ITEM 1. BUSINESS
GENERAL
Outdoor Systems, Inc. (the "Company") is the largest out-of-home advertising company in North America, operating, as of December 31, 1998, approximately 112,500 bulletin, poster, mall and transit advertising display faces in 90 metropolitan markets in the United States, 13 metropolitan markets in Canada, and 44 metropolitan markets in Mexico, as well as approximately 125,000 subway advertising display faces in New York City. The Company has operations in 50 of the 50 largest United States markets, 13 of the 15 largest Canadian markets and 44 of the 45 largest Mexican markets.
Since going public in April of 1996, the Company has effected five three-for-two stock splits of the Common Stock. All applicable information in this report, including the Consolidated Financial Statements and the Notes thereto, was adjusted to reflect these stock splits on a retroactive basis for all periods presented.
INDUSTRY OVERVIEW
The outdoor advertising industry has experienced increased advertiser interest and revenue growth in recent years. Outdoor advertising generated total revenues of approximately $2.3 billion in 1998, or approximately 1.2% of the total advertising expenditures in the United States, while the out-of-home advertising industry, consisting of transit and in-store advertising displays in addition to outdoor advertising, generated revenues in excess of $4.4 billion in 1998, according to estimates by the Outdoor Advertising Association of America ("OAAA"). Outdoor advertising's 1998 revenues represent growth of approximately 9.0% over estimated total revenues for 1997, which compares favorably to the growth of total U.S. advertising expenditures of approximately 7.1% during the same period.
Advertisers purchase outdoor advertising for a number of reasons. Outdoor advertising offers repetitive impact and a relatively low cost per-thousand-impressions, a commonly used media measurement, as compared to television, radio, newspaper, magazine and direct mail marketing. Accordingly, because of its efficiency, outdoor advertising is a good vehicle to build "mass market" support. In addition, outdoor advertising can be used to target a defined audience in a specific location and, therefore, can be relied upon by local businesses concentrating on a particular geographic area where customers have specific demographic characteristics. For instance, restaurants, motels, service stations and similar roadside businesses may use outdoor advertising to reach potential customers close to the point of sale and provide directional information. Other local businesses such as television and radio stations and consumer products companies may wish to appeal more broadly to customers and consumers in the local market. National brand name advertisers may use the medium to attract customers generally and build brand awareness. In all cases, outdoor advertising can be combined with other media such as radio and television to reinforce messages being provided to consumers.
The outdoor advertising industry has experienced significant changes due to a number of factors. First, the entire "out-of-home" advertising category has expanded to include, in addition to traditional billboards and roadside displays, displays in shopping centers and malls, airports, stadiums, movie theaters and supermarkets, as well as on taxis, trains, buses and subways. Second, the outdoor advertising industry has increased its visibility with and attractiveness to local advertisers as well as national retail, entertainment and consumer product-oriented companies. Third, the industry has benefited significantly from improvements in production technology, including the use of computer printing, vinyl advertising copy and improved lighting techniques, which have facilitated a more dynamic, colorful and creative use of the medium. These technological advances have permitted the outdoor advertising industry to respond more promptly and efficiently to the changing needs of its advertising customers and to increase its participation in multi-media campaigns. Lastly, the outdoor advertising industry has benefited from the growth in automobile travel time for business and leisure due to increased highway congestion and continued demographic shifts of residences and businesses from the cities to outlying suburbs. According to a 1995 survey from the U.S. Department of Transportation, Federal Highway Administration, since 1969, the rate of increase in drivers is more than three times the population growth. Since 1970, daily vehicle trips increased 102% and daily automobile travel miles increased 110%. The Company believes that the foregoing trends have resulted in increased consumer
exposure to existing billboard structures at a time when other media have been fragmenting their audiences as the number of broadcast and cable networks, magazines and other narrowly targeted formats has increased.
An expanding opportunity within the out-of-home advertising industry is transit advertising. Local governments are providing transit amenities to enhance their service and image to local transit users. To finance these transit amenities, municipalities issue contracts for advertising displays on bus shelters, subways and buses to private enterprises. Under these contracts, the private party constructs and maintains the amenities, which it can use for advertising displays. The primary benefits of privatizing transit advertising are the avoidance of capital expenditures by the municipality, the prospect of additional revenue for the municipality from a portion of the advertising revenue, the consistent quality that a coordinated transit program can provide and the benefits of regular cleaning and maintenance undertaken by private enterprises.
The outdoor advertising industry is comprised of several large outdoor advertising and multi-media companies with operations in multiple markets, as well as many smaller and local companies operating a limited number of structures in a single or a few local markets. While the industry has experienced significant consolidation within the past few years, the OAAA estimates that, as of December 31, 1998, there were approximately 400 companies in the outdoor advertising industry operating approximately 396,000 display faces. The Company expects the trend of consolidation in the outdoor advertising industry to continue.
BUSINESS STRATEGY
The Company's primary objective is to be the leading provider of out-of-home advertising services in each of its major markets. The Company's successful operating strategy, focusing on superior sales and service, optimal management of its inventory, centralized administration, low overhead and strategic acquisitions, has enabled it to improve the historical operating results in each of its existing markets. Management intends to apply this strategy to each of its newly-acquired markets.
- - Superior Sales and Service. The Company seeks to gain market share in each of its markets through an intensive focus on customer sales and service, quality displays and competitive pricing. The Company has recruited and trained a skilled sales force that is motivated by a program of commission-based compensation and supported by a network of experienced local managers who operate under a centrally coordinated marketing plan. Each of the Company's markets has a general manager who is actively engaged in sales. In addition, the Company seeks to attract and retain advertisers through creative advertising layouts, timely installation and rotation of displays and rapid response to customer needs.
- - National Sales Force. The Company's markets generally possess demographic characteristics that are attractive to national advertisers, allowing the Company to combine several of its markets into single contracts so that advertisers with national and regional campaigns can simplify their purchasing process while presenting their messages in multiple markets. The Company seeks to gain national market share by providing advertisers easy access to all of the Company's markets through one of its four national sales offices in the U.S.
- - Optimal Inventory Management. The Company seeks to balance advertising rate growth with optimal occupancy of its displays in order to maximize revenues. The Company's variety of outdoor advertising displays in its geographically diverse markets permits flexibility in pricing and packaging its display inventory.
- - Centralized Administration. The Company has consolidated substantially all of its administration, accounting, sales management and leasing management functions into its Phoenix headquarters and five regional offices. This centralization allows the Company to focus local efforts on customer service and sales and to exercise greater control over administrative costs and expenses.
- - Strategic Acquisitions. The Company pursues strategic acquisitions in existing and new markets to achieve increased operating efficiencies, greater geographic diversification and increased market penetration. The Company is primarily interested in further expansion in the 50 largest United States, ten largest Canadian and ten largest Mexican markets, because these markets typically generate greater outdoor advertising revenues, readily attract national advertisers, provide a better basis for regional advertising, attract quality management and offer opportunities to gain a larger market share from competitive media.
MARKETS
The Company's markets generally possess demographic characteristics that are attractive to national advertisers, allowing the Company to combine several of its markets into single contracts so that advertisers with national and regional campaigns can simplify their purchasing process while presenting their messages in multiple markets. Each market also has unique local industries, businesses, sports franchises and special events that are frequent users of outdoor advertising. The following table sets forth certain information with respect to the Company's outdoor markets as of December 31, 1998:
- --------------- (1) Display faces do not include 125,000 subway advertising display faces in New York City.
(2) Includes 141 wall murals and 51 "Spectacular" signs.
INVENTORY
The Company operates five standard types of outdoor advertising billboards and displays:
- - Bulletins generally are 14 feet high and 48 feet wide (672 square feet) in the United States with varying sizes in Canada and Mexico. The advertising copy is either hand painted onto panels at the facilities of the outdoor advertising company in accordance with design specifications supplied by the advertiser, and then attached to the outdoor advertising structure, or is printed with computer-generated graphics on a single sheet of vinyl that is "wrapped" around the structure. On occasion, to attract more attention, some of the panels may extend beyond the linear edges of the display face and may include three-dimensional embellishments. Because of their greater impact and higher cost, bulletins are usually located on major highways.
- - 30-sheet posters generally are 12 feet high by 25 feet wide (300 square feet) and are the most common type of billboard. Advertising copy for 30-sheet posters consists of lithographed or silk-screened paper sheets supplied by the advertiser that are pasted and applied like wallpaper to the face of the display, or single sheets of vinyl with computer-generated advertising copy that are wrapped around the structure. 30-sheet posters are concentrated on major traffic arteries.
- - Junior (8-sheet) posters usually are 6 feet high by 12 feet wide (72 square feet). Displays are prepared and mounted in the same manner as 30-sheet posters, except that vinyl sheets are not typically used on junior posters. Most junior posters, because of their smaller size, are concentrated on city streets and target specific neighborhoods.
- - Mall and airport posters are displayed in backlighted cases. The displays are generally constructed, owned and maintained by the outdoor advertising company under a contract with a governmental entity or a shopping mall owner who receives a share of the advertising revenues.
- - Transit displays include displays on bus shelters, subways and bus benches. Bus shelters and benches are usually constructed, owned and maintained by the out-of-home advertising company under a contract with the municipality or transit authority which receives a share of the shelters' advertising revenues. Bus shelter displays are enclosed within glassed, backlighted cases on sides of a pedestrian shelter at an urban bus stop on city rights of way. Subway displays are located within subway stations and walkways as well as in subway trains. Advertisements appear on lithographed or silk-screened posters supplied in a single sheet by the advertiser. Transit displays are an attractive medium to advertisers using "vertical" advertising copy, such as magazines and movie posters, because the advertising copy is easily adapted for use in transit shelters, and because of the proximity of the display to consumers.
