incorporated herein by reference. 10.7 Amendment No. 1 to the Bank Credit Agreement dated as of March 31, 1997 between the Company, the Subsidiary Guarantors party thereto, the Lenders party thereto and the Chase Manhattan Bank, as administrative agent. Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File No. 1-12407), and incorporated herein by reference. 10.8 Amendment No. 2 to the Bank Credit Agreement dated as of September 12, 1997 between the Company, certain of its subsidiaries, the lenders party thereto and The Chase Manhattan Bank, as administrative agent. Previously filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed on September 30, 1997 (File No. 1-12407), and incorporated herein by reference. 10.9 Amendment No. 3 to the Bank Credit Agreement dated as of December 31, 1997 between the Company, certain of its subsidiaries, the lenders party thereto and The Chase Manhattan Bank, as administrative agent. Filed herewith. 10.10 Contract to Sell and Purchase, dated as of October 9, 1996, between the Company and Outdoor East L.P. Previously filed as Exhibit 10.16 to the Company's Registration Statement on Form S-3 (File No. 333-14677), and incorporated herein by reference. 10.11 Stock Purchase Agreement, dated as of September 25, 1996, between the Company and the shareholders of FKM Advertising, Co., Inc. Previously filed as Exhibit 10.17 to the Company's Registration Statement on Form S-3 (File No. 333-14677), and incorporated herein by reference.
63 10.12 Stock Purchase Agreement dated as of February 7, 1997 between the Company and the stockholders of Penn Advertising, Inc. named therein. Previously filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on April 14, 1997 (File No. 1-12407), and incorporated herein by reference. 10.13 Asset Purchase Agreement dated as of August 15, 1997 between The Lamar Corporation and Outdoor Systems, Inc. Previously filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on August 27, 1997 (File No. 1-12407), and incorporated herein by reference. 11.1 Statement regarding computation of per share earnings. Filed herewith. 21.1 Subsidiaries of the Company. Filed herewith. 23.1 Consent of KPMG Peat Marwick LLP. Filed herewith. 27.1 Financial Data Schedule. Filed herewith.
______________ * Management contract or compensatory plan or arrangement in which the executive officers or directors of the Company participate. EX-3.2 2 CERTIFICATE OF AMENDMENT 1 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF LAMAR ADVERTISING COMPANY Pursuant to Section 242 of the General Corporation Law of the State of Delaware Lamar Advertising Company (hereinafter called the "Corporation"), organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: By unanimous written consent of the Board of Directors of the Corporation, a resolution was duly adopted, pursuant to Section 242 of the General Corporation Law of the State of Delaware, setting forth an amendment to the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable. The stockholders of the Corporation duly approved said proposed amendment by written consent in accordance with Sections 222 and 242 of the General Corporation Law of the State of Delaware. The resolution setting forth the amendment is as follows: RESOLVED: That Article FOURTH of the Certificate of Incorporation of the Corporation be and hereby is deleted and the following Article FOURTH is inserted in lieu thereof: FOURTH. The total number of shares of all classes of stock which the Corporation shall have authority to issue is one hundred thirteen million five hundred ten thousand (113,510,000) shares, and shall consist of: (1) Seventy-five million (75,000,000) shares of Class A Common Stock, $0.001 par value per share; 2 (2) Thirty-seven million five hundred thousand (37,500,000) shares of Class B Common Stock, $0.001 par value per share; (3) Ten thousand (10,000) shares of Class A Preferred Stock, $638.00 par value per share; and (4) One million (1,000,000) shares of undesignated Preferred Stock, $0.001 par value per share. The Class A Common Stock and the Class B Common Stock are hereinafter collectively referred to as "Common Stock." 4.1 Common Stock The powers, preferences, rights, qualifications, limitations and restrictions relating to the Common Stock are as follows: 4.1.1. Rank The Common Stock is junior to the Class A Preferred Stock and is subject to all the powers, preferences, rights and priorities of Preferred Stock designated herein or in any resolution or resolutions adopted by the Board of Directors pursuant to authority expressly vested in it by the provisions of Section 4.3 of this Article FOURTH (the "Designated Preferred Stock"). 4.1.2. Voting Holders of Class A Common Stock are entitled to one (1) vote for each share of such stock held, and holders of Class B Common Stock are entitled to ten (10) votes for each share of such stock held, with respect to all matters properly submitted for the vote of holders of Common Stock. Except as otherwise provided by law, the holders of Common Stock will vote together as a single class on all matters properly submitted for their vote, including without limitation any amendment to this Amended and Restated Certificate of Incorporation which would increase or decrease the number of authorized shares of Class A Common Stock or Class B Common Stock. 