Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
METRO DISPLAY ADVERTISING, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
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[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
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METRO DISPLAY ADVERTISING, INC.
15265 Alton Parkway
Irvine, California 92618
(714) 727-4444
January 5, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Metro Display Advertising, Inc. (the "Company"), to be held at the Fullerton
Senior Multi-Service Center, 340 West Commonwealth Avenue, Fullerton, California
92832, at 2:00 p.m. local time, on January 15, 1998.
The Board of Directors is submitting for your consideration, at the Annual
Meeting, a proposal to approve and adopt an Agreement and Plan of Merger, dated
as of September 8, 1997, by and among the Company, Eller Media Company ("Eller")
and EMS, Inc. ("EMS"), a wholly-owned subsidiary of Eller, as amended and
restated on January 5, 1998 (the "Agreement and Plan of Merger"), pursuant to
which EMS will be merged with and into the Company (the "Merger") and the
Company will become a wholly-owned subsidiary of Eller. The Notice of Annual
Meeting of Shareholders and Proxy Statement accompanying this letter more fully
describe the matters to be considered at the Annual Meeting. We urge you to read
the enclosed materials carefully.
THE COMPANY'S BOARD OF DIRECTORS HAS APPROVED THE AGREEMENT AND PLAN OF
MERGER AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE AGREEMENT AND PLAN OF
MERGER.
Approval of the Agreement and Plan of Merger requires the affirmative vote
of the holders of a majority of the outstanding shares of the Company's Common
Stock entitled to vote thereon.
At the Annual Meeting, you will also be asked to elect three directors to
serve on the Company's Board of Directors until the Merger is consummated or
until the next Annual Meeting and until their successors are elected and
qualified, and to ratify the selection of Peck & Lopez as the Company's
independent auditors for the fiscal year ending December 31, 1997.
Whether or not you plan to attend the Annual Meeting, we urge you to sign,
date and return the enclosed proxy in the envelope provided. The vote of each
shareholder is important. If you attend the Annual Meeting, you may vote your
shares in person, even if you have previously submitted a proxy.
Sincerely,
Scott A. Kraft
Chief Executive Officer and President
METRO DISPLAY ADVERTISING, INC.
15265 Alton Parkway, Suite 100
Irvine, California 92618
(714) 727-4444
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 15, 1998
To the Shareholders:
Notice is hereby given that the Annual Meeting of Metro Display
Advertising, Inc., a California corporation (the "Company"), will be held at the
Fullerton Senior Multi-Service Center, 340 West Commonwealth Avenue, Fullerton,
California 92832, at 2:00 p.m. local time, on January 15, 1998, for the
following purposes:
1. Acquisition. To approve the Agreement and Plan of Merger, dated
September 8, 1997, by and among the Company, Eller Media Company, a Delaware
corporation ("Eller"), and EMS, Inc., a California corporation and wholly-owned
subsidiary of Eller ("EMS"), as amended and restated on January 5, 1998 (the
"Merger Agreement"), pursuant to which EMS will be merged with and into the
Company and the Company will become a wholly-owned subsidiary of Eller (the
"Merger"). If the Merger is consummated, each share of the Company's common
stock (the "Common Stock"), (other than shares as to which dissenters' rights
have been properly exercised) will be converted into the right to receive,
subject to certain reductions, $41,800,000 in cash divided by the number of
outstanding shares of Common Stock, which will be placed in escrow until the
resolution of certain litigation and other matters.
2. Election of Directors. To elect three persons to the Board of
Directors to serve until the Merger is completed or until the next Annual
Meeting of Shareholders and until their successors are elected and qualified.
3. Selection of Independent Auditors. To ratify the selection of Peck &
Lopez as the Company's independent auditors for the fiscal year ending December
31, 1997.
4. Other Business. To transact such other business as may properly come
before the Annual Meeting or any adjournment thereof.
Only shareholders of record at the close of business on December 1, 1997,
will be entitled to notice of and to vote at the Annual Meeting and any
adjournment thereof.
You are cordially invited to attend the Annual Meeting in person. However,
in order to ensure your representation at the meeting, please promptly complete,
date, sign and return the enclosed proxy as soon as possible in the return
envelope provided. A shareholder who executes and returns a proxy may revoke
such proxy at any time before it is voted at the Annual Meeting by following the
procedures set forth in the attached Proxy Statement.