Billboards generally are mounted on structures owned by the outdoor advertising company and located on sites that are either owned or leased by it or on which it has acquired a permanent easement. Billboard structures, bus shelters and benches are durable, have long useful lives and do not require substantial maintenance. When disassembled, they typically can be moved and relocated at new sites.
EMPLOYEES
The Company had approximately 2,500 employees at December 31, 1998.
SALES AND SERVICE
The Company devotes considerable time and resources to recruiting, training and coordinating the activities of its sales force. Sales personnel are compensated primarily on a commission basis to maximize the incentive to perform. Arturo R. Moreno, President, Chief Executive Officer and a member of the Board of Directors, and Wally C. Kelly, Senior Vice President, are the Company's two principal officers responsible for day-to-day operations, and have an aggregate of approximately 46 years of experience in the outdoor advertising industry, virtually all of which has been spent in sales and management positions.
CUSTOMERS
Advertisers usually contract for outdoor displays through advertising agencies, which are responsible for the artistic design and written content of the advertising as well as the choice of media and the planning and implementation of the overall campaign. The Company pays commissions to the agencies for advertising contracts that are procured by or through those agencies. Advertising rates are based on a particular display's visual exposure (or number of "impressions" delivered) in relation to the demographics of the particular market and its location within that market. The number of "impressions" delivered by a display is measured by the number of vehicles passing the site during a defined period and is weighted to give effect to such factors as its proximity to other displays, the speed and viewing angle of approaching traffic, the national average of adults riding in vehicles and whether the display is illuminated. The number of impressions delivered by a display is verified by independent companies.
The size and geographic diversity of the Company's markets allows it to attract national advertisers by providing the opportunity to package displays in several of its markets in a single contract allowing a national advertiser to simplify the purchasing process and simultaneously present its message in several markets. National advertisers generally seek wide exposure in major markets and therefore tend to make larger purchases. The Company competes for national advertisers primarily on the basis of location, price, availability and service.
The Company also focuses its efforts on local sales. Local advertisers tend to have smaller advertising budgets and require greater assistance from the Company's production and creative personnel in designing and producing advertising copy. In local sales, the Company often expends more sales efforts on educating customers regarding the benefits of outdoor media and helping potential customers develop an advertising strategy using outdoor advertising. While price and availability are important competitive factors, service and customer relationships are also critical components of local sales.
Tobacco revenues have historically accounted for a significant portion of outdoor advertising revenues. In the 1990s, due to a declining population of smokers, societal pressures, consolidation in the tobacco industry and price competition from generic brands, the leading tobacco companies substantially reduced their expenditures for outdoor advertising. Because tobacco advertisers often utilized some of the industry's prime inventory, the decline in tobacco-related advertising expenditures made this space available for other advertisers, including those that had not traditionally utilized outdoor advertising. As a result of this decline in tobacco-related advertising revenues and the increased use of outdoor advertising by other advertisers, the range of the Company's advertisers has become quite diverse, with no single category of advertisers accounting for more than 14.7% of net revenues in 1998. The following table illustrates the diversity of the Company's advertising base:
NET REVENUES BY CATEGORY
PRODUCTION
In many of its markets, the Company possesses internal production facilities and staff to perform the full range of activities required to develop, create and install outdoor advertising. In smaller operations, the Company hires subcontractors to perform varying degrees of its production. Production work includes creating the advertising copy design and layout, painting the design or coordinating its printing and installing the designs on its displays. The Company usually provides its full range of production services to local advertisers and to advertisers that are not represented by advertising agencies, since national advertisers and advertisers represented by advertising agencies often use preprinted designs that require only installation. However, the Company's creative and production personnel frequently are involved in production activities even when advertisers are represented by agencies by developing new designs or adapting copy from other media for use on billboards. The Company's artists also assist in the development of marketing presentations, demonstrations and strategies to attract new advertisers.
With the increased use of vinyl and pre-printed advertising copy, outdoor advertising companies are becoming less responsible for labor-intensive production work since vinyl and pre-printed copy is typically produced by the advertiser or its agency and can be installed quickly. The Company believes that this trend over time will reduce operating expenses associated with production activities.
COMPETITION
The Company competes in each of its markets with other outdoor advertising operations as well as other media, including broadcast and cable television, radio, print and direct mail marketers. In addition, the Company also competes with a wide variety of "out-of-home" media, including advertising in shopping centers and malls, airports, stadiums, movie theaters and supermarkets, as well as on taxis, trains, buses and subways. Advertisers compare the effectiveness of relative costs of available media and cost-per-thousand impressions, particularly when delivering a message to customers with distinct demographic characteristics. In competing with other media, outdoor advertising relies on its low cost per-thousand impressions and its ability to reach a broad segment of the population in a specific market or to target a particular geographic area or population with a particular set of demographic characteristics within that market.
The outdoor advertising industry is highly fragmented, consisting of several large outdoor advertising and media companies with operations in multiple markets as well as smaller and local companies operating a limited number of structures in a single or a few local markets. Although significant consolidation has occurred over the past few years, according to the OAAA, as of December 31, 1998, there were approximately 400 companies in the outdoor advertising industry operating approximately 396,000 bulletin and poster display faces. In several of its markets, the Company encounters direct competition from other major outdoor media companies. The Company believes that its strong emphasis on sales and customer service and its position as a major provider of advertising services in each of its markets enable it to compete effectively with the other outdoor advertising companies, as well as other media, within those markets.
GOVERNMENT REGULATION
U.S. Regulations. The outdoor advertising industry is subject to governmental regulation at the federal, state and local level. Federal law, principally the Highway Beautification Act of 1965, encourages states, by the threat of withholding 10% of the federal appropriations for the construction and improvement of highways within such states, to implement state legislation to prohibit billboards located within 660 feet of, or visible from, interstate and primary highways except in commercial or industrial areas where off-site signage is permitted provided it meets spacing and size restrictions. All of the states have implemented regulations at least as restrictive as the Highway Beautification Act. The Highway Beautification Act, and the various state statutes implementing it, require payment of just compensation whenever governmental authorities require legally erected and maintained billboards to be removed from areas adjacent to federally aided highways.
The states and local jurisdictions have, in some cases, passed additional and more restrictive regulations on the construction, repair, upgrading, height, size and location of outdoor advertising structures adjacent to federally-aided highways and other thoroughfares. Such regulations, often in the form of municipal building, sign or zoning ordinances, specify minimum standards for the height, size and location of billboards. In some cases, the construction of new billboards or relocation of existing billboards is prohibited. Some jurisdictions also have restricted the ability to enlarge or upgrade existing billboards, such as converting from wood to steel or from nonilluminated to illuminated structures, and/or restrict the reconstruction of billboards which are substantially destroyed as a result of storms or other causes. From time to time governmental authorities order the removal of billboards by the exercise of eminent domain. Thus far, the Company believes it has been able to obtain satisfactory compensation for any of its structures removed at the direction of governmental authorities, although there is no assurance that it will be able to continue to do so in the future.
Amortization of billboards has also been adopted in varying forms in certain jurisdictions. In theory, amortization permits the billboard owner to operate its billboard as a non-conforming use for a specified period of time during which it is to recover its investment, after which it must remove or otherwise conform its billboard to the applicable regulations at its own cost without any compensation. Several municipalities in the Company's markets, including municipalities or townships in Denver, Houston, Jacksonville, Kansas City, St. Louis and Tampa, currently have amortization ordinances or regulations. Ordinances requiring the removal of a billboard without compensation, whether through amortization or otherwise, are being challenged in various state and federal courts with conflicting results. In some cities, amortization ordinances or regulations are not being enforced or have been held unconstitutional. However, no assurance can be given as to the effect
on the Company of the enforcement of existing laws or regulations, or of new laws and regulations that may be adopted in the future.
In recent years, there have been efforts to restrict billboard advertising of certain products, including tobacco and alcohol. Congress has passed no legislation at the federal level except legislation requiring health hazard warnings similar to those on cigarette packages and print advertisements. Certain states in which the Company operates have historically prohibited the outdoor advertising of distilled spirits. In California and Phoenix, Arizona, transit shelter advertising posters on public rights of way are prohibited from displaying tobacco and/or alcohol advertising. San Francisco has adopted an ordinance banning all tobacco and alcohol advertising on public property, but has "grandfathered" existing sales contracts through 2002. Oakland has adopted a spacing ordinance which, if upheld in court, would de facto prohibit outdoor advertising of alcohol.
In November 1998, the major U.S. tobacco companies (the "Tobacco Companies") reached an out of court settlement (the "Agreement") with 46 states, the District of Columbia, the Commonwealth of Puerto Rico and four other U.S. territories (the "Settling States"). The remaining four states had already reached similar settlements with the Tobacco Companies. The Agreement calls for the removal of tobacco advertising from out-of-home media, including billboards, along with signs and placards in arenas, stadiums, shopping malls and video game arcades by April 23, 1999. Additionally, the Agreement provides that, at the Settling States' option, the Tobacco Companies must, at their expense, substitute for tobacco advertising alternative advertising which discourages youth smoking. That alternative advertising must remain in place for the duration of the Tobacco Companies' out-of-home media advertising contracts which existed as of the date of the Agreement.
The elimination of tobacco advertising as called for by the Agreement will cause a reduction in direct revenues from Tobacco Companies and may simultaneously increase the available space on the existing inventory of billboards in the outdoor advertising industry. Although the extent of the future impact on operations is not known, the Company has been successful thus far in replacing tobacco advertising in areas where settlements were reached prior to the Agreement (i.e., Florida, Texas and San Francisco). Also, tobacco revenues in the U.S. accounted for only 4.2% of the Company's total net revenues in 1998. While both of these factors are positive, the Company can give no assurance that the further cutbacks in tobacco advertising during 1999 will not have an adverse effect on operations for 1999 or beyond.
Canadian Regulations. Outdoor advertising in Canada is subject to regulation at the federal, provincial and municipal levels. These regulations may prohibit advertising of certain products on outdoor signs in certain locations. For example, in Ontario, billboards and posters advertising liquor may not be placed within 200 meters of a primary or secondary school. Additionally, Canadian federal legislation was enacted in April, 1997 which effectively prohibits substantially all outdoor tobacco advertising. While this legislation is being challenged, there can be no assurance that such challenge will be successful. In addition, the placement of outdoor billboards is primarily regulated at the provincial and local level. For example, Quebec regulates the placement of advertising adjacent to highways, as well as the language used on outdoor signs.
Mexican Regulations. In Mexico there are no current regulations which limit the advertising of any product on outdoor signs. While the Company is not aware of any such legislation being proposed, there can be no assurance that legislation restricting the advertising of any specific product on outdoor signs will not be enacted in the future. In addition, the placement of outdoor billboards is primarily regulated at the local level. For example, Mexico City regulates the placement of billboards near historical monuments.
General. To date, regulations in the Company's markets have not materially adversely affected its operations. However, the outdoor advertising industry is heavily regulated and at various times and in various markets can be expected to be subject to varying degrees of regulatory pressure affecting the operation of advertising displays. Accordingly, although the Company's experience to date is that the regulatory environment is not prohibitive, no assurance can be given that existing or future laws or regulations will not materially adversely affect the Company.
ITEM 2.
ITEM 2. PROPERTIES
Outdoor Advertising Sites. The majority of the Company's advertising display sites are leased. However, the Company owns parcels of real property that serve as sites for a few of its outdoor displays. In addition, the Company possesses perpetual easements on parcels of real property owned by third parties on which it has placed a few of its outdoor displays.
The Company's leases are for varying terms ranging from monthly or annual periods to terms of ten years or longer, and many provide for renewal options. There is no significant concentration of displays under any one lease or subject to negotiation with any one landlord.
Office and Production Facilities. The Company's principal executive and administrative offices are located in Phoenix, Arizona, in a facility owned by the Company. A portion of this facility also is used for painting, poster prepasting and related production activities. Additionally, the Company owns the majority of the office and production facilities from which it operates in its United States, Canadian and Mexican metropolitan markets.
See also "Item 1 -- Business -- Markets."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is party either as plaintiff or defendant to various actions, proceedings and pending claims, in the ordinary course of business. Litigation is subject to many uncertainties and it is possible that some of the legal actions, proceedings or claims referred to above could be decided against the Company. Although the ultimate amount for which the Company or its subsidiaries may be held liable with respect to matters where the Company is defendant is not ascertainable, the Company believes that any resulting liability will not materially affect the Company's financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
Mr. Levine, a founder and principal stockholder of the Company, has been Chairman of the Board and a director of the Company since its formation. Mr. Levine has 19 years of experience in the outdoor advertising industry. He is an owner and officer of numerous privately-owned firms and commercial real estate operations. Since 1990, Mr. Levine has dedicated a substantial portion of his time to the Company's affairs.
Mr. Moreno has served as the Company's President and Chief Executive Officer and has been a director of the Company since April 1984. Mr. Moreno has 26 years of experience in the outdoor advertising industry. From 1981 to 1984, Mr. Moreno served as President and General Manager of Gannett Outdoor of New Jersey. From 1979 to 1981, he was President and General Manager of Gannett Outdoor of Kansas City (Missouri). From 1973 to 1981, Mr. Moreno worked in Phoenix as a Vice President of Sales for Gannett Outdoor and its predecessor company.
Mr. Kelly has been the Company's Senior Vice President since 1984. Mr. Kelly has 20 years of experience in the outdoor advertising business. From 1979 to 1984, Mr. Kelly worked for Whiteco Metrocom, Inc. in Tucson (1979 to 1981) as Sales Manager and in Chicago as Vice President of National Sales (1982 to 1984).
Mr. Reade has been Vice President of the Company since May 1997. He served as the Company's Director of Real Estate from April 1993 to May 1997 and was a consultant to the Company from 1992 to April 1993. Mr. Reade has 29 years of experience in the outdoor advertising industry. From 1987 to 1990, Mr. Reade served as President and Chief Operating Officer of a major convenience store chain and from 1985 to 1987 was Real Estate Manager of such chain. In 1985, Mr. Reade served as Vice President, Sales and Marketing for Gannett Outdoor Group in New York and from 1970 to 1985 he was General Manager for Gannett Outdoor and its predecessor company in Phoenix.
Mr. Beverage has served as the Company's Controller since 1992, its Treasurer and Secretary since May 1993, and its Chief Financial Officer since October 1995. Mr. Beverage has 19 years of experience in the accounting departments of various outdoor advertising companies. From 1990 to 1992, he served as the Company's Atlanta real estate manager. From 1988 until 1990, he worked for Outdoor Today, Inc. in Atlanta (which was acquired by the Company in 1990) as a consultant and as its accounting manager. Prior to 1988, he worked for five years for Turner Outdoor Advertising in Atlanta and for four years for Creative Displays in Atlanta. From 1976 to 1979, he was an auditor for Arthur Young & Co. (now known as Ernst & Young).
Executive officers of the Company are elected by the Board of Directors on an annual basis and serve at the discretion of the Board of Directors.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company effected the initial public offering of its Common Stock on April 24, 1996 at a price of $1.97 per share, as adjusted for all subsequent stock splits. The Company's Common Stock is currently traded on the New York Stock Exchange under the symbol "OSI". From April 24, 1996 to September 1, 1997, the Common Stock was quoted on the Nasdaq Stock Market under the symbol "OSIA". The following table sets forth, for the periods indicated, the high and low sales prices per share of the Common Stock as reported by the New York Stock Exchange or the Nasdaq Stock Market, as applicable.
On March 15, 1999, the last reported sales price of the Common Stock on the New York Stock Exchange was $30.0625 per share. As of March 15, 1999, there were 100 shareholders of record of the Common Stock.
The Company's Senior Credit Facility prohibits the payment of cash dividends and other distributions until certain financial ratios are achieved.
On May 19, 1998, the Company issued 2,494,790 shares of Common Stock, with an aggregate value of approximately $49.8 million, as merger consideration to the former stockholders of an acquired company. Pursuant to the merger agreement, the value of these shares was determined by the average of the per share closing prices of the Common Stock as reported by the New York Stock Exchange for each of the five days preceding the closing date. These shares were issued in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), provided by Section 4(2) thereof. These shares were subsequently registered for resale under the Securities Act.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below were derived from the audited consolidated financial statements of the Company for the five years ended December 31, 1998. The financial statements of the Company as of December 31, 1997 and 1998 and for the three years in the period ended December 31, 1998 together with the report of Deloitte & Touche LLP, independent auditors, are included elsewhere herein. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements, including the Notes thereto, appearing elsewhere herein.
- --------------- (1) On July 1, 1998, the Company completed the acquisition of (i) substantially all of the assets of Vendor, S.A. de C.V., the outdoor advertising subsidiary of Televisa, S.A. de C.V., for approximately $216.0 million and (ii) substantially all of the outdoor advertising business conducted by MM Billboard, S.A. de C.V., an affiliated outdoor advertising company in northern Mexico, for approximately $21.9 million. The operations of these acquisitions (collectively, the "Vendor Acquisitions") include approximately 6,600 bulletin display faces in 44 metropolitan markets in Mexico. In addition, during 1998 the Company completed other acquisitions. Accordingly, operating results are not necessarily comparable on a year-to-year basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 of the Consolidated Financial Statements.
(2) During 1996 and 1997, the Company completed certain acquisitions, including the Gannett Outdoor Acquisition (as defined herein) and the Denver Disposition (as defined herein) in 1996, and the 3M Media Acquisition (as defined herein) in 1997. In December 1994, the Company consummated the disposition of substantially all the operating assets of its business then operating in Atlanta (the "Atlanta Disposition"). Accordingly, operating results are not necessarily comparable on a year-to-year basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 of the Consolidated Financial Statements.
(3) Net revenues are gross revenues minus agency commissions, plus lease, printing and other revenues.
(4) Deferred financing costs of $17.8 and $6.8 million associated with borrowings which were retired or redeemed were charged as an extraordinary loss during 1996 and 1997, respectively.
(5) Stock options are included because the Company had net income before the extraordinary loss.
(6) "EBITDA" is defined as operating income (loss) before depreciation and amortization expense and, in 1994 and 1996, before the gain on the Atlanta Disposition and Denver Disposition, respectively. While EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with generally accepted accounting principles, or as a measure of profitability or liquidity, management understands that it is customarily used by certain investors as one measure to evaluate the financial performance of companies in the outdoor advertising industry.
(7) "EBITDA margin" is EBITDA stated as a percentage of net revenues.
(8) Does not include approximately 125,000 subway advertising display faces in New York City.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion of the consolidated results of operations of the Company for the three years ended December 31, 1998 and financial condition at December 31, 1998 should be read in conjunction with the Consolidated Financial Statements of the Company and the related Notes included elsewhere herein.
SOURCES OF REVENUE
The Company derives substantially all of its revenues from sales of advertising on its out-of-home advertising displays. Revenues are a function of both the occupancy of the Company's out-of-home advertising display inventory (the amount of time that its display faces contain advertisements) and the rates that the Company charges for use of its display faces. Accordingly, the Company focuses its sales efforts on attaining an optimal "mix" of occupancy and rates in order to maximize revenues, and believes that there are opportunities for additional improvements to its occupancy and rate mix with respect to its entire inventory.