4.1.3. Dividends and Other Distributions (a) Except as provided herein, each share of Common Stock issued and outstanding shall be identical in all respects, and no dividend shall be paid on any share of Common Stock unless the same dividend is paid on all shares of Common Stock outstanding at the time of such payment. Except for and subject to those special voting rights expressly granted herein to the holders of the Class B Common Stock and subject to the powers, rights, privileges, preferences and priorities of the Class A Preferred Stock and any Designated Preferred Stock, the holders of Common Stock shall have exclusively all other rights of -2- 3 stockholders, including without limitation (i) the right to receive dividends, when, as and if declared by the Board of Directors out of funds legally available therefor, and (ii) in the event of any distribution of assets upon liquidation, dissolution or winding up of the Corporation or otherwise, the right to receive ratably all of the assets and funds of the Corporation remaining after the payment to the creditors of the Corporation. (b) Dividends and distributions payable in shares of Class A Common Stock may not be made on or to shares of Class B Common Stock and dividends and distributions payable in shares of Class B Common Stock may not be made on or to shares of any class of the Corporation's capital stock other than the Class B Common Stock. If a dividend or distribution payable in shares of Class A Common Stock shall be made on the shares of Class A Common Stock, a dividend or distribution payable in shares of Class B Common Stock shall be made simultaneously on the shares of Class B Common Stock, and the number of shares of Class B Common Stock payable on each share of Class B Common Stock pursuant to such dividend or distribution shall be equal to the number of shares of Class A Common Stock payable on each share of Class A Common Stock pursuant to such dividend or distribution. If a dividend or distribution payable in shares of Class B Common Stock shall be made on the shares of Class B Common Stock, a dividend or distribution payable in shares of Class A Common Stock shall be made simultaneously on the shares of Class A Common Stock, and the number of shares of Class A Common stock pursuant to such dividend or distribution shall be equal to the number of shares of Class B Common Stock payable on each share of Class B Common Stock pursuant to such dividend or distribution. (c) If the Corporation shall in any manner subdivide (by stock split, reclassification, stock dividend, recapitalization, or otherwise) or combine (by reverse stock split or otherwise) the outstanding shares of Class A Common Stock or Class B Common Stock, then the outstanding shares of each other class of Common Stock shall be subdivided or combined, as the case may be, to the same extent, on an equal share basis. 4.1.4. Conversion of Class B Common Stock (a) In the event that the number of outstanding shares of Class B Common Stock falls below ten percent (10%) of the total number of shares of Common Stock outstanding, each share of Class B Common Stock shall at that time be converted automatically to one (1) fully paid and non-assessable share of Class A Common Stock. (b) Upon the sale or other transfer by a holder of Class B Common Stock to a person or entity other than a Permitted Transferee (as such term is defined below), such shares of Class B Common Stock shall be converted automatically into an equal number of shares of Class A Common Stock. Promptly upon such sale or other transfer, the holder of Class B Common Stock shall surrender the certificate or certificates therefor, duly endorsed in blank or accompanied by proper instruments of transfer, at the office of the Corporation or of any transfer agent for the Class A Common Stock, and shall give written notice to the Corporation at such office: (i) stating that the shares are being converted pursuant to this paragraph, (ii) identifying the number of shares of Class B Common Stock being converted and (iii) setting forth the name or names (with addresses) and denominations in which the certificate or -3- 4 certificates for Class A Common Stock shall be issued and shall include instructions for delivery thereof. Delivery of such notice together with the certificates representing the Class B Common Stock shall obligate the Corporation or its transfer agent to issue and deliver at such stated address to such stated transferee a certificates or certificates for the number of shares of Class A Common Stock to which such transferee is entitled, registered in the name of such transferee. In the event of a sale or other transfer of less than all of the Class B Common Stock evidenced by a certificate surrendered to the Corporation in accordance with the above procedures, subject to paragraph (a) above, the Corporation shall execute and deliver to the transferor, without charge, a new certificate evidencing the number of shares of Class B Common Stock not sold or otherwise transferred. For the purpose of paragraph (b) above, a "Permitted Transferee" is defined as : (i) (A) any Controlling Stockholder (which shall mean the Reilly Family Limited Partnership or any successor entity thereto, Kevin P. Reilly, Sr., Kevin P. Reilly, Jr., Wendell S. Reilly, Sean E. Reilly, and Anna R. Cullinan; (B) the estate of a Controlling Stockholder; (C) the spouse or former spouse of a Controlling Stockholder; (D) any lineal descendent of a Controlling Stockholder, any spouse of such lineal descendent, a Controlling Stockholder's grandparent, parent, brother or sister or a Controlling Stockholder's spouse's brother or sister; (E) any guardian or custodian (including a custodian for purposes of the Uniform Gift to Minors Act or Uniform Transfers to Minors Act) for, or any conservator or other legal representative of, one