By Order of the Board of Directors
__________________________________
William M. Slater
Secretary
January 5, 1998
TABLE OF CONTENTS
Page
----
Introduction......................................................................... 1
SUMMARY OF PROPOSED MERGER TRANSACTION............................................... 2
VOTING RIGHTS AND VOTE REQUIRED...................................................... 5
PROPOSAL ONE--THE MERGER............................................................. 6
General........................................................................ 6
Contingencies and Adjustments Affecting the Merger Consideration............... 6
Van Wagner Litigation and Disputes............................................. 8
Background of the Merger....................................................... 10
Reasons for the Merger......................................................... 12
Fairness of Merger Consideration............................................... 12
The Merger Agreement........................................................... 13
Stockholder Representatives.................................................... 16
Transfer of Assets of BSON and Distribution of BSON Stock...................... 17
Regulatory Approvals........................................................... 18
Dissenters' Rights............................................................. 18
Certain Federal Income Tax Considerations...................................... 19
Accounting Treatment........................................................... 21
BUSINESS OF THE COMPANY.............................................................. 21
General........................................................................ 21
Background/Prior Bankruptcy.................................................... 21
Outdoor Advertising............................................................ 23
Operations..................................................................... 23
Operations in Absence of Merger................................................ 25
Contracts with Municipalities.................................................. 26
Competition.................................................................... 27
Employees...................................................................... 28
Properties..................................................................... 28
BUSTOP SHELTERS OF NEVADA, INC. (BSON)............................................... 28
History........................................................................ 28
Operations..................................................................... 28
Post-Merger Operations......................................................... 29
Properties..................................................................... 29
BUSINESS OF ELLER AND EMS............................................................ 30
Eller.......................................................................... 30
EMS............................................................................ 31
SPECIAL CONSIDEATIONS REGARDING MERGER AND RELATED TRANSACTIONS...................... 31
No Fairness Opinion............................................................ 31
Merger Consideration in Escrow................................................. 32
Damages Escrow................................................................. 32
Van Wagner Escrow.............................................................. 32
Net Reductions................................................................. 32
Regulatory Approvals........................................................... 33
Third Party Consents........................................................... 33
Risks Associated with BSON..................................................... 33
PROPOSAL TWO--ELECTION OF DIRECTORS.................................................. 37
Officers and Directors......................................................... 37
Board Committees and Meetings.................................................. 38
PROPOSAL THREE--RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS................. 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................. 40
General........................................................................ 40
Results of Operations.......................................................... 40
Liquidity and Capital Resources................................................ 41
Comparison of nine-months ended September 30, 1997 and September 30, 1996...... 42
Liquidity and Capital Resources as of September 30, 1997....................... 43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................................................... 43
Change in Control.............................................................. 43
INTERESTS OF CERTAIN PERSONS; RELATED TRANSACTIONS................................... 44
Transfer of Assets to BSON and the Distribution of BSON Stock.................. 44
Litigation Responsibility Agreement............................................ 44
Interim Sales Representation Agreement......................................... 45
Consulting Agreement........................................................... 45
Credit Facility and Loans...................................................... 45
Employment Agreements.......................................................... 46
Bonuses........................................................................ 47
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.............................. 47
EXECUTIVE COMPENSATION............................................................... 48
Stock Option Plan.............................................................. 48
Stock Option Grants and Exercises.............................................. 49
Employment Agreements.......................................................... 49
Bonuses........................................................................ 50
Compensation of Directors...................................................... 50
Compensation Committee Interlocks and Insider Participation.................... 50
LITIGATION........................................................................... 50
Litigation with Van Wagner..................................................... 50
Litigation with Municipalities................................................. 50
Litigation with Busline Media.................................................. 51
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS............................. 51
AVAILABLE INFORMATION................................................................ 51
INDEPENDENT ACCOUNTANTS.............................................................. 52
OTHER MATTERS........................................................................ 52
SUBMISSION OF SHAREHOLDER PROPOSALS.................................................. 52
INDEX TO FINANCIAL STATEMENTS........................................................ F-1
EXHIBITS
Amended and Restated Agreement and Plan of Merger by and among Eller Media
Company, EMS, Inc. and Metro Display Advertising, Inc. dated January 5, 1998;
and the Specific Performance Escrow Agreement, Van Wagner Escrow Agreement
and Damages Escrow and Disbursement Agreement related thereto Exhibit A
Chapter 13 of the California General Corporation Law Exhibit B
Form of Amended and Restated Articles of Incorportaion of BSON Exhibit C
Form of Amended and Restated Bylaws of BSON Exhibit D
Letter from Stinchfield & Co. dated September 19, 1997 Exhibit E
METRO DISPLAY ADVERTISING, INC.
15265 Alton Parkway, Suite 100
Irvine, California 92618
ANNUAL MEETING OF SHAREHOLDERS
JANUARY 15, 1998
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of Metro
Display Advertising, Inc., a California corporation (the "Company" or "Metro"),
in connection with the solicitation of proxies by the Board of Directors of the
Company (the "Board") for use at the Annual Meeting of Shareholders of the
Company to be held on Janaury 15, 1998, and at any adjournment thereof (the
"Annual Meeting").
A form of proxy is enclosed for your use. The shares represented by each
properly executed unrevoked proxy will be voted as directed by the shareholder
executing the proxy. If no direction is made, the shares represented by each
properly executed unrevoked proxy will be voted "FOR" the approval and adoption
of the amended and restated Agreement and Plan of Merger, "FOR" the election of
management's nominees for the Board of Directors, and "FOR" ratification of the
selection of Peck & Lopez as the Company's independent auditors for the fiscal
year ending December 31, 1997. With respect to any other item of business that
may come before the Annual Meeting, the proxy holders will vote the proxy in
accordance with their best judgment.
Any proxy given may be revoked at any time prior to the exercise thereof by
filing with William M. Slater, Secretary of the Company, an instrument revoking
such proxy or by the filing of a duly executed proxy bearing a later date. Any
shareholder present at the Annual Meeting who has given a proxy may withdraw it
and vote his or her shares in person if such shareholder so desires.
It is contemplated that the solicitation of proxies will be made primarily
by mail. Should it, however, appear desirable to do so in order to ensure
adequate representation of shares at the Annual Meeting, the officers, agents
and employees of the Company may communicate with shareholders, banks, brokerage
houses and others by telephone, telegraph, or in person to request that proxies
be furnished. All expenses incurred in connection with this solicitation will
be borne by the Company. In following up the original solicitation of proxies
by mail, the Company may make arrangements with brokerage houses and other
custodians, nominees and fiduciaries to send proxies and proxy material to the
beneficial owners of the shares eligible to vote at the Annual Meeting and will
reimburse them for their expenses in so doing. The Company has no present plans
to hire special employees or paid solicitors to assist in obtaining proxies, but
reserves the option of doing so if it should appear that a quorum otherwise
might not be obtained. This Proxy Statement and the accompanying form of proxy
are first being mailed to shareholders on or about January 5, 1998.