Net revenues are gross revenues less commissions paid to advertising agencies that contract for the use of advertising display faces on behalf of advertisers plus other income arising from the Company's operations. Advertisers typically contract for advertising space through agencies, although in some cases the Company sells advertising space directly to local advertisers. Agency commissions are typically 15% of gross revenues on local sales and 16 2/3% of gross revenues on national sales. The Company measures its operating performance based upon percentages of net revenues rather than gross revenues.
COMPONENTS OF EXPENSES
Operating expenses are comprised of direct advertising expenses, general and administrative expenses and depreciation and amortization expense. Direct advertising expenses consist of rental payments to property owners for use of land on which advertising display faces are located, production expenses and selling expenses. Production expenses consist of salaries for operations personnel and real estate representatives, materials and supplies used in the preparation and display of advertising copy, annual permits, property taxes and other similar expenses. Selling expenses consist of salaries and commissions for salespeople, travel and entertainment relating to sales, sales administration and other similar expenses. The Company's general and administrative expenses consist of expenses related to accounting, administrative functions, insurance, bad debts and other similar expenses.
USE OF EBITDA
The performance of an outdoor advertising business, such as the Company, is measured by its ability to generate EBITDA. EBITDA is defined as operating income (loss) before interest, taxes, depreciation and amortization expense and, with respect to 1996, before the gain on the Denver Disposition. Although EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles, the Company believes that EBITDA is accepted by the outdoor advertising industry as a generally recognized measure of performance and is used by analysts who report publicly on the performance of outdoor advertising companies. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles.
NET OPERATING LOSS CARRYFORWARDS
The Company has U.S., Mexican and Canadian net operating loss carryforwards of approximately $39.0 million, $214.0 million and $3.0 million, respectively, as of December 31, 1998, which expire subsequent to the year 2005. Although realization is not assured, management believes, based on operating results in 1998 and its expectations for the future, that the taxable income of the Company will more likely than not be
sufficient to utilize all of the net operating loss carryforwards prior to their ultimate expiration. However, there can be no assurances that the Company will generate taxable income in the future.
ACQUISITIONS
Mexico Acquisitions. On July 1, 1998, the Company completed the acquisition of (i) substantially all of the assets of Vendor, S.A. de C.V., the outdoor advertising subsidiary of Televisa, S.A. de C.V., for approximately $216.0 million and (ii) substantially all of the outdoor advertising business conducted by MM Billboard, S.A. de C.V., an affiliated outdoor advertising company in northern Mexico, for approximately $21.9 million. The operations of the Vendor Acquisitions include approximately 6,600 bulletin display faces in 44 metropolitan markets in Mexico. The Company financed the purchase price of the Vendor Acquisitions, plus approximately $4.1 million of other costs associated with the Vendor Acquisitions, with borrowings under the Company's Senior Credit Facility.
The Company also completed other acquisitions of outdoor advertising companies in northern Mexico in October 1998.
3M Media Acquisition. On August 15, 1997, the Company acquired the outdoor advertising operations of Minnesota Mining and Manufacturing Company ("3M") through the purchase of the capital stock of National Advertising Company, a subsidiary of 3M ("3M Media"), for approximately $1.0 billion in cash (the "3M Media Acquisition"). The 3M Media operations included approximately 29,900 advertising display faces consisting of approximately 20,800 bulletins, 2,400 posters and 6,700 mall advertising display faces in 56 metropolitan markets and non-metropolitan locations in the United States (net of assets disposed of as described below).
The Company financed the purchase price of the 3M Media Acquisition and the fees and expenses associated with the acquisition and the acquisition financing through (i) proceeds from the offering of 45,562,500 shares of common stock (the "1997 Common Stock Offering") to the public, completed on May 28, 1997, (ii) proceeds of an offering of $500 million aggregate principal amount of 8 7/8% Senior Subordinated Notes due 2007 completed on June 23, 1997 (the "1997 Notes Offering"), and (iii) borrowings under the Company's Senior Credit Facility which was amended to provide for a revolving credit facility and term loans of up to approximately $900 million.
In connection and simultaneously with the 3M Media Acquisition, the Company sold to Lamar Advertising Company and another outdoor advertising company certain outdoor advertising assets the Company acquired from 3M. The assets sold consisted of approximately 1,800 advertising displays in Atlanta, Denver, Detroit, Grand Rapids, Houston, New Orleans, Kansas City, Louisville, Phoenix and Sacramento. The selling price for such assets was approximately $116 million in cash. There was no gain or loss recognized on this sale.
Gannett Outdoor Acquisition. On August 22, 1996, the Company purchased substantially all of the assets of Gannett Outdoor (the "Gannett Outdoor Acquisition"), including the stock of certain indirect subsidiaries of Gannett Co., Inc. ("Gannett")related to the outdoor division, for approximately $712.5 million in cash. The Company acquired from Gannett a total of approximately 40,000 advertising display faces consisting of 4,100 bulletins, 20,400 posters and 15,500 transit advertising displays (the Company also acquired approximately 125,000 subway advertising display faces in New York City) in 15 metropolitan markets in the United States and seven metropolitan markets in Canada.
The Company financed the Gannett Outdoor Acquisition through (i) borrowings under its Senior Credit Facility, (ii) a Subordinated Credit Facility ("Bridge Loan") and (iii) the proceeds from the offering of 43,486,875 shares of Common Stock to the public, completed on August 22, 1996, for which it received proceeds of approximately $283.1 million net of underwriting discounts and commissions and offering expenses of approximately $13.1 million. In October 1996, the Company sold $250.0 million of 9 3/8% Senior Subordinated Notes due 2006. The proceeds from this offering were used to repay all borrowings under the Bridge Loan and to partially repay amounts outstanding under the Senior Credit Facility (as defined herein) (see Note 5 to the Consolidated Financial Statements).
RESULTS OF OPERATIONS
Operating results for the twelve months ended December 31, 1997 include, from their respective acquisition dates, the operations of the 3M Media Acquisition completed August 15, 1997 and the several other acquisitions completed during 1997 (see Note 2 to the Consolidated Financial Statements) (collectively, the "1997 Acquisitions"). Operating results for the twelve months ended December 31, 1998 include the operations, from their respective acquisition dates, of the Vendor Acquisitions completed July 1, 1998, and the several other acquisitions completed during 1998 (collectively, the "1998 Acquisitions") (see Note 2 to the Consolidated Financial Statements).
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1998
Gross revenues increased by 49.2% from $527.5 million in 1997 to $786.9 million in 1998. Gross revenues increased approximately 11.0% during 1998 compared to 1997 for markets where the Company operated both in 1997 and 1998. The balance of the increased revenues were a result of the inclusion of the 1997 Acquisitions for a full twelve months in 1998 and the 1998 Acquisitions since their respective dates of completion.
Agency commissions were 13.6% of gross revenues in 1997 compared to 12.6% in 1998. Agency commissions were lower in 1998 primarily as a result of slightly lower proportion of revenues generated through advertising agencies.
Net revenues increased by 49.9% from $471.0 million in 1997 to $705.9 million in 1998, primarily as a result of the increase in gross revenues combined with an increase of lease, printing and other income from $15.3 million in 1997 to $18.4 million in 1998. Other income increased primarily due to the inclusion in 1998 of a full twelve months of license fee revenue from perpetual easements acquired in 1997.
Direct advertising expenses increased from $237.2 million in 1997 to $331.0 million in 1998. This was primarily a result of including in 1998 a full twelve months expense for the 1997 Acquisitions and the 1998 Acquisitions. As a percentage of net revenues, direct advertising expenses decreased from 50.4% in 1997 to 46.9% in 1998 because of efficiencies realized from economies of scale.
General and administrative expenses increased from $28.6 million in 1997 to $37.3 million in 1998. This was primarily a result of including in 1998 a full twelve months expense for the 1997 Acquisitions and expense for the 1998 Acquisitions since their respective dates of completion. As a percentage of net revenues, general and administrative expenses decreased from 6.1% in 1997 to 5.3% in 1998 because of efficiencies realized from economies of scale.
As a result of the above factors, EBITDA increased by 64.5% from $205.3 million in 1997 to $337.6 million in 1998.
Depreciation and amortization expenses increased from $75.3 million in 1997 to $123.1 million in 1998, primarily due to the net increase in depreciation and amortization from the 1997 Acquisitions and the 1998 Acquisitions which was offset in part by certain assets becoming fully depreciated during 1998. As a percentage of net revenues, depreciation and amortization expense increased from 16.0% in 1997 to 17.4% in 1998.
Net interest expense increased from $87.2 million in 1997 to $138.1 million in 1998, as a result of interest expense related to obligations incurred in connection with the 1997 Acquisitions and the 1998 Acquisitions. As a percentage of net revenues, net interest expense increased from 18.5% in 1997 to 19.6% in 1998, primarily due to the increase in net revenues.
Income before taxes and extraordinary item was approximately $40.7 million in 1997 and $72.2 million in 1998.
The Company recorded an income tax provision of $18.5 million in 1997 and $31.0 million in 1998. The decrease in the reported effective income tax rate for 1998 is due primarily to the lower statutory tax rate and the tax effect of currency losses in Mexico.
The Company reported an extraordinary loss of $6.8 million, net of $4.5 million tax benefit, in 1997. This extraordinary loss resulted primarily from the write-off of one time bridge loan commitment costs in connection with certain of the 1997 Acquisitions.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1997
Gross revenues increased by 171.7% from $194.2 million in 1996 to $527.5 million in 1997. Gross revenues increased approximately 9.8% during 1997 compared to 1996 for markets where the Company operated both in 1997 and 1996. The balance of the increased revenues were a result of the 1997 Acquisitions (see Note 2 to the Consolidated Financial Statements).
Agency commissions were 13.6% of gross revenues in 1997 compared to 14.0% in 1996. Agency commissions were lower in 1997 primarily as a result of slightly lower proportion of revenues generated through advertising agencies.
Net revenues increased by 172.1% from $173.1 million in 1996 to $471.0 million in 1997, primarily as a result of the increase in gross revenues combined with an increase of lease, printing and other income from $6.1 million in 1996 to $15.3 million in 1997. Lease, printing and other income increased primarily due to the inclusion of license fee revenue from perpetual easements acquired in 1997 and the inclusion in 1997 of a full twelve months of revenues from a printing operation acquired in connection with the Gannett Outdoor Acquisition.
Direct advertising expenses increased from $87.6 million in 1996 to $237.2 million in 1997. This was primarily a result of the 1997 Acquisitions. As a percentage of net revenues, direct advertising expenses decreased to 50.4% in 1997 from 50.6% in 1996 as a result of efficiencies realized from economies of scale from the 1997 Acquisitions.
General and administrative expenses increased from $13.5 million in 1996 to $28.6 million in 1997. This was primarily a result of the 1997 Acquisitions. As a percentage of net revenues, general and administrative expenses decreased from 7.8% in 1996 to 6.1% in 1997 because of efficiencies realized from economies of scale.
As a result of the above factors, EBITDA increased by 184.8% from $72.1 million in 1996 to $205.3 million in 1997.
Depreciation and amortization expenses increased from $22.6 million in 1996 to $75.3 million in 1997, primarily due to the net increase in depreciation and amortization from the 1997 Acquisitions which was offset in part by certain assets becoming fully depreciated during 1997. As a percentage of net revenues, depreciation and amortization expense increased from 13.0% in 1996 to 16.0% in 1997.
Net Interest expense increased from $32.5 million in 1996 to $87.2 million in 1997, as a result of interest expense related to obligations incurred in connection with the 1997 Acquisitions. As a percentage of net revenues, net interest expense decreased from 18.8% in 1996 to 18.5% in 1997, primarily due to the increase in net revenues.
Income before taxes and extraordinary item was approximately $24.5 million in 1996 and $40.7 million in 1997. Included in 1996 income before taxes and extraordinary item was a $7.3 million gain on the Denver Disposition. Disregarding the effect of this gain, income before taxes and extraordinary item increased from $17.2 million in 1996 to $40.7 million in 1997.
The Company recorded an income tax provision of $10.2 million in 1996 and $18.5 million in 1997. The increase in the reported effective income tax rate for 1997 is due primarily to the inclusion of a full year of operations of the Company's Canadian subsidiary.
The Company reported an extraordinary loss of $17.8 million, net of $9.8 million tax benefit, in 1996 and $6.8 million, net of $4.5 million tax benefit in 1997. Both of these extraordinary losses resulted primarily from one time bridge loan commitment costs in connection with certain of the 1997 Acquisitions and from a premium associated with the early redemption of its 10 3/4% Senior Notes due 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $61.2 million at December 31, 1997 and $37.8 million at December 31, 1998. The decrease in working capital resulted primarily from the increased current portion of long term debt offset by working capital acquired in the 1998 Acquisitions.
Net cash provided by operating activities increased by $65.9 million from $90.7 million during 1997 to $156.6 million during 1998, primarily due to increased net income resulting from the 1997 and 1998 Acquisitions and the effect of a larger depreciation and amortization expense as a component of net income, which were partially offset by changes in working capital accounts. Net cash used in investing activities decreased from $1,293.8 million in 1997 to $507.7 million in 1998, primarily due to the larger investment in the 1997 Acquisitions as compared to the 1998 Acquisitions. Net cash provided by financing activities decreased from $1,197.3 million in 1997 to $362.9 million in 1998, primarily because of proceeds received from the 1997 Common Stock Offering, the 1997 Notes Offering and borrowings under the Senior Credit Facility, all used to finance the 1997 Acquisitions.
The Company made approximately $38.2 million of capital expenditures, other than through acquisitions during 1998, an increase from approximately $30.2 million during 1997. Currently, the Company has no material commitments for capital expenditures, although it anticipates ongoing capital expenditures in the ordinary course of business, other than for acquisitions, will be approximately $38.0 million to $40.0 million in each of the next two years.
The Company financed the purchase price of the 1998 Acquisitions and the fees and expenses associated with the 1998 Acquisitions through (i) borrowings under the Company's Senior Credit Facility and (ii) the issuance of 2,494,790 shares of stock in one of the 1998 Acquisitions.
The Company believes that internally generated funds and available borrowings under the Senior Credit Facility will be sufficient to satisfy its operating cash requirements for at least the next twelve to twenty-four months. The Company may, however, require additional capital to consummate significant acquisitions in the future and there can be no assurance that such capital will be available.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure that its operations will not be adversely impacted by Year 2000 software failures. The Company has identified all significant internal information technology systems ("IT Systems") that will require modification to ensure Year 2000 compliance ("Year 2000 Compliance"). Internal and external resources are being used to make the required modifications and test Year 2000 Compliance for these IT Systems as well as non-IT Systems (i.e., telephone, security, etc.) (collectively "Business Systems"). Although the Company can provide no assurances, the incremental cost to make the Business Systems year 2000 compliant is estimated to be no more than approximately $600,000 of which approximately $200,000 has been spent to date. The Company plans on completing all upgrades by the end of the second quarter of 1999. These costs and the date on which the Company plans to complete the Year 2000 modification and testing processes are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans.
In addition, the Company has communicated with others with whom it does significant business, primarily banks and suppliers of electricity, to determine their Year 2000 Compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 issues. There can be no guarantee that the systems of other companies on which the Company relies will be timely converted, or that a failure to convert by another company would not have a material adverse effect on the Company.
Based on the results of its review of the Year 2000 issues to date, the Company does not believe that a contingency plan to handle Year 2000 problems is necessary at this time and has not developed such a plan. The Company will, however, continue to monitor the Year 2000 compliance program and evaluate the need
for a contingency plan to handle the most reasonably likely worst case Year 2000 scenario; which might be disruptions in service from suppliers in a few isolated places in North America.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133") during 1998. SFAS No. 133 is effective for all fiscal quarters beginning after June 15, 1999, and requires all derivative contracts to be carried on the balance sheet at their fair values. The Company is currently evaluating what impact SFAS No. 133 will have on its financial statements.
The American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities during 1998 ("SOP 98-5"). SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company is currently evaluating the impact SOP 98-5 will have on its financial statements.
INFLATION
Because a significant portion of the Company's costs are fixed, the Company does not believe that inflation in the U.S. and Canada has had or will have a material adverse effect on its operations. However, there can be no assurance that a high rate of inflation in the future will not have an adverse effect on the Company's operations in the U.S. and Canada.
The rate of inflation in Mexico is higher than in the U.S. and Canada. While the Mexican economy is experiencing a lower rate of inflation than it has experienced historically, there can be no assurance that a higher rate of inflation in the future will not have an adverse effect on the Company's operations in Mexico.
FORWARD-LOOKING STATEMENTS
This report contains certain statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this report, the words "estimate", "expect", "anticipate", "believe" and similar expressions are intended to identify forward-looking statements. The Company cautions that reliance on any forward-looking statement involves risk and uncertainties, and that although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions also could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in the risk factors discussed under "Risk Factors" in the Company's Prospectus dated July 24, 1997 included in the Company's Registration Statement on Form S-4 (Reg. No. 333-30957).
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk:
The Company carries some floating rate debt and thus is exposed to the impact of interest rate changes. The Company mitigates this exposure through the use of an interest rate protection agreement which allows it to manage its mix of variable rate and fixed rate debt. The Company does not enter into derivative arrangements for trading purposes.
The information below summarizes the Company's market risk associated with debt obligations and other significant financial instruments as of December 31, 1998. The information presented below should be read in conjunction with Note 5 of the Notes to Consolidated Financial Statements.
At December 31, 1998, the Company's indebtedness under its Senior Credit Facility, representing approximately 58.4% of the Company's long-term debt, bears interest at variable rates. Accordingly, the Company's net income and after tax cash flow are affected by changes in interest rates. The Company is
required under its Senior Credit Facility to maintain an interest rate protection agreement to mitigate the exposure to the impact of interest rate changes. As of December 31, 1998, the Company had interest rate collar agreements which provide for a maximum base interest rate of 8.5% and a minimum base interest rate of 4.95% on a portion of its debt ("Notional Debt"). If the actual base interest rate exceeds the maximum, the Company receives a payment equal to the amount of actual interest in excess of the maximum times the Notional Debt and, conversely, makes a payment if the actual base interest rate falls below the minimum.
Assuming the 1998 average level of borrowings under its Senior Credit Facility at the 1998 average variable interest rate of 7.2% and assuming a two percentage point decrease in the 1998 average variable interest rate under these borrowings, it is estimated that the Company's 1998 interest expense would have decreased by approximately $16.0 million resulting in an increase in the Company's 1998 net income and after tax cash flow of approximately $9.6 million. However, a two percentage point increase in the 7.2% average variable interest rate to 9.2%, would have resulted in an increase in the Company's 1998 interest expense of approximately $17.5 million resulting in a decrease in the Company's 1998 net income and after tax cash flow of approximately $10.5 million.
In the event of an adverse change in interest rates, management would likely take actions to further mitigate its exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such actions. Further this analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment.
Fluctuations in interest rates may also adversely affect the fair market value of the Company's fixed rate borrowings. The fair market value of debt with a fixed interest rate will increase as interest rates fall and the fair market value will decrease as interest rates rise. The Company's fixed rate borrowings consist of $750 million aggregate amount of senior notes, of which $500 million bear interest at 8 7/8% per annum and $250 million bear interest at 9 3/8% per annum.
Foreign Currency Risk:
The Company's earnings are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies as a result of its operations in Canada and Mexico. It is estimated that the result of a 10% fluctuation in the value of the U.S. dollar relative to these foreign currencies at December 31, 1998 would change the Company's 1998 net income and after tax cash flow by approximately $5.6 million. The Company's analysis does not consider the implications that such fluctuations could have on the overall economic activity that could exist in such an environment in either the U.S. or the foreign countries or on the results of operation of these foreign entities.
Although the Company continues to evaluate derivative financial instruments, including forwards, swaps and purchased options, to manage foreign currency exchange rate changes, the Company does not currently hold derivatives for managing these risks or for trading purposes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Board of Directors Outdoor Systems, Inc. Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Outdoor Systems, Inc. and subsidiaries (the "Company") as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Outdoor Systems, Inc. and subsidiaries at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP Phoenix, Arizona February 2, 1999
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
See notes to consolidated financial statements.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
See notes to consolidated financial statements.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
See notes to consolidated financial statements.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT SHARE DATA)
See notes to consolidated financial statements.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Outdoor Systems, Inc. was incorporated on February 22, 1980, and is engaged principally in the rental of advertising space on outdoor advertising structures in 90 metropolitan markets in the United States, 13 metropolitan markets in Canada and 44 metropolitan markets in Mexico.
Principles of consolidation -- The consolidated financial statements include the accounts of Outdoor Systems, Inc. and its subsidiaries (collectively, the "Company"), including its Canadian subsidiary Mediacom, Inc. ("Mediacom") and its Mexican subsidiary, Outdoor Systems Mexico, Inc. ("OSM"). All significant intercompany accounts and transactions have been eliminated in consolidation.
Significant accounting policies are as follows:
a. Cash and cash equivalents -- The Company considers all highly liquid investments with an initial maturity of three months or less at the date of purchase to be cash equivalents.
b. Property and equipment are recorded at cost. Normal maintenance and repair costs are expensed. Improvements which extend the life or usefulness of an asset are capitalized. Depreciation is computed principally on a straight-line method based upon the following useful lives:
c. Deferred financing costs are amortized using the effective interest method over the terms of the related loans.
d. Goodwill represents the excess purchase price over net assets acquired and is amortized over 30 years. Amortization expense was $713,000, $6,128,269 and $16,318,906 in 1996, 1997 and 1998, respectively.
e. Revenue recognition -- The Company recognizes revenue from advertising contracts when billed, which is on a straight-line pro rata monthly basis in accordance with contract terms. Costs associated with providing service for specific contracts are expensed as incurred, although such contracts generally extend beyond one month. Other revenue represents license fees from perpetual land easements and revenues from a printing operation.
f. Income (loss) per share -- Basic income (loss) per common share is computed based on the weighted average number of common shares outstanding during each period. Diluted income (loss) per share is computed based on the weighted average number of common and common equivalent shares outstanding during each year and includes shares issuable upon exercise of stock options except in those circumstances where such options would be anti-dilutive.
g. Impairment of long-lived assets -- The Company reviews the carrying values of its long-lived assets, identifiable intangibles and goodwill for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets to be held and used may not be recoverable.
h. Use of estimates -- The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
i. Stock-based compensation -- As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), the Company uses the intrinsic value based method prescribed by the Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans because the exercise price has been equal to market price at date of grant. A summary of the pro forma effects on reported income from continuing operations and earnings per share for 1996, 1997 and 1998, as if the fair value based method of accounting defined in SFAS No. 123 had been applied is included in Note 9 to these consolidated financial statements.
j. New accounting pronouncements -- The Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133") which is effective for all fiscal quarters beginning after June 15, 1999, and requires all derivative contracts to be carried on the balance sheet at their fair values. The Company is currently evaluating what impact SFAS No. 133 will have on its financial statements.
The American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities during 1998 ("SOP 98-5"). SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The Company is currently evaluating the impact SOP 98-5 will have on its financial statements.
k. Stock splits -- Since going public in April of 1996, the Company has effected five three-for-two stock splits of the Common Stock. The consolidated financial statements and the notes thereto have been adjusted to reflect these stock splits on a retroactive basis for all periods presented.
l. Foreign currency translation -- In accordance with the principles of Statement of Financial Accounting Standards No. 52, Foreign Currency Translation ("SFAS No. 52"), the Company is using the local currency as the functional currency of its Canadian operating subsidiaries. The Company acquired most of its Mexican operations effective July 1, 1998, and determined that, as of such date, and as of January 1, 1999, the Mexican economy was not "highly inflationary." Therefore, in accordance with SFAS No. 52, the Company is using the Mexican peso as the functional currency of its Mexican operating subsidiary. Accordingly, assets and liabilities held outside the United States are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Income and expense items are translated from the functional currency into U.S. dollars at the weighted average exchange rate prevailing during the period. Translation gains and losses are included in other comprehensive income in the stockholders' equity. Gains and losses resulting from foreign currency transactions are reflected currently in the consolidated statements of operations.
m. Reclassifications -- Certain reclassifications were made to the 1996 and 1997 financial statements to conform with the 1998 presentation.
2. OFFERINGS AND ACQUISITIONS
COMPLETION OF INITIAL PUBLIC OFFERING
On April 24, 1996, the Company completed its Initial Public Offering ("IPO") by selling 20,331,430 shares of its common stock. The Company received proceeds of approximately $36,677,000 net of underwriting discounts and commissions and offering expenses of approximately $3,517,000.
GANNETT OUTDOOR ACQUISITION
On August 22, 1996, the Company purchased substantially all of the billboard and transit advertising operations of the Outdoor Advertising Division of Gannett Co., Inc. (the "Gannett Outdoor Acquisition"), for
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $712,545,000 ($707,980,000 before cash overdraft acquired of $4,565,000). The Company also acquired an option to acquire the Gannett Outdoor operations in Houston, which option was exercised on November 14, 1996 for $12,174,000.
The Company financed the Gannett Outdoor Acquisition through borrowings under its Senior Credit Facility, a Subordinated Credit Facility ("Bridge Loan") and the offering of 43,486,875 shares of common stock, for which it received proceeds of approximately $283,135,000 net of underwriting discounts and commissions and offering expenses of approximately $13,133,000. In October 1996, the Company sold (the "1996 Notes Offering") $250,000,000 of 9 3/8% Senior Subordinated Notes due 2006 (the "1996 Notes"). The proceeds from the 1996 Notes Offering were used to repay all borrowings under the Bridge Loan and to partially repay amounts outstanding under the Senior Credit Facility (see Note 5).
The Gannett Outdoor Acquisition was accounted for using the purchase method of accounting and the results of operations have been included in the consolidated financial statements subsequent to the date of acquisition. The Gannett Outdoor Acquisition resulted in goodwill of $60 million which represents the excess of the purchase price over the fair value of the assets which is amortized on a straight-line basis over 30 years.
DENVER DISPOSITION
In connection with the Gannett Outdoor Acquisition, on August 8, 1996, the Company sold substantially all of its existing billboard assets in Denver ("Denver Disposition") to an unrelated party for $2,760,000 in cash and a $6,440,000 9% promissory note due November 8, 2006, which is included in other assets. The Denver Disposition resulted in a gain of $7,344,000.
OTHER 1996 ACQUISITIONS
On May 22, 1996, the Company completed the acquisition of perpetual land easements located on real property and leased to independent outdoor advertising companies from CSX Realty Development Corporation ("CSX") for $21,525,000 in cash and certain future payments in an aggregate amount not to exceed $10,000,000 payable over a period of ten years beginning no later than the year 2006. The exact amount and timing of such payments is to be determined based upon the results of the Company's operation of the easements. The cost of the perpetual land easements is included in property and equipment and is amortized on a straight-line basis over 40 years.
In April 1996, the Company acquired all of the stock of Decade Communications Group, Inc. (the "Bench Ad Acquisition"), which owned approximately 5,300 bus benches in the Denver metropolitan area for a purchase price of approximately $1,817,000. The acquisition was accounted for as a purchase and the results of operations of the Bench Ad Acquisition are included in these financial statements from the date of acquisition.
UNAUDITED PRO FORMA INFORMATION
The following table summarizes unaudited pro forma operating results for the Company for the year ended December 31, 1996, assuming that the Gannett Outdoor Acquisition and other 1996 acquisitions and the Denver Disposition had occurred at the beginning of the applicable year and after giving effect to financing costs and purchase accounting adjustments.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited consolidated pro forma financial information does not purport to represent the results of operations of the Company that actually would have resulted had the acquisitions occurred as of the applicable year, nor should it be taken as indicative of the future results of the operations of the Company.
1997 ACQUISITIONS
During 1997, the Company acquired outdoor advertising assets through approximately 25 acquisitions throughout the United States and Canada for a total purchase price of approximately $1.3 billion (the "1997 Acquisitions").
The 1997 Acquisitions were accounted for using the purchase method of accounting and the results of operations have been included in the consolidated financial statements subsequent to the date of acquisition. The acquisitions resulted in goodwill of $346.5 million which represents the excess of the purchase price over the fair value of the assets which is amortized on a straight-line basis over 30 years.
Included in the 1997 Acquisitions is the August 15, 1997 acquisition of the outdoor advertising operations of Minnesota Mining and Manufacturing Company ("3M") through the purchase of the capital stock of National Advertising Company, a subsidiary of 3M ("3M Media"), for approximately $1.0 billion in cash (the "3M Media Acquisition").
The Company financed the purchase price of the 3M Media Acquisition and the fees and expenses associated with the acquisition and the acquisition financing through (i) proceeds from the offering of 45,562,500 shares of common stock to the public, completed on May 28, 1997, (ii) proceeds of an offering of $500 million aggregate principal amount of 8 7/8% Senior Subordinated Notes due 2007 (the "1997 Notes") completed on June 23, 1997 (the "1997 Notes Offering"), and (iii) borrowings under the Company's Senior Credit Facility which was amended to provide for a revolving credit facility and term loans of up to approximately $900 million.
In connection and simultaneously with the 3M Media Acquisition, the Company sold to Lamar Advertising Company and another outdoor advertising company certain outdoor advertising assets the Company acquired from 3M. The assets sold consisted of approximately 1,800 advertising displays in Atlanta, Denver, Detroit, Grand Rapids, Houston, New Orleans, Kansas City, Louisville, Phoenix and Sacramento. The selling price for such assets was approximately $116 million in cash, there was no gain or loss recognized on the sale.
The other 1997 acquisitions were financed, primarily, utilizing cash flows from operations and borrowings under the company's Senior Credit Facility.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA INFORMATION
The following table summarizes unaudited pro forma operating results for the Company for the two years ended December 31, 1997, assuming that the 1997 Acquisitions had occurred at the beginning of the applicable year and after giving effect to financing costs and purchase accounting adjustments.
The pro forma amounts above include adjustments for the 1997 Acquisitions only and do not include pro forma adjustments for the Gannett Outdoor Acquisition which was completed on August 22, 1996 and the other 1996 acquisitions. The unaudited consolidated pro forma financial information does not purport to represent the results of operations of the Company that actually would have resulted had the acquisitions occurred as of the applicable year, nor should it be taken as indicative of the future results of the operations of the Company.
1998 ACQUISITIONS
During 1998, the Company acquired outdoor advertising assets through approximately 14 acquisitions throughout the United States, Canada and Mexico for a total purchase price of approximately $468 million (the "1998 Acquisitions").
The 1998 Acquisitions were accounted for using the purchase method of accounting and the results of operations have been included in the consolidated financial statements subsequent to the date of acquisition. The 1998 Acquisitions resulted in goodwill of approximately $137 million which represents the excess of the purchase price over the fair value of the assets which is amortized on a straight-line basis over 30 years. The Company is continuing its evaluation of the fair value of the 1998 Acquisitions and further adjustments to the purchase price may be made.
Included in the 1998 Acquisitions is the July 1, 1998 acquisition of (i) substantially all of the assets of Vendor, S.A. de C.V., the outdoor advertising subsidiary of Televisa, S.A. de C.V., for approximately $216.0 million and (ii) substantially all of the outdoor advertising business conducted by MM Billboard, S.A. de C.V., an affiliated outdoor advertising company in northern Mexico, for approximately $21.9 million. The Company financed the purchase price of these acquisitions (collectively, the "Vendor Acquisitions") with borrowings under the Company's Senior Credit Facility. Value added tax paid to the Mexican government for the Vendor Acquisitions is recorded as a current receivable at December 31, 1998.
UNAUDITED PRO FORMA INFORMATION
The following table summarizes unaudited pro forma operating results for the Company for the two years ended December 31, 1998, assuming that the 1998 Acquisitions had occurred at the beginning of the applicable year and after giving effect to financing costs and purchase accounting adjustments.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma amounts above include adjustments for the 1998 Acquisitions only and do not include pro forma adjustments for the 1997 Acquisitions. The unaudited consolidated pro forma financial information does not purport to represent the results of operations of the Company that actually would have resulted had the acquisitions occurred as of the applicable year, nor should it be taken as indicative of the future results of the operations of the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
Included in advertising structures are costs allocated to display leases totaling $528,819 and $792,067, at December 31, 1997 and 1998, respectively.
The Company has granted a security interest in substantially all of its assets to lenders in connection with the Senior Credit Facility.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities are comprised of the following at December 31:
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
SENIOR CREDIT FACILITY
The Company's senior credit facility (the "Senior Credit Facility"), dated August 15, 1997, consists of (i) a U.S. Dollar senior revolving line of credit facility of up to $600,000,000 including a $35,000,000 letter of credit subfacility ("United States Revolver"), and a Canadian Dollar ("C$") senior revolving line of credit facility ("Canadian Revolver") of up to C$69,625,000 including a C$7,000,000 letter of credit sub-facility; (ii) a $450,000,000 Senior Secured U.S. Dollar Term Loan; and (iii) a $50,000,000 Senior Secured Canadian Term Loan. Letters of credit with stated amounts totaling $22,097,077 have been issued for the Company's account at December 31, 1998. Availability under the Senior Credit Facility totaled approximately $60,373,500 at December 31, 1998.
The commitment of the lenders under the United States Revolver will be reduced annually on December 31st of each year (commencing on December 31, 1999) through 2003 by $90,000,000 and by $150,000,000 on June 30, 2004. The commitment under the Canadian Revolver will be reduced annually on December 31st of each year (commencing on December 31, 1999) through 2003 by C$10,443,750 and by C$17,406,250 on June 30, 2004. The United States Term Loan must be repaid in equal quarterly installments commencing on March 31, 1998, with annual amortization of $50,000,000 through 1999, $75,000,000 from 2000 through 2003 and $50,000,000 in 2004 in equal installments on March 31 and June 30. The Canadian Term Loan must be repaid in equal quarterly installments commencing on March 31, 1998, with annual amortization of $1,000,000 through 2001, $8,000,000 during 2002, $15,000,000 during 2003 and $23,000,000 in 2004 in equal installments on March 31 and June 30.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The United States and Canadian Revolvers and United States and Canadian Term Loans bear interest at the ABR or C$ Prime Rate (as defined in the Senior Credit Facility's terms) (7.75% and 6.75%, respectively, at December 31, 1998) plus 0.0% to 1.125% or Eurodollar Rate or Applicable BA Discount Rate (as defined in the Senior Credit Facility's terms) (5.63% and 5.11%, respectively, at December 31, 1998) plus 0.75% to 2.125%, based on the Company's total leverage ratio.
The Senior Credit Facility is secured by a first perfected lien on substantially all of the present and future assets of the Company and a pledge of the Company's equity interest in its subsidiaries provided that the Senior Credit Facility is only secured by 65% of the stock of Mediacom. The U.S. facilities are guaranteed by each of the Company's U.S. subsidiaries, and the Canadian facilities are guaranteed by the Company and each of the Company's U.S. subsidiaries.
The Senior Credit Facility, among other things, places limitations on the Company's acquisitions, dispositions, asset swaps and stock repurchases, and requires the Company to comply with financial covenants concerning leverage, interest coverage, fixed charges and minimum cash flows. Additionally, the Senior Credit Facility requires the Company to maintain interest rate protection on a portion of its debt. At December 31, 1998, the Company had interest rate collar agreements which provide for a maximum base interest rate of 8.5% and a minimum base interest rate of 4.95%.
1996 AND 1997 NOTES
In October 1996, the Company completed the sale of the 1996 Notes. The net proceeds of the 1996 Notes were used to repay the Bridge Loan and to reduce amounts borrowed under the Senior Credit Facility and to pay related fees and expenses. In July 1997, the Company completed the sale of the 1997 Notes. The net proceeds of the 1997 Notes were used to finance a portion of the purchase price paid in the 3M Media Acquisition.
The 1996 Notes and 1997 Notes represent general unsecured obligations of the Company and are subordinated to all existing and future senior indebtedness of the Company and are senior to all subordinated indebtedness of the Company. Under the 1996 Notes and 1997 Notes, among other things, the Company is restricted in its ability to incur additional indebtedness, make certain investments, create liens, enter into transactions with affiliates, issue stock of a restricted subsidiary, enter into sale and leaseback transactions, merge or consolidate the Company, and transfer or sell assets. The Company is prohibited from paying cash dividends and distributions.
OTHER
In November 1997, the Company issued a note for $4,950,000 in connection with an acquisition in Los Angeles. The note bears interest at 10% per annum, payable monthly. The principal is due 2003.
The annual maturities of long-term debt at December 31, 1998 are as follows:
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. EXTRAORDINARY LOSS ARISING FROM EARLY EXTINGUISHMENT OF DEBT
The extraordinary loss arising from the early extinguishment of debt consisted of the following:
In connection with the IPO, the Company redeemed $6,583,000 principal amount of subordinated debt that had a carrying value of $6,099,000 for $7,514,000 in cash, resulting in an extraordinary loss of $1,415,000.
In order to facilitate the financing of the Gannett Outdoor Acquisition, the Company purchased, pursuant to a tender offer (the "Debt Tender Offer"), all but $15,000 aggregate principal amount of its outstanding 10 3/4% Senior Notes due 2003 (the "10 3/4% Senior Notes"). The aggregate consideration paid by the Company in the Debt Tender Offer of $1,116.25 per $1,000 principal amount of 10 3/4% Senior Notes, plus expenses associated therewith, resulted in an extraordinary loss from debt extinguishment of $13,542,000.
In connection with the Gannett Outdoor Acquisition, the Company entered into long-term bridge financing commitments for the Bridge Loan and redeemable preferred stock. Such commitment fees and bridge loan issuance costs aggregated $8,949,000. The commitment on the redeemable preferred stock was canceled at the date of the Gannett Outdoor Acquisition and the Bridge Loan was repaid with the net proceeds of the offering of the 1996 Notes resulting in an extraordinary loss of $8,856,000.
In connection with the 3M Media Acquisition, the Company entered into a bridge loan financing commitment. Commitment fees aggregated $11,288,000. The bridge loan financing commitment was cancelled in June 1997 after the Company completed the 1997 Notes Offering. No amounts were borrowed under the Bridge Loan.
7. FINANCIAL INSTRUMENTS
The fair values of the 1996 Notes and 1997 Notes were approximately $268,750,000 and $527,500,000, respectively at December 31, 1998. The fair values of the 1996 Notes and the 1997 Notes were determined based upon quotations from an investment banker. The carrying amount of variable rate long-term debt instruments is estimated to approximate fair values as the rates are tied to short-term indices.
8. OTHER EQUITY MATTERS
At December 31, 1995, the Company's redeemable preferred stock totaled $13,649,000. During 1996, in connection with the IPO, the Company redeemed all of its outstanding preferred stock for approximately $16,369,000.
In 1990, the Company issued common stock in connection with the financing of an acquisition under which the Company was required to redeem the common stock at a redemption price based upon the appraised value of the common stock as of the redemption date. Because this common stock was subject to redemption at the option of the holder, the Company accreted the stock to its estimated appraised value over OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the redemption period based upon annual estimates of value determined as a multiple of cash flow. Accretion was calculated on a straight-line basis and was charged directly to stockholders' deficit. At the date of the IPO, the common stock was sold by the holders and the related put options were terminated. Accordingly, amounts aggregating $3,868,000 were credited to accumulated deficit.
9. STOCK OPTIONS
The following is a summary of changes in outstanding options:
The following table summarizes information concerning currently outstanding and exercisable options:
Notes:
(1) These options have no exercise price, have no expiration date and are exercisable only upon termination.
(2) These options are fully exercisable and have no expiration date.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost for the Company's stock option plan been determined based upon the fair value at the grant date for awards under this plan consistent with the methodology prescribed in SFAS No. 123, the Company's net (loss) income and basic and diluted (loss) income per share for the years ended December 31, 1996, 1997 and 1998 would have been as follows:
10. BENEFIT PLANS
The Company established an Incentive Plan (the "Incentive Plan") covering certain managers and key employees. Incentive Awards ("Awards") were made under the Incentive Plan in the form of shares of phantom stock based on the individual's performance. Awards were valued each year based upon the estimated value of the Company. Awards are vested at the date of grant and any increases in value vested over a four year period. For the years ended December 31, 1996, 1997 and 1998, the Company charged earnings for compensation expense of $196,000, $234,300 and $234,300, respectively. In connection with the IPO, effective January 1, 1996, the Company ceased allocating amounts to the accounts maintained under the Incentive Plan. The Company offered to each then current employee who was a participant in the Incentive Plan the alternative of having their account settled in cash, in shares of the common stock of the Company, or both, with actual distributions of cash or common stock subject to both vesting requirements and terms and conditions similar to those under which distributions would have been made under the Incentive Plan. To the extent participants elected to settle their accounts in common stock, the Company issued (subject to the vesting requirements and distribution terms and conditions) to such participants options to purchase common stock at the initial public offering price.
The Company has a 401(k) savings plan under which it has the discretion of making contributions as a percentage of employee contributions. For the years ended December 31, 1996, 1997 and 1998 the Company's contributions to the 401(k) plan were $63,000, $75,700 and $251,000, respectively.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The provision for income taxes is comprised of the following for the years ended December 31,
The Company has U.S., Mexican and Canadian net operating loss carryforwards (before applicable tax rates) of approximately $39,000,000, $214,000,000, and $3,000,000, respectively, as of December 31, 1998 which expire subsequent to the year 2005.
Although realization is not assured, the Company believes, based on operating results in 1998, and its expectations for the future, that taxable income of the Company will more likely than not be sufficient to utilize all of the net operating loss carryforwards prior to their ultimate expiration.
Significant components of the Company's net deferred tax asset (liability) as of December 31 are as follows:
The Company has not provided for U.S. deferred income taxes or foreign withholding taxes on undistributed earnings of its non-U.S. subsidiaries as of December 31, 1998, since these earnings are intended to be reinvested indefinitely.
The following is a reconciliation of the reported effective income tax rates to the statutory rates:
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND OTHER
LEASES
The Company leases land and equipment under operating leases with various terms expiring at various dates. Certain of the land leases provide for periodic rental increases. At December 31, 1998, minimum annual rentals under all operating leases for the next five years are as follows:
TRANSIT AGREEMENTS
The Company has signed agreements which provide an exclusive right to sell advertising space in various airports, transit shelters and transit systems. Under the various agreements, the Company must make minimum guarantee payments for the next five years as follows:
Operating lease expense was $29,790,000, $90,196,391 and $153,178,570 for 1996, 1997 and 1998, respectively.
LITIGATION
The Company is party either as plaintiff or defendant to various actions, proceedings and pending claims, in the ordinary course of business. Litigation is subject to many uncertainties and it is possible that some of the legal actions, proceedings or claims referred to above could be decided against the Company. Although the ultimate amount for which the Company or its subsidiaries may be held liable with respect to matters where the Company is defendant is not ascertainable, the Company believes that any resulting liability should not materially affect the Company's financial position or results of operations.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SEGMENTS
The Company has operations in 147 metropolitan markets throughout North America which have similar operations, but are managed independently. No single customer accounts for 10% or more of any segment's revenue. None of these markets, individually, account for a significant portion of the Company's assets, revenues or net income and, therefore, they have been aggregated by geographical region as follows:
The Canadian operating segment sells products to the U.S. segment. Revenue is recognized upon shipment of products.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BASIC AND DILUTED INCOME (LOSS) PER SHARE
The weighted average number of shares outstanding for 1996, 1997 and 1998 is as follows:
- --------------- (1) Stock options were included in 1996 because the Company had net income before the extraordinary loss.
15. QUARTERLY DATA (UNAUDITED)
The second quarter of 1997 includes an extraordinary loss from the early extinguishment of debt of approximately $6.8 million, net of tax. The third and fourth quarters of 1997 include the operating results from the 3M Media Acquisition.
The third and fourth quarters of 1998 include the operating results from the Vendor Acquisitions.
16. CONSOLIDATING FINANCIAL STATEMENTS
The following represents consolidating condensed financial statements of Outdoor Systems, Inc. and its subsidiaries (the "Subsidiaries") which are presented because certain of the Subsidiaries have guaranteed the 1996 Notes and the 1997 Notes. The 1996 Notes and 1997 Notes are guaranteed by all of the Company's domestic subsidiaries (the "Guarantors"). The guarantees of the Guarantors of the 1996 Notes and 1997 Notes are full, unconditional, and joint and several. The subsidiaries which have not guaranteed the 1996 Notes and 1997 Notes (the "Non-Guarantors") are Mediacom, located in Canada, and OSM, located in Mexico. Separate financial statements of the Guarantors are not presented because management has determined that they would not be material to investors. There are no significant restrictions on the Company's ability to obtain funds from the Guarantors.
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 1997 (IN THOUSANDS)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1998 (IN THOUSANDS)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information regarding the directors of the Company is incorporated herein by reference to the information set forth in the table captioned "Director and Director Nominee Information" and under "Election of Directors" in the definitive proxy statement of the Registrant for the Registrant's annual meeting of stockholders to be held on May 27, 1999.
(b) Pursuant to Form 10-K General Instruction G(3), the information regarding executive officers of the Company has been included in Part I of this Report under the caption "Executive Officers of the Company."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference to the information set forth under the captions "Executive Compensation" and "Compensation of Directors" in the definitive proxy statement of the Registrant for the Registrant's annual meeting of stockholders to be held on May 27, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by reference to the information set forth in the table captioned "Beneficial Ownership of Common Stock" in the definitive proxy statement of the Registrant for the Registrant's annual meeting of stockholders to be held on May 27, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by reference to the information set forth in the table captioned "Certain Transactions" in the definitive proxy statement of the Registrant for the Registrant's annual meeting of stockholders to be held on May 27, 1999.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are incorporated by reference in or are filed as a part of this report:
1. Financial statements (included under Item 8).
2. Financial statement schedules. S-1 Independent Auditors' Report on Schedule S-2 Schedule II -- Valuation and Qualifying Accounts
3. Exhibits.
The following exhibits are incorporated by reference in or filed as a part of this report:
- --------------- * Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
Current Report on Form 8-K/A dated September 10, 1998 (July 1, 1998) amending Item 7 of the Current Report on Form 8-K dated July 16, 1998, reporting the completion of the acquisition of substantially all of the assets of Vendor, S.A. de C.V. and MM Billboard, S.A. de C.V.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Phoenix, State of Arizona, on the 18th day of March 1999.
OUTDOOR SYSTEMS, INC.
By: /s/ WILLIAM S. LEVINE ------------------------------------ William S. Levine Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
OUTDOOR SYSTEMS, INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Outdoor Systems, Inc. Phoenix, Arizona
We have audited the consolidated financial statements of Outdoor Systems, Inc. as of December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 2, 1999; such consolidated financial statements and report are included elsewhere in this Form 10-K. Our audits also included the financial statement schedule of Outdoor Systems, Inc., listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Phoenix, Arizona February 2, 1999
S-1
OUTDOOR SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS)
- --------------- (1) Represents accounts receivable write-offs.
(2) Amount represents reserve at date of acquisition related to accounts receivable in the working capital of companies acquired.
S-2
EXHIBIT INDEX
- --------------- * Indicates management contract or compensatory plan or arrangement.