or more Permitted Transferees; or (F) any trust or savings or retirement account, including an individual retirement account for purposes of federal income tax laws, whether or not involving a trust, principally for the benefit of one or more Permitted Transferees, including any trust in respect of which a Permitted Transferee has any general or special testamentary power of appointment which is limited to any other Permitted Transferee; (ii) the Corporation; (iii) any employee benefit plan or trust thereunder sponsored by the Corporation or any of its subsidiaries; (iv) any trust principally for the benefit of one or more of the individuals, persons, firms or entities ("Persons") referred to in (i) through (iii) above; (v) any corporation, partnership, or other entity if all of the beneficial ownership is held solely by one or more of the Persons referred to in (i) through (iv) above; (vi) any voting trust for the benefit of one or more of the Persons referred to in (i) through (v) above; and (vii) any broker or dealer in securities, clearing house, bank, trust company, savings and loan association or other financial institution which holds the Class B Common Stock as nominee for the benefit of a Permitted Transferee thereof. (c) Notwithstanding anything to the contrary set forth herein, any holder of -4- 5 Class B Common Stock may pledge his shares of Class B Common Stock to a pledgee pursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee without causing an automatic conversion of such shares into Class A Common Stock, provided, however, that such shares may not be transferred to or registered in the name of the pledgee unless such pledgee is a Permitted Transferee. In the event of foreclosure or other similar action by a pledgee who is not a Permitted Transferee, such pledged shares of Class B Common Stock shall be converted automatically, without any act or deed on the part of the Corporation or any other person, into shares of Class A Common Stock as provided above. (d) Each share of Class B Common Stock shall be convertible, at the option of its holder, into one fully paid and non-assessable share of Class A Common Stock at any time. In the event of such voluntary conversion, the procedures set forth in paragraph (b) above shall be followed. (e) The Corporation hereby reserves and shall at all times reserve and keep available, out of its authorized and unissued Class A Common Stock, for the purpose of effecting the conversions provided for herein, a sufficient number of shares of Class A Common Stock to effect the conversion of all outstanding Class B Common Stock. All of the Class A Common Stock so issuable shall, when issued, be duly and validly issued, fully paid and non-assessable, and free from liens and charges with respect to the issue. The Corporation will take such action as may be necessary to ensure that all such Class A Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any stock exchange or market on which any shares of the Class A Common Stock are listed or quoted. (f) In any merger, consolidation or business combination, the consideration to be received per share by the holders of Class A Common Stock and Class B Common Stock must be identical for each class of stock, except that in any such transaction in which shares of Common Stock are to be distributed, such shares may differ as to voting rights to the extent that voting rights differ among Class A Common Stock and Class B Common Stock as provided herein. 4.1.5. Preemptive Rights No holder of shares of Common Stock shall be entitled to preemptive or subscription rights. 4.2 Class A Preferred Stock The powers, preferences, rights, qualifications, limitations and restrictions relating to the Class A Preferred Stock are as follows: 4.2.1. Rank The Class A Preferred Stock, with respect to dividends and upon liquidation, ranks senior to the Common Stock and is subject to all the powers, preferences, rights and -5- 6 priorities of any Designated Preferred Stock. 4.2.2. Dividends Holders of Class A Preferred Stock, in priority to the Common Stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available therefor, dividends at the rate of fifteen and 95/100 dollars ($15.95) per share per quarter, payable to the stockholders of record at the close of business on such date before the payment thereof as is fixed by the Board of Directors on declaring any such dividend. Dividends shall be cumulative and the holders of Class A Preferred Stock shall have no right to such dividend even though the Corporation has funds available for the payment therefor, unless payment has been declared by the Board of Directors. Dividends on the Class A Preferred Stock shall be paid or declared and set apart for payment before dividends are declared and paid on the Common Stock. 4.2.3. Dissolution or Liquidation In the case of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the Class A Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets are capital or surplus, the sum of the par value of the Class A Preferred Stock plus a further amount equal to any dividend thereon accrued and unpaid to the date of such distribution before any payment shall be made or any assets distributed to the Common Stock. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, if the assets distributed among the holders of the Class A Preferred Stock are insufficient to permit the payment to such holders of the full preferential amounts to which they are entitled, the entire assets of the Corporation to be distributed shall be distributed among the holders of the Class A Preferred Stock. After payment to the holders of the Class A Preferred Stock of the full preferential amounts to which they are entitled, the holders of the Common Stock shall be entitled to receive ratably all the remaining assets. A merger or consolidation of the Corporation with or into any other corporation or entity, shall not be deemed to be a dissolution or liquidation within the meaning of this provision. 4.2.4. Voting Except as otherwise provided by law, the holders of the Class A Preferred Stock shall not be entitled to vote. 4.2.5. Preemptive Rights No holder of shares of Class A Preferred Stock shall be entitled to preemptive or subscription rights. 4.3. Designated Preferred Stock The Board of Directors is authorized, subject to limitations prescribed by law and the -6- 7 provisions of this Article FOURTH, to provide by resolution for the issuance of the shares of undesignated Preferred Stock in one or more series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designations, powers, preferences and rights of the shares of each such series and qualifications, limitations or restrictions thereof. The authority of the Board with respect to each series, which shall be Designated Preferred Stock, shall include, but shall not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The dividend rate, if any, on the shares of that series, whether dividends shall be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable, and if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (h) Any other relative rights, preferences and limitations of that series. -7- 8 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its President and Chief Executive Officer this 26th day of February, 1998. LAMAR ADVERTISING COMPANY By: /s/ Kevin P. Reilly, Jr. --------------------------------------- Kevin P. Reilly, Jr. President and Chief Executive Officer -8- EX-4.10 3 FORM OF 8 5/8% OF SENIOR SUBORDINATED NOTE 1 EXHIBIT 4.10 UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. LAMAR ADVERTISING COMPANY 8 5/8% SENIOR SUBORDINATED NOTE DUE 2007 No. A-1 $200,000,000 CUSIP No. 512815 AE 1 LAMAR ADVERTISING COMPANY, a Delaware corporation, promises to pay to Cede & Co., or registered assigns, the principal sum of $200,000,000, on September 15, 2007. Interest Payment Dates: March 15 and September 15, commencing March 15, 1998. Record Dates: March 1 and September 1, commencing March 1, 1998 (whether or nor a business day). Additional provisions of this Note are set forth on the other side of this Note. 2 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers. LAMAR ADVERTISING COMPANY By: -------------------------------------- Kevin P. Reilly, Jr., President By: -------------------------------------- Keith A. Istre, Treasurer TRUSTEE'S CERTIFICATE OF AUTHENTICATION Dated: December 16, 1997 STATE STREET BANK AND TRUST COMPANY as Trustee, certifies that this is one of the 8 5/8% Senior Subordinated Notes referred to in the Indenture By: ------------------------------- Authorized Signatory -2- 3 REVERSE SIDE OF NOTE LAMAR ADVERTISING COMPANY 8 5/8% SENIOR SUBORDINATED NOTE DUE 2007 1. INTEREST. Lamar Advertising Company, a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Note semiannually on March 15 and September 15 of each year (each an "Interest Payment Date"), commencing on March 15, 1998 at the rate of 8 5/8% per annum. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Interest shall accrue from the most recent date to which interest has been paid or duly provided for, or if no interest has been paid or duly provided for, from September 25, 1997. The Company shall pay interest on overdue principal, and on overdue premium, if any, and overdue interest, to the extent lawful, at a rate equal to the rate of interest otherwise payable on the Notes. 2. METHOD OF PAYMENT. The Company will pay interest on this Note provided for in Paragraph 1 above (except defaulted interest) to the person who is the registered Holder of this Note at the close of business on the Record Date immediately preceding the Interest Payment Date. The Holder must surrender this Note to a Paying Agent to collect principal payments. The Company will pay principal, premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts; provided, however, that so long as this Note is a Global Note such payments will be made in immediately available funds and the Company may pay principal, premium, if any, and interest on a Note which is not a Global Note by check payable in such money. The Company may mail an interest check with respect to any Note that is not a Global Note to the Holder's registered address. 3. PAYING AGENT AND REGISTRAR. Initially, State Street Bank and Trust Company, a trust company duly organized under the laws of the Commonwealth of Massachusetts (the "Trustee"), will act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to the Holders of the Notes. Neither the Company nor any of its Subsidiaries or Affiliates may act as Paying Agent but may act as registrar or co-registrar. 4. INDENTURE; RESTRICTIVE COVENANTS. The Company issued this Note under an Indenture dated as of September 25, 1997 (the "Indenture") among the Company, the Guarantors and the Trustee. The terms of this Note include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) as in effect on the date of the Indenture. This Note is subject to all such terms, and the Holder of this Note is referred to -3- 4 the Indenture and said Trust Indenture Act for a statement of them. All capitalized terms in this Note, unless otherwise defined, have the meanings assigned to them by the Indenture. The Notes are general unsecured obligations of the Company limited to $200,000,000 aggregate principal amount. The Indenture imposes certain restrictions on, among other things, the incurrence of Indebtedness and Liens by the Company and its Restricted Subsidiaries, mergers and sale of assets, the payment of dividends on, or the repurchase of, Capital Stock of the Company and its Restricted Subsidiaries, certain other Restricted Payments by the Company and its Restricted Subsidiaries and certain transactions with Affiliates. 5. SUBORDINATION. The Indebtedness evidenced by the Notes is, to the extent and in the manner provided in the Indenture, subordinated and subject in right of payment to the prior payment in full in cash of all Senior Indebtedness, and this Note is issued subject to such provisions. Each Holder of this Note, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee, on behalf of such Holder, to take such action as may be necessary or appropriate to effectuate the subordination as provided in the Indenture and (c) appoints the Trustee attorney-in-fact of such Holder for such purpose. 6. OPTIONAL REDEMPTION. The Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after September 15, 2002 at the following redemption prices (expressed as a percentage of principal amount), together, in each case, with accrued and unpaid interest to (but not including) the redemption date, if redeemed during the twelve-month period beginning on September 15, of each year listed below:
Year Percentage ---- ---------- 2002 104.313% 2003 102.875% 2004 101.438% 2005 and thereafter 100.000%
Notwithstanding the foregoing, the Company may redeem in the aggregate up to $60 million of the original principal amount of the Notes at any time and from time to time prior to September 15, 2000 at a redemption price equal to 108.625% of the aggregate principal amount so redeemed, plus accrued interest to but not including the redemption date out of the Net Proceeds of one or more Public Equity Offerings; provided that at least $140 million of the aggregate principal amount of the Notes originally issued remain outstanding immediately after the occurrence of any such redemption and that any such redemption occurs within 120 days following the closing of any such Public Equity Offering. 7. NOTICE OF REDEMPTION. -4- 5 Notice of redemption will be mailed via first-class mail at least 30 days but not more than 60 days prior to the redemption date to each Holder of Notes to be redeemed at its registered address as it shall appear on the register of the Notes maintained by the Registrar. On and after any Redemption Date, interest will cease to accrue on the Notes or portions thereof called for redemption unless the Company shall fail to redeem any such Note. 8. OFFERS TO PURCHASE. The Indenture requires that certain proceeds from Asset Sales be used, subject to further limitations contained therein, to make an offer to purchase certain amounts of Notes in accordance with the procedures set forth in the Indenture. The Company is also required to make an offer to purchase Notes upon occurrence of a Change of Control in accordance with procedures set forth in the Indenture. 9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples thereof. As provided in the Indenture and subject to certain limitations therein set forth, a Holder may register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Note selected for redemption or register the transfer of or exchange any Note for a period of 15 days before a selection of Notes to be redeemed or any Note after it is called for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. 10. PERSONS DEEMED OWNERS. The registered Holder of this Note may be treated as the owner of it for all purposes. 11. UNCLAIMED MONEY. If money for the payment of principal, premium or interest on any Note remains unclaimed for two years, the Trustee or Paying Agent will pay the money back to the Company at its written request. After that, Holders entitled to money must look to the Company for payment as general creditors unless an "abandoned property" law designates another person. 12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the Indenture or the Notes may be modified, amended or supplemented by the Company, the Guarantors and the Trustee with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding and any existing default or compliance with any provision may be waived in a particular instance with the consent of the Holders of a majority in principal amount of the Notes then outstanding. Without the -5- 6 consent of Holders, the Company, the Guarantors and the Trustee may amend the Indenture or the Notes or supplement the Indenture for certain specified purposes including providing for uncertificated Notes in addition to certificated Notes, and curing any ambiguity, defect or inconsistency, or making any other change that does not adversely affect the rights of any Holder. 13. DEFAULTS AND REMEDIES. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of Notes then outstanding may declare all the Notes to be due and payable immediately in the manner and with the effect provided in the Indenture. Holders of Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity reasonably satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of a majority in aggregate principal amount of the Notes then outstanding may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of Notes notice of any continuing Default or Event of Default (except a Default in payment of principal or interest) if it determines that withholding notice is in their interest. 14. TRUSTEE DEALINGS WITH THE COMPANY. The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, any Guarantor or their Affiliates, and may otherwise deal with the Company, any Guarantor or their Affiliates, as if it were not Trustee. 15. NO RECOURSE AGAINST OTHERS. As more fully described in the Indenture, a director, officer, employee or stockholder, as such, of the Company or any Guarantor shall not have any liability for any obligations of the Company or any Guarantor under the Notes or the Indenture or for any claim based on, in respect or by reason of, such obligations or their creation. The Holder of this Note by accepting this Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of this Note. 16. DEFEASANCE AND COVENANT DEFEASANCE. The Indenture contains provisions for defeasance of the entire indebtedness on this Note and for defeasance of certain covenants in the Indenture upon compliance by the Company with certain conditions set forth in the Indenture. 17. ABBREVIATIONS. Customary abbreviations may be used in the name of a Holder of a Note or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), -6- 7 and U/G/M/A (Uniform Gifts to Minors Act). 18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP Numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders of the Notes. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 19. GOVERNING LAW. THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES TO THE INDENTURE AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE INDENTURE OR THIS NOTE. THE COMPANY WILL FURNISH TO ANY HOLDER OF A NOTE UPON WRITTEN REQUEST AND WITHOUT CHARGE A COPY OF THE INDENTURE. REQUESTS MAY BE MADE TO: LAMAR ADVERTISING COMPANY, 5551 CORPORATE BOULEVARD, BATON ROUGE, LOUISIANA 70808, ATTENTION: CHIEF FINANCIAL OFFICER. -7- 8 ASSIGNMENT I or we assign and transfer this Note to: (Insert assignee's social security or tax I.D. number) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Print or type name, address and zip code of assignee) and irrevocably appoint: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Agent to transfer this Note on the books of the Company. The Agent may substitute another to act for him. Date: Your Signature: ------------------------- ----------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ------------------------------------------------------------ -8- 9 GUARANTEE Each Guarantor (the "Guarantor", which term includes any successor Person under the Indenture) has unconditionally guaranteed, on a senior subordinated basis, jointly and severally, to the extent set forth in the Indenture and subject to the provisions of the Indenture, (a) the due and punctual payment of the principal of, and premium, if any, and interest on the Notes, when and as the same shall become due and payable, whether at maturity, by acceleration or otherwise, the due and punctual payment of interest on overdue principal of, and interest on the Notes, to the extent permitted by law and the due and punctual performance of all other Obligations of the Company to the Noteholders or the Trustee all in accordance with the terms set forth in the Indenture, and (b) in case of any extension of time of payment or renewal of any Notes or any of such other Obligations, that the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, at stated maturity, by acceleration or otherwise. The obligations of each Guarantor to the Noteholders and to the Trustee pursuant to this Guarantee and the Indenture are expressly set forth in Article 10 of the Indenture and reference is hereby made to the Indenture for the precise terms of this Guarantee. This Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Note upon which this Guarantee is noted shall have been executed by the Trustee under the Indenture by the manual signature of one of its authorized signatories. Guarantors: INTERSTATE LOGOS, INC. THE LAMAR CORPORATION LAMAR ADVERTISING OF MOBILE,INC. LAMAR ADVERTISING OF COLORADO SPRINGS, INC. LAMAR ADVERTISING OF SOUTH MISSISSIPPI, INC. LAMAR ADVERTISING OF JACKSON, INC. LAMAR TEXAS GENERAL PARTNER, INC. LAMAR ADVERTISING OF SOUTH GEORGIA, INC. LAMAR TENNESSEE LIMITED PARTNER, INC. TLC PROPERTIES, INC. TLC PROPERTIES II, INC. LAMAR PENSACOLA TRANSIT, INC. LAMAR ADVERTISING OF YOUNGSTOWN, INC. LAMAR ADVERTISING OF HUNTINGTON- BRIDGEPORT, INC. LAMAR ADVERTISING OF PENN, INC. LAMAR ADVERTISING OF MISSOURI, INC. LAMAR ADVERTISING OF MICHIGAN, INC. LAMAR ELECTRICAL, INC. NEBRASKA LOGOS, INC.
-9- 10 OKLAHOMA LOGO SIGNS, INC. MISSOURI LOGOS, INC. OHIO LOGOS, INC. UTAH LOGOS, INC. TEXAS LOGOS, INC. MISSISSIPPI LOGOS, INC. GEORGIA LOGOS, INC. SOUTH CAROLINA LOGOS, INC. VIRGINIA LOGOS, INC. MINNESOTA LOGOS, INC. MICHIGAN LOGOS, INC. NEW JERSEY LOGOS, INC. FLORIDA LOGOS, INC. KENTUCKY LOGOS, INC. NEVADA LOGOS, INC. TENNESSEE LOGOS, INC. KANSAS LOGOS, INC. CANADIAN TODS LIMITED
By: ------------------------------------------- Keith A. Istre, Treasurer ATTEST: - ------------------------------- Kevin P. Reilly, Jr., President LAMAR TEXAS LIMITED PARTNERSHIP By: Lamar Texas General Partner, Inc., its General Partner By: ------------------------------------------- Keith A. Istre, Treasurer ATTEST: - ------------------------------- Kevin P. Reilly, Jr., President -10- 11 LAMAR TENNESSEE LIMITED PARTNERSHIP LAMAR TENNESSEE LIMITED PARTNERSHIP II By: The Lamar Corporation, their General Partner By: -------------------------------------------- Keith A. Istre, Treasurer ATTEST: - ------------------------------- Kevin P. Reilly, Jr., President LAMAR AIR, L.L.C. By: The Lamar Corporation, its Manager By: -------------------------------------------- Keith A. Istre, Treasurer ATTEST: - ------------------------------- Kevin P. Reilly, Jr., President MINNESOTA LOGOS, A PARTNERSHIP By: Minnesota Logos, Inc. its General Partner By: -------------------------------------------- Keith A. Istre, Treasurer ATTEST: - ---------------------------------- T. Everett Stewart, Jr., President -11- 12 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have all or any part of this Note purchased by the Company pursuant to Section 4.14 or Section 4.21 of the Indenture, check the appropriate box: (TM) Section 4.14 (TM) Section 4.21 If you want to have only part of the Note purchased by the Company pursuant to Section 4.14 or Section 4.21 of the Indenture, state the amount you elect to have purchased: $ ------------------ Date: Your Signature: -------------------------- ---------------------------------- (Sign exactly as your name appears on the face of this Note) - ------------------------------- Signature Guaranteed -12- EX-10.9 4 AMENDMENT NO. 3 TO THE BANK CREDIT AGREEMENT 1 EXHIBIT 10.9 Execution Counterpart AMENDMENT NO. 3 AMENDMENT NO. 3 to Credit Agreement ("Amendment No. 3") dated as of December 31, 1997, between Lamar Advertising Company (the "Borrower"), the Subsidiary Guarantors party hereto and The Chase Manhattan Bank, as Administrative Agent (in such capacity, the "Administrative Agent"). The Borrower, the Subsidiary Guarantors, the lenders party thereto (the "Lenders") and the Administrative Agent are parties to a Credit Agreement dated as of December 18, 1996 (as modified and supplemented and in effect on the date hereof, the "Credit Agreement"). The Borrower, the Subsidiary Guarantors and the Administrative Agent with the consent of the Required Lenders (as defined in the Credit Agreement) wish to amend the Credit Agreement in certain respects and, accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment No. 3, terms defined in the Credit Agreement (as amended hereby) are used herein as defined therein. Section 2. Amendments to the Credit Agreement. Subject to the due execution and delivery by the Borrower, the Subsidiary Guarantors and the Administrative Agent of this Amendment No. 3, but effective as of the date hereof (the "Effective Date"), the Credit Agreement shall be amended as follows: 2.01. References in the Credit Agreement (including references to the Credit Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and "hereof") shall be deemed to be references to the Credit Agreement as amended hereby. 2.02. Section 7.09(a) of the Credit Agreement is hereby amended to read as follows: "(a) Total Debt Ratio. The Borrower will not permit the Total Debt Ratio at any time during any period below to exceed the ratio set opposite such period below:
Period Ratio ------ ----- From the Effective Date through March 30, 1998 5.50 to 1 From March 31, 1998 through December 30, 1998 5.25 to 1 From December 31, 1998 through December 30, 1999 5.00 to 1 From December 31, 1999 through December 30, 2000 4.50 to 1 From December 31, 2000 and at all times thereafter 4.00 to 1
2.03. Section 7.09(c) of the Credit Agreement is hereby amended to read as follows: Amendment No. 3 2 -2- "(c) Interest Coverage Ratio. The Borrower will not permit the Interest Coverage Ratio at any time during the period below to exceed the ratio set opposite such period below:
Period Ratio ------ ----- From the Effective Date through March 30, 1998 2.00 to 1 From March 31, 1998 through December 30, 1998 2.10 to 1 From December 31, 1998 through December 30, 1999 2.20 to 1 From December 31, 1999 and at all times thereafter 2.40 to 1"
Section 3. Miscellaneous. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment No. 3 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 3 by signing any such counterpart. This Amendment No. 3 shall be governed by, and construed in accordance with, the law of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3 to be duly executed and delivered as of the day and year first above written. LAMAR ADVERTISING COMPANY By: ----------------------- Title: Amendment No. 3 3 -3- SUBSIDIARY GUARANTORS INTERSTATE LOGOS, INC. THE LAMAR CORPORATION LAMAR ADVERTISING OF MOBILE, INC. LAMAR ADVERTISING OF COLORADO SPRINGS, INC. LAMAR ADVERTISING OF SOUTH MISSISSIPPI, INC. LAMAR ADVERTISING OF JACKSON, INC. LAMAR TEXAS GENERAL PARTNER, INC. LAMAR ADVERTISING OF SOUTH GEORGIA, INC. LAMAR TENNESSEE LIMITED PARTNER, INC. TLC PROPERTIES, INC. TLC PROPERTIES II, INC. LAMAR PENSACOLA TRANSIT, INC. LAMAR ADVERTISING OF YOUNGSTOWN, INC. NEBRASKA LOGOS, INC. OKLAHOMA LOGO SIGNS, INC. MISSOURI LOGOS, INC. OHIO LOGOS, INC. UTAH LOGOS, INC. TEXAS LOGOS, INC. MISSISSIPPI LOGOS, INC. GEORGIA LOGOS, INC. SOUTH CAROLINA LOGOS, INC. VIRGINIA LOGOS, INC. MINNESOTA LOGOS, INC. MICHIGAN LOGOS, INC. NEW JERSEY LOGOS, INC. FLORIDA LOGOS, INC. KENTUCKY LOGOS, INC. NEVADA LOGOS, INC. TENNESSEE LOGOS, INC. KANSAS LOGOS, INC. LAMAR ADVERTISING OF HUNTINGTON - BRIDGEPORT, INC. LAMAR ADVERTISING OF PENN, INC. LAMAR ADVERTISING OF MISSOURI, INC. LAMAR ADVERTISING OF MICHIGAN, INC. LAMAR ELECTRICAL, INC. By: ----------------------------- Title: LAMAR TEXAS LIMITED PARTNERSHIP Amendment No. 3 4 -4- By: Lamar Texas General Partner, Inc., its general partner By: ----------------------------- Title: LAMAR TENNESSEE LIMITED PARTNERSHIP LAMAR TENNESSEE LIMITED PARTNERSHIP II By: The Lamar Corporation, their general partner By: ----------------------------- Title: LAMAR AIR, L.L.C. By: The Lamar Corporation, its manager By: ----------------------------- Title: MINNESOTA LOGOS, A PARTNERSHIP By: Minnesota Logos, Inc., its general partner By: ----------------------------- Title: TLC PROPERTIES, L.L.C. By: TLC Properties, Inc., its manager By: Title: ADMINISTRATIVE AGENT THE CHASE MANHATTAN BANK, as Administrative Agent By: ----------------------------- Title: EX-11.1 5 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 Lamar Advertising Company and Subsidiaries Earnings Per Share Computation Information Years ended October 31, 1995 and 1996, the two months ended December 31, 1996 and the year ended December 31, 1997
Year Ended October 31 Two Months Ended Year Ended December 31 December 31, 1995 1996 1996 1997 ----------- ----------- ------------ ----------- Net earnings (loss) applicable to common stock $10,698,000 10,484,000 (8,115,000) 2,476,000 =========== =========== =========== =========== Weighted average common shares outstanding 50,658,161 41,134,476 45,520,784 47,037,497 Shares issuable upon exercise of stock options -- 114,057 -- 363,483 Weighted average common shares and common ----------- ----------- ----------- ----------- equivalents outstanding 50,658,161 41,248,533 45,520,784 47,400,980 =========== =========== =========== =========== Net earnings (loss) per common share basic and diluted $ 0.21 0.25 (0.18) 0.05 =========== =========== =========== =========== The above earnings per share (EPS) calculations are submitted in accordance with Statement of Financial Accounting Standards No. 128. An EPS calculation in accordance with Regulation S-K item 601 (b) (11)) is not shown above for the two months ended December 31, 1996 because it produces an antidilutive result. The following information is disclosed for purposes of calculating antidilutive EPS for that period. Weighted average common shares outstanding 45,520,784 Shares issuable upon exercise of stock options 547,018 ----------- Weighted average common shares and common share equivalents outstanding 46,067,802 =========== Net loss per common share $ (0.18) ===========
EX-21.1 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1
STATE OR OTHER JURISDICTION OF EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER INCORPORATION OR ORGANIZATION - ---------------------------------------------------- ------------------------------- The Lamar Corporation Louisiana Interstate Logos, Inc. Delaware Lamar Advertising of Colorado Springs, Inc. Colorado Lamar Advertising of Jackson, Inc. Mississippi Lamar Advertising of Mobile, Inc. Alabama Lamar Advertising of South Georgia, Inc. Georgia Lamar Advertising of South Mississippi, Inc. Mississippi Lamar Advertising of Youngstown, Inc. Delaware TLC Properties, Inc. Louisiana Missouri Logos, Inc. Missouri Missouri Logos, a Partnership Missouri Nebraska Logos, Inc. Nebraska Oklahoma Logo Signs, Inc. Oklahoma Utah Logos, Inc. Utah Ohio Logos, Inc. Ohio Georgia Logos, Inc. Georgia Kansas Logos, Inc. Kansas Lamar Air, LLC Louisiana Lamar Pensacola Transit, Inc. Florida Lamar Tennessee Limited Partnership, Inc. Louisiana Lamar Tennessee Limited Partnership Tennessee Lamar Tennessee Limited Partnership II Tennessee Lamar Texas General Partner, Inc. Texas Lamar Texas Limited Partnership Louisiana Michigan Logos, Inc. Michigan Minnesota Logos, Inc. Minnesota Minnesota Logos, a Partnership Minnesota Mississippi Logos, Inc. Mississippi New Jersey Logos, Inc. New Jersey South Carolina Logos, Inc. South Carolina Tennessee Logos, Inc. Tennessee Texas Logos, Inc. Texas TLC Properties II, Inc. Texas Virginia Logos, Inc. Virginia Lamar Advertising of Huntington-Bridgeport, Inc. West Virginia Lamar Advertising of Penn, Inc. Delaware Lamar Advertising of Michigan, Inc. Michigan Lamar Advertising of Missouri, Inc. Missouri Canadian TODS Limited Nova Scotia, Canada Nevada Logos, Inc. Nevada Kentucky Logos, Inc. Kentucky Florida Logos, Inc. Florida Lamar Electrical, Inc. Louisiana Lamar Advertising of South Dakota, Inc. South Dakota TLC Properties, L.L.C Louisiana
EX-23.1 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 Independent Auditors' Report on Financial Statement Schedule and Consent The Board of Directors Lamar Advertising Company: The audits referred to in our report dated February 6, 1998, except as to Note 18 of the consolidated financial statements which is as of February 27, 1998, included the related financial statement schedule for the years ended October 31, 1995, and 1996, the two months ended December 31, 1996, and the year ended December 31, 1997. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to incorporation by reference in the registration statement (No. 333-10337) on Form S-8 of Lamar Advertising Company of our report dated February 6, 1998, except as to Note 18 of the consolidated financial statements which is as of February 27, 1998, relating to the consolidated balance sheets of Lamar Advertising Company and subsidiaries as of October 31, 1996 and December 31, 1997, and the related consolidated statements of earnings, stockholders' equity (deficit) and cash flows for the years ended October 31, 1995 and 1996, the two months ended December 31, 1996, and the year ended December 31, 1997, which report appears in the December 31, 1997, annual report on Form 10-K of Lamar Advertising Company. KPMG PEAT MARWICK LLP New Orleans, Louisiana March 26, 1998 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 0000899045 LAMAR ADVERTISING 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 7,246 679 33,237 1,311 0 49,420 429,615 113,477 651,336 30,758 534,091 0 3,649 47 65,017 651,336 200,508 201,062 0 63,390 0 2,098 38,230 7,495 4,654 2,841 0 0 0 2,476 .05 .05
-----END PRIVACY-ENHANCED MESSAGE-----