1
SUMMARY OF PROPOSED MERGER TRANSACTION
The following is a summary of certain information contained in this Proxy
Statement. This summary does not purport to be complete and is qualified in its
entirety by reference to the more detailed information contained elsewhere in
this Proxy Statement and the Exhibits hereto. Capitalized terms used and not
defined in the following summary will have the meanings ascribed to them
elsewhere in this Proxy Statement. Shareholders are urged to read this Proxy
Statement and the Exhibits hereto in their entirety.
THE ANNUAL MEETING
The annual meeting will be held on January 15, 1998 at 2:00 p.m. local
time, at the Fullerton Senior Multi-Service Center, 340 West Commonwealth
Avenue, Fullerton, California 92832 (the "Annual Meeting"). At the Annual
Meeting, the shareholders of the Company will be asked to consider and vote upon
(i) a proposal to approve and adopt the Merger Agreement, (ii) the election of
three directors to serve until the Merger is completed or until the next Annual
Meeting and until their successors have been elected and qualified, (iii) the
ratification of the selection of Peck & Lopez as the Company's independent
auditors for the fiscal year ending December 31, 1997, and (iv) such other
business as may properly come before the Annual Meeting.
RECORD DATE; SHARES ENTITLED TO VOTE
Only holders of record of the shares of Common Stock at the close of
business on December 1, 1997 (the "Record Date") are entitled to notice of, and
to vote at, the Annual Meeting and any adjournment thereof.
VOTE REQUIRED
The affirmative vote of a majority of all shares of Common Stock
outstanding on the Record Date is required for approval and adoption of the
Merger Agreement. The affirmative vote of a majority of the shares voted at the
Annual Meeting is required for ratification of the selection of Peck & Lopez as
the Company's independent auditors for the fiscal year ending December 31, 1997.
A plurality of the votes represented and entitled to vote at the Annual
Meeting, either in person or by proxy, is required to elect three directors to
serve until the Merger is completed or until the next Annual Meeting and until
their successors have been elected and qualified. Shareholders may cumulate
their votes if at least one shareholder has given notice at the Annual Meeting
of his intention to do so. See "Voting Rights And Vote Required."
THE MERGER
The Company, Eller and EMS entered into the Agreement and Plan of Merger
dated September 8, 1997, as amended and restated on January 5, 1998 (the "Merger
Agreement"). The Merger Agreement provides that, subject to the approval of the
Merger Agreement by the shareholders of the Company and satisfaction of certain
other conditions, EMS will be merged with and into the Company, the separate
corporate existence of EMS will cease and the Company will continue as the
surviving corporation and wholly-owned subsidiary of Eller (the "Merger"). Upon
consummation of the Merger, each outstanding share of Common Stock of the
Company (other than those for which dissenters' rights have been asserted) will
be converted into the right to receive in cash, subject to the number of
dissenting shares and certain reductions, $41,800,000 divided by the number of
outstanding shares of Common Stock, which will be placed in escrow until the
resolution of certain contingencies, including certain pending litigation. See
"The Merger - Contingencies and Adjustments Affecting the Merger Consideration"
and "The Merger - The Merger Agreement - Distribution of the Consideration."
2
Assuming that there are no dissenting shares and that all outstanding stock
options are exercised prior to the Closing of the Merger, a total of 970,030
shares of Common Stock will participate pro rata in the distribution of the
Merger Consideration. The Company is unable to predict the outcome of certain
contingencies that will affect the amount available for distribution. After
deducting approximately $2,200,000 in reductions known to Metro as of December
15, 1997, the Merger Consideration divided by 970,030 shares equals $40.82 per
share of Common Stock. It is expected that the actual amount of Merger
Consideration received per share will be lower than this amount. See
"Contingencies and Adjustments Affecting the Merger Consideration," "Special
Considerations Regarding Merger and Related Transactions - Net Reductions." The
rights of the shareholders to receive the Merger Consideration will be
nontransferable except by will and the laws of descent and distribution.
Shareholders should be especially mindful that although management believes
that the following is highly unlikely, it is possible that reductions to the
Merger Consideration could completely exhaust the Merger Consideration and, in
such case, the Metro shareholders would receive nothing. See "Contingencies and
Adjustments Affecting the Merger Consideration," "Special Considerations
Regarding Merger and Related Transactions - Net Reductions."
Promptly after the closing of the Merger and filing of the Merger Agreement
with the Secretary of State of California (such date, the "Closing Date"), a
letter of transmittal with instructions will be mailed to all holders of record
of shares of Common Stock at the close of business on the Closing Date for use
in the surrendering of their certificates representing shares of Common Stock.
See "The Merger - The Merger Agreement - Exchange of Stock Certificates."
THE DISTRIBUTION OF BSON STOCK
Prior to the Closing Date, and subject to approval and adoption of the
Merger Agreement by the Company's shareholders, the Company will transfer
certain assets to Bus Shelters of Nevada, Inc. ("BSON"), a Nevada corporation
and wholly-owned subsidiary of the Company, and will declare a pro rata dividend
on shares of Common Stock of the Company pursuant to which the Company will
distribute to the Company's shareholders, as a "spinoff," all shares of BSON so
that BSON will become a corporation that is separate and distinct from, and no
longer a subsidiary of, the Company (the "Distribution"). See "Interests of
Certain Persons; Related Transactions - Transfer of Assets to BSON and
Distribution of BSON Stock." It is contemplated that the Articles of
Incorporation of BSON will be amended to authorize, and the Board of BSON will
then issue, a sufficient number of shares of BSON common stock to provide for a
dividend on each share of Metro Common Stock of one share of BSON common stock.
The Articles of Incorporation of BSON, as they will be amended prior to the
Distribution, are attached hereto as Exhibit C. The stock of BSON will be
subject to various restrictions on transferability. See "Special Considerations
Regarding Merger and Related Transactions - Risks Associated With BSON -
Illiquid Stock of BSON."
THE EFFECTIVE DATE OF THE MERGER
The Merger will become effective upon the filing of the Merger Agreement
with the Secretary of State of the State of California (the Closing Date).
Subject to the terms and conditions of the Merger Agreement, the Merger is
expected to become effective shortly after the date of the Annual Meeting.
DISSENTERS' RIGHTS
If the Merger is consummated, holders of shares of Common Stock who do not
vote in favor of approval and adoption of the Merger Agreement and who otherwise
comply with the requirements of Sections 1300-1302 of the California General
Corporation Law will be entitled to statutory appraisal rights. See "The Merger
- - Dissenters' Rights."
3
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
On the Closing Date, each shareholder will recognize gain or loss for
federal tax purposes as of that date to the extent of the difference between the
holder's share of the Merger Consideration and the adjusted basis of the
holder's Common Stock. See "The Merger - Certain Federal Income Tax
Considerations."
4
VOTING RIGHTS AND VOTE REQUIRED
The Board of Directors has fixed the close of business on December 1, 1997
(the "Record Date"), as the date for determining the shareholders entitled to
notice of and to vote at the Annual Meeting and any adjournment thereof. On the
Record Date, the Company had 970,030 shares of Common Stock outstanding. The
affirmative vote, in person or by proxy, of holders of a majority of all
outstanding shares of Common Stock on the Record Date is required to approve and
adopt the Merger Agreement. The affirmative vote of a majority of shares voting
at the Annual Meeting, either in person or by proxy, is required to ratify the
selection of Peck & Lopez as independent auditors of the Company for the fiscal
year ending December 31, 1997. A plurality of the shares voted at the Annual
Meeting, either in person or by proxy, is required to elect three directors to
serve until the Merger is completed or until the next Annual Meeting and until
their successors have been elected and qualified. Except as described in the
second paragraph below, each share outstanding on the Record Date is entitled to
one vote at the Annual Meeting.
As to proposals requiring the affirmative vote of at least a majority in
voting interest of shareholders present, abstentions on such a proposal will
have the effect of a negative vote on that proposal, but broker non-votes with
respect to such a proposal will not be considered as shares present and entitled
to vote at the Annual Meeting with respect to that proposal and therefore will
have no effect on the outcome of the vote.
Shareholders may exercise cumulative voting rights with respect to the
election of directors. Accordingly, if at least one shareholder has given
notice at the Annual Meeting, prior to the voting, of his or her intention to
cumulate his or her votes, all shareholders will be entitled to cumulate their
votes. Under cumulative voting, each shareholder may give one nominee a number
of votes equal to the number of directors to be elected multiplied by the number
of votes to which shareholder's shares are normally entitled, or may distribute
the shareholder's votes on the same principle among as many candidates as the
shareholder thinks fit. Unless proxy holders are otherwise instructed,
shareholders, by means of the accompanying proxy, will grant the proxy holders
discretionary authority to cumulate votes. Under cumulative voting, the three
candidates receiving the highest number of affirmative votes cast will be
elected directors of the Company.
5
PROPOSAL ONE
------------
THE MERGER
GENERAL
At the Annual Meeting, the shareholders of the Company will be asked to
consider and to vote upon a proposal to approve and adopt an Agreement and Plan
of Merger dated September 8, 1997 by and among the Company, Eller Media Company,
a Delaware corporation ("Eller"), and EMS, Inc., a California corporation and
wholly-owned subsidiary of Eller ("EMS"), as amended and restated on
January 5, 1998, pursuant to which EMS will be merged with and into the
Company and the Company will become a wholly-owned subsidiary of Eller. At the
Closing Date, (a) each share of the Company's Common Stock (other than shares as
to which dissenters' rights have been properly exercised) will be converted into
the right to receive, subject to the number of dissenting shares and certain
reductions, $41,800,000 in cash divided by the number of outstanding shares of
Common Stock (in the aggregate, the "Merger Consideration"), which will be
placed in escrow until the resolution of certain contingencies, including
certain pending litigation (See "- Contingencies and Adjustments Affecting the
Merger Consideration" and "- The Merger Agreement - Distribution of the
Consideration"), and (b) each share of common stock of EMS automatically will be
converted into and become one share of common stock of the surviving corporation
in the Merger. A copy of the Merger Agreement is attached hereto as Exhibit A.
The Merger Consideration will be reduced to at least $39,600,000 because of
certain known adjustments to be made at the Closing. Of this amount, $5,000,000
will be deposited into a damages escrow (the "Damages Escrow"), up to an
additional $5,000,000 will be deposited into a Van Wagner escrow (the "Van
Wagner Escrow"), and the remainder will be deposited into a specific performance
escrow (the "Specific Performance Escrow"). The Damages Escrow will be
established for three years to reserve against breaches of the Merger Agreement
by the Company and loss of certain bus shelter contracts. See "- Contingencies
and Adjustments Affecting the Merger Consideration." The Specific Performance
Escrow will be established for up to five years to reserve against expenses and
damages resulting from certain pending litigation. See "- Contingencies and
Adjustments Affecting the Merger Consideration," " - Van Wagner Litigation and
Disputes." The Van Wagner Escrow will be established for an indefinite period
of time to reserve against expenses and damages resulting from certain pending
litigation following disbursement of the Specific Performance Escrow. See "-
Contingencies and Adjustments Affecting the Merger Consideration," " - Van
Wagner Litigation and Disputes."
Prior to the Closing, Metro will transfer certain assets to BSON and will
declare a pro rata dividend on the shares of Common Stock of Metro pursuant to
which Metro will distribute to Metro's shareholders, as a spinoff, all shares of
BSON. See "- Transfer of Assets to BSON and Distribution of BSON Stock."
The closing will take place on the seventh business day after all
conditions to closing have been satisfied or waived, unless mutually agreed
otherwise by Eller and the Company; provided, however, that Eller will have the
right to extend the closing to January 15, 1998 (such day, the "Closing"). See
"The Merger - The Merger Agreement - Conditions to Merger."
CONTINGENCIES AND ADJUSTMENTS AFFECTING THE MERGER CONSIDERATION
The $41,800,000 Merger Consideration is subject to the following
contingencies and adjustments:
(a) At the Closing, the aggregate amount of the Merger Consideration will
be reduced by an amount equal to the sum of (i) the Company's aggregate net
accounts receivable balance as of the Closing Date of the Merger, (ii) the
amount by which the Company's liabilities as of the Closing Date exceed
$2,343,741.64, (iii) any accounts receivable written off by the Company after
June 30, 1997 and through the Closing Date, (iv) amounts equal to the cost of
certain obligations incurred by the Company up until the Closing Date (the
aggregate amount of clauses (iv) and (vi) not to exceed $400,000), (v) the
amounts to be
6
paid as bonuses to Metro's employees, (vi) an amount equal to the legal fees and
costs incurred by Metro through the Closing Date in the litigation with Van
Wagner Communications, Inc. ("Van Wagner"), Outdoor Systems, Inc. ("OSI") and
their affiliates (collectively, the "Van Wagner Group"), and (vii) the amounts
Metro is obligated to pay for federal and state taxes related to employee
bonuses and the exercise of any Metro stock options; and, subsequent to the
Closing, will be (i) further reduced by the costs and expenses incurred by
certain stockholder representatives, (ii) further reduced by any damages awarded
against the Company as a result of the Van Wagner litigation or payable in
settlement of such litigation and (iii) increased by the amount, if any,
recovered by the Company in connection with the Van Wagner litigation
(collectively, the "Net Reductions"). See "- Van Wagner Litigation and
Disputes;" and "- Stockholder Representatives."
(b) The Damages Escrow will be subject to reduction from time to time for
payments made by the escrow agent ("Escrow Agent") out of the Damages Escrow of
amounts owing to Eller for monetary damages, if any, suffered by Eller with
respect to (i) any breach of a representation or warranty by, or covenant or
agreement of, the Company set forth in the Merger Agreement, (ii) any litigation
pending against the Company as of the Closing date other than litigation between
the Company and the Van Wagner Group (iii) any undisclosed rights requiring the
issuance of capital stock of the Company, (iv) the loss of the ability to
utilize any net operating carry forwards of the Company resulting from the
transfer of assets from the Company to BSON, (v) fees under bus shelter
contracts resulting from the Merger and (vi) the termination of bus shelter
contracts ("Reserve Expenses"). See "- Van Wagner Litigation and Disputes," "-
Merger Agreement - Representations and Warranties" and "- Merger Agreement -
Covenants."
(c) Costs and expenses of the Van Wagner litigation incurred after the
Closing will be paid out of the Merger Consideration. At such time as Eller
receives evidence acceptable to Eller in its sole reasonable discretion that the
only remedy available to the Van Wagner Group in the Van Wagner litigation is
monetary damages (the "Condition"), the amounts in the Specific Performance
Escrow, but not the Damages Escrow or Van Wagner Escrow, will be distributed to
the Metro shareholders. See "- Van Wagner Litigation and Disputes," " - The
Merger Agreement - Distribution of the Consideration." The amount of the Van
Wagner Escrow will be $5,000,000, less the Merger Consideration adjustment for
costs and expenses of the Van Wagner litigation incurred by the Company through
the Closing Date. At the end of five years, if the Condition has not been
satisfied, the matter will be submitted to arbitration to determine (i) the
percentage likelihood that the court will rule that the Van Wagner Group is
entitled to remedies other than monetary damages only, multiplied by (ii) the
estimated amount of Eller's losses if remedies other than monetary damages were
available. This arbitration award would be paid to Eller, the Van Wagner Escrow
would remain in place and the Specific Performance Escrow would be distributed
to the Metro shareholders. Eller would then bear all future costs, expenses and
damages relating to the Van Wagner litigation, which sums would be paid first
out of the arbitration award given to Eller and then, if necessary, out of the
Van Wagner Escrow. Upon final resolution of the litigation and payment of all
expenses and damages relating thereto, the remainder of the Van Wagner Escrow
will be paid to the Metro shareholders.
(d) Assuming that there are no dissenting shares and that all outstanding
stock options are exercised prior to the Closing of the Merger, a total of
970,030 shares of Common Stock will participate pro rata in the distribution of
the Merger Consideration. The Company is unable to predict the outcome of
certain contingencies that will affect the amount available for distribution.
After deducting approximately $2,200,000 in Net Reductions known to Metro as of
December 15, 1997, the Merger Consideration divided by 970,030 shares would
equal $40.82 per share of Common Stock. It is expected that the actual amount
of Merger Consideration received per share will be lower than this amount. See
"- Contingencies and Adjustments Affecting the Merger Consideration," "Special
Considerations Regarding Merger and Related Transactions - Net Reductions." The
rights of the shareholders to receive the Merger Consideration will be
nontransferable except by will and the laws of descent and distribution.
7
The Metro shareholders should be especially mindful that although
management believes that the following is highly unlikely, it is possible that
reductions to the Merger Consideration could completely exhaust the Merger
Consideration and, in such case, the Metro shareholders would receive nothing.
See "Contingencies and Adjustments Affecting the Merger Consideration," "Special
Considerations Regarding Merger and Related Transactions - Net Reductions."
(e) Certain persons designated as stockholder representatives will
represent the interests of the Metro shareholders after the Closing and until
all of the Merger Consideration has been properly distributed. They will manage
the conduct of the Van Wagner litigation, enter into escrow agreements regarding
the Specific Performance Escrow, Damages Escrow and Van Wagner Escrow, verify
claims made by Eller for payment out of any of the escrows, represent the
shareholders in any arbitration require or permitted by the Merger Agreement and
the exhibits thereto, and provide annual reports to the Metro shareholders
concerning the Van Wagner litigation and escrows. See "- Stockholder
Representatives."
(f) In the event that arbitration is required pursuant to paragraph (c)
above to estimate the losses to Eller if non-monetary damages are permitted in
the Van Wagner litigation, the arbitration will be conducted in Los Angeles,
California. Eller and the Stockholder Representatives will select a single
arbitrator. If they cannot agree on an arbitrator within 30 days, an arbitrator
will be selected according to the rules and regulations of the American
Arbitration Association governing commercial transactions. The arbitration
proceeding will be conducted within 90 days after the demand for arbitration.
Each party to the proceeding will submit all documents, lists of witnesses and a
written summary of the proposed testimony to the arbitrator at least 30 days
prior to the proceeding. An arbitrator's decision will be final. Neither party
may commence litigation subsequent to the arbitration concerning such matters,
except to enforce the arbitration award. The costs of arbitration will be paid
one-half by Eller and one-half out of the Specific Performance Escrow.
(g) Until distribution, the Merger Consideration, including the amounts in
the Damages Escrow and Van Wagner Escrow, will be deposited in interest-bearing
bank accounts and/or invested in United States Treasury obligations and/or other
obligations guaranteed by the United States Government or any agency thereof.
Interest received from such investments will be paid quarterly to the Metro
shareholders, except that after two years, interest on the Damages Escrow will
accrue and be paid out proportionally with any disbursements made from such
escrow either to the shareholders or to Eller upon claims for the loss of
certain bus shelter contracts.
VAN WAGNER LITIGATION AND DISPUTES
The Company is currently involved in litigation and disputes with certain
parties related to the Company's prior agreements with Van Wagner. Pursuant to
an agreement dated as of January 1, 1993 and subsequently amended (the "Sales
Representation Agreement"), the Company had engaged Van Wagner to act as its
exclusive sales representative through March 1999 for the rental by national and
regional advertisers of advertising space on the Company's bus stop shelters.
The Company retained the right to rent shelter space to all local advertisers.
The Company and Van Wagner also entered into a 15-year Joint Venture Agreement
in November 1994 for the purpose of seeking additional contracts and/or permits
from municipalities throughout the United States for bus shelter advertising and
of managing, developing and operating such shelters and the advertising space in
connection therewith. See Note 6 to the Notes to Consolidated Financial
Statements of Metro included in this Proxy Statement.
In April 1997, OSI, a direct competitor of Metro, acquired Van Wagner and
changed Van Wagner's name to Outdoor Systems of New York, Inc. ("OSI-NY").
Following this acquisition and the assertion by OSI-NY that it would assume and
continue Van Wagner's position as Metro's sales representative, the Company gave
notice that it was terminating the Sales Representation Agreement based upon
various alleged breaches and on Metro's conclusion that, because of OSI's
ownership and
8
control, OSI-NY has a fundamental conflict of interest which disables it from
effectively representing Metro's interests. Metro's Board of Directors
concluded that OSI-NY could not reasonably be expected to act as Metro's
exclusive sales representative since such activities would be in conflict with
those of OSI-NY's parent company (OSI) and would jeopardize the confidentiality
of Metro's proprietary information and trade secrets. OSI and OSI-NY dispute
Metro's position on this matter and have asserted that OSI-NY is ready, willing
and able to perform its duties under the agreement and that Metro is refusing to
permit it to do so. Metro also asserted that the sale of Van Wagner to OSI
violated a provision of the agreement which prohibits Van Wagner from assigning
the agreement; OSI-NY contends that, notwithstanding the change of control of
Van Wagner, there has been no assignment since the same corporate entity would
continue to act as sales representative. OSI-NY also disputes Metro's other
asserted grounds for terminating the Sales Representation Agreement.
The Sales Representation Agreement also provides that if Metro intends to
accept an offer from a third party to purchase all or a substantial part of
Metro's assets, Metro must give Van Wagner a right of first refusal to acquire
the assets on the same terms. Since this provision makes no reference to a sale
of stock or a merger, Metro believes that it does not apply to the proposed
merger transaction with Eller. Nevertheless, in order to avoid any dispute on
this point, Metro sent notice of the transaction to the Van Wagner Group on May
23, 1997 and attached the letter of understanding executed between Eller and
Metro. OSI did not respond to Metro's notice. The Sales Representation
Agreement requires that any exercise of the right of first refusal must occur
within 30 days of notice, or else Metro could proceed to contract with a third
party within 90 days thereafter on the same terms and conditions. On July 16,
1997, the Company sent notice to the Van Wagner Group of the failure to exercise
the right of first refusal and Metro's freedom to contract with Eller on the
terms set forth in the letter of understanding. To confirm that Metro was
contracting with Eller on the same terms as offered to the Van Wagner Group,
Metro sent a draft of the Merger Agreement to the Van Wagner Group on August 1,
1997. On August 15, 1997, the Van Wagner Group sent a letter to the Company
alleging that Metro was inconsistent as to whether the right of first refusal
applied to the transaction with Eller, that Metro indicated that it did not
intend to allow OSI-NY to exercise the right of first refusal and that OSI-NY
had only recently received the complete "Purchase Agreement." On September 8,
1997 (which is within 90 days of the termination of the right of Van Wagner to
exercise its right of first refusal), the Company entered into an Agreement and
Plan of Merger with Eller.
It is possible that OSI-NY will still seek to enforce the right of first
refusal. Metro's management believes that in the unlikely event that a court
were to uphold OSI-NY's right of first refusal, OSI-NY would then be required to
acquire Metro on the same terms as offered to Eller and the shareholders would
be in substantially the same position as they are currently. In the event of
such an acquisition by OSI-NY, Metro's management believes that the
consolidation of Metro into the Van Wagner Group would likely result in the
termination of the Van Wagner litigation, thereby requiring that the Specific
Performance Escrow be distributed pro rata to the Metro shareholders at that
time.
On June 12, 1997, the Company filed an action against Van Wagner, Richard
Schaps (the previous majority shareholder of Van Wagner), OSI and OSI-NY in the
U.S. Bankruptcy Court in the Central District of California (Orange County)
seeking damages, injunctive relief against the use of Metro's trade secrets or
proprietary information, and declaratory relief determining that the Sales
Representation Agreement is no longer binding upon Metro. On June 20, 1997,
OSI-NY filed an action against the Company in California Superior Court in
Orange County alleging breach of contract and seeking declaratory relief; this
state action was subsequently removed to the U.S. Bankruptcy Court and is likely
to be consolidated with the action brought by Metro.
9
The Company filed a motion for a preliminary injunction to prevent OSI and
OSI-NY from interfering with the sale and merger of Metro. This motion was
denied by the Bankruptcy Court. Metro filed a First Amended Complaint in
December 1997. The Court has scheduled a status conference for April 6, 1998.
Metro will seek a Court determination that the Sales Representation
Agreement has been properly terminated. If and when a satisfactory final
determination is made on this issue (or if OSI-NY agrees that it has no right of
specific performance to act as sales representative), then all but the Van
Wagner Escrow, and the Damages Escrow if not yet distributed, will be released
from escrow and distributed pro rata to the Metro shareholders; see "The Merger
- - Contingencies and Adjustments Affecting the Merger Consideration." In this
event, the litigation would then involve primarily claims by the various parties
for monetary damages.
Metro believes that regardless of whether it has sufficient grounds to
terminate the Joint Venture Agreement, Metro can not be forced to perform any
activities thereunder or to engage in business with OSI-NY since the Joint
Venture Agreement is a partnership arrangement, and any partner has the right to
withdraw from a partnership; however, this would not necessarily be
determinative of the question of whether either party is entitled to monetary
damages under the Joint Venture Agreement.
Pursuant to the terms of the Van Wagner Escrow described under "The Merger
- - Contingencies and Adjustments Affecting the Merger Consideration," if there is
a determination prior to the fifth anniversary of the Merger that OSI-NY is
entitled to only monetary damages against Metro, then all funds except the Van
Wagner Escrow (initially $5,000,000), and the Damages Escrow if not yet
distributed, will be released from escrow and distributed pro rata to the Metro
shareholders. If such a determination is not made within five years after the
Closing of the Merger, then the impact upon Eller will be quantified by
arbitration as set forth in said description of the Van Wagner Escrow, and that
amount, together with the Van Wagner Escrow, would constitute the maximum
possible reduction of the Merger Consideration. The Company is unable to
predict how much, if any, of the funds held in the Van Wagner Escrow will
ultimately be released and distributed to the Metro shareholders.
BACKGROUND OF THE MERGER
Pursuant to the Sales Representation Agreement entered into between the
Company and Van Wagner in 1993, the Company had engaged Van Wagner to act as its
exclusive sales representative for the rental of its advertising space through
March 1999, subject to automatic extension for an additional five years if
certain performance criteria are met. In April 1997, OSI, a direct competitor
of the Company, acquired Van Wagner. Following that acquisition and the
assertion by OSI's affiliate that it would assume Van Wagner's position as the
Company's sales representative, the Company terminated the Sales Representation
Agreement on the grounds that there had been various material breaches of such
agreement, which termination and breaches are the subject of the pending
litigation described above, and notified OSI and its affiliates of such.
Without a sales representative, the Company re-evaluated its business position.
The outdoor advertising industry has experienced a trend of consolidation
over the past several years. Although the Company has been steadily growing its
business base for the past five years at an annual rate of approximately 15%,
the outdoor advertising industry, and particularly other bus stop shelter
advertising companies, are expanding at a much faster rate due primarily to
acquisitions and mergers within the industry. In order to keep pace and remain
competitive within the industry, the management gave primary consideration to
two alternatives: (1) a public offering of securities to acquire sufficient
capital to expand its business base, or (2) exploring the possibilities of a
merger or acquisition with a larger established company which desires to expand
its shelter operations.
10
Due to the greater length of time and expense involved in conducting a
public offering, the Board of Directors decided to explore a potential merger or
acquisition. Management and the Board reviewed information and made analyses of
the established outdoor advertising companies that appeared to have sufficient
capital resources and a sound track record for expansion of bus stop shelter
operations through acquisitions and/or mergers. Although the Company has been
able to finance the development and construction of bus shelters, which have a
relatively low capital investment compared to the cost of full size billboards,
the Board recognized that a business engaged almost entirely in bus shelters is
at a disadvantage in attracting advertisers, and does not have the economies of
scale that an outdoor advertising company with nationwide billboard locations
would have. The Board felt that in the current economy, Metro could be an
attractive acquisition candidate for larger companies because of the synergy
possible from marketing a combination of bus shelters and billboard space in
offering display faces to advertisers.
In 1997, one of the three candidates identified by the Company, Eller,
expressed a genuine interest in a consolidation with the Company. Scott Kraft,
the President of the Company, recommended this offer to the Board of Directors
and subsequently conducted the initial negotiations of the transaction with
Eller. In the negotiations, Mr. Kraft pointed out to Eller that Metro already
has an infrastructure of municipal contracts, permits and bus shelters in place,
giving Eller an immediate base to build upon. He noted that a large investment
of time and money is required in order to obtain municipal contracts and permits
to build and operate bus shelters, and to obtain advertisers, and that Metro had
already expended funds to build its existing bus shelters and paid fees to local
governments for such contracts and permits. After further discussion and
Eller's due diligence review of the Company, including an evaluation of the
Company's bus shelter advertising marketing potential, Eller made an initial
offer to the Company in early 1997 of $41,800,000 for the purchase of 100% of
the Company's stock. On May 3, 1997, the Board of Directors of the Company
authorized management to enter into a letter of intent with Eller. Subsequent
negotiations between the Company and Eller involved, among other things, the
extent of the excluded assets, payment terms, the use of escrow accounts, and
ancillary agreements.
The initial Merger Agreement, in the form signed as of September 8, 1997,
was substantially similar to the basic terms of the amended and restated Merger
Agreement attached hereto as Exhibit A, except that under the initial Merger
Agreement, if the issue of specific performance in the Van Wagner litigation was
not resolved prior to the Closing, Eller would have delivered a promissory note
for the full amount of the Merger Consideration, backed by a bank letter of
credit, instead of the present arrangement under which Eller will be depositing
all cash in the escrow. In addition, the initial Merger Agreement provided that
if the issue of specific performance in the Van Wagner litigation was not
resolved within three years, stockholder representatives could require Eller to
either distribute the Merger Consideration except for a Van Wagner Escrow or
unwind the whole transaction, thereby returning Metro to the shareholders,
terminating any obligations of Eller to pay consideration to the Metro
shareholders and requiring Metro to pay to Eller any sums advanced to Metro
during the three year period. Also, $1,000,000 of the Merger Consideration
would have been distributed to BSON as a contribution to capital. For tax
purposes, Eller's delivery of a promissory note rather than cash would have
enabled the Metro shareholders to use installment sale treatment in recognizing
their gain, if any, on their shares of the Company; but the parties decided to
use cash instead of a promissory note and to eliminate the possible unwind and
the contribution to BSON in favor of the arbitration provisions and an increase
in shareholder consideration because such initial provisions would have entailed
issues under the securities laws that the parties felt would be burdensome and
would delay the Closing of the Merger. The respective Boards of Directors of
Eller and the Company have approved the Merger Agreement, subject to approval by
the Company's shareholders.
11
REASONS FOR THE MERGER
The Board of Directors of the Company believes that the Merger is fair to
the shareholders of the Company and has approved the Merger Agreement and
recommended it for adoption by the shareholders of the Company. In determining
to approve the Merger Agreement and to recommend that the shareholders approve
and adopt the Merger Agreement, the Board of Directors considered a number of
things, including, without limitation, the following:
(a) Presentations from, and discussions of the terms and conditions of the
Merger with, senior executive officers of the Company and
representatives of its legal counsel and its accountants;
(b) Information with respect to the financial condition, results of
operations and business of the Company, on both a historical and
prospective basis, and current industry, economic and market
conditions;
(c) The absence of a public market for the Metro Common Stock and the fact
that no dividends are paid on the Common Stock;
(d) The consideration to be paid to the Company's shareholders in the
Merger and the payment terms;
(e) The exclusion of BSON and certain assets from the Merger, the
continuing ownership of BSON, as an independent corporation, by the
shareholders of the Company, and the execution of the Consulting
Agreement between BSON and Eller;
(f) In the past five months, no other unaffiliated party has made any firm
offer to the Company to acquire the Company and, since the
announcement of the Merger in principle, no party has expressed an
interest in acquiring the Company.
FAIRNESS OF MERGER CONSIDERATION
The Company's Board of Directors believes that the Merger is fair to and in
the best interest of the holders of Common Stock and thus recommends the Merger
Agreement to the shareholders based upon the following factors:
. The opinion of management that the Merger Consideration to be received
by the Company's shareholders in the Merger was, as of September 8,
1997, fair to the shareholders from a financial point of view;
. The Board of Directors regards the initial cash consideration of more
than $35 per share of Common Stock, subject to the various reductions
and contingencies described under "Contingencies and Adjustments
Affecting the Merger Consideration" above, and the other terms of the
Merger Agreement, as fair to Metro and its shareholders.
. Shareholders will have dissenters' rights so that any shareholder who
believes that the Merger Consideration is unfair or inadequate will,
by strictly complying with Sections 1300-1302 of the California
General Corporation Law, be entitled to a judicial determination of
the fair value of the shareholder's Common Stock. See "Dissenters'
Rights."
12
THE MERGER AGREEMENT
Merger. The Merger Agreement provides that, on the Closing Date, EMS will
be merged with and into the Company. The separate corporate existence of EMS
will cease and the Company will continue as the surviving corporation (the
"Surviving Corporation"), as a wholly-owned subsidiary of Eller. The Articles
of Incorporation and the Bylaws of Metro will be the Articles of Incorporation
and Bylaws of the Surviving Corporation.
Consideration. On the Closing Date of the Merger, each share of Common
Stock, other than Common Stock in respect of which dissenters' rights have been
properly exercised, will be cancelled and extinguished and converted into the
right to receive, subject to certain adjustments and holdback provisions
described in "Contingencies and Adjustments Affecting the Merger Consideration"
above, cash in an amount equal to $41,800,000 divided by the number of
outstanding shares of Common Stock, which will be placed in escrow until the
resolution of certain litigation and other matters. See " - Distribution of the
Consideration." Each share of Common Stock held in treasury by Metro on the
Closing Date will be cancelled and extinguished. Each share of common stock of
EMS issued and outstanding immediately prior to the Closing Date automatically
will be converted into and become one share of common stock of the Surviving
Corporation.
The rights of shareholders to receive the Merger Consideration will be
nontransferable except by will and the laws of descent and distribution.
Distribution of the Consideration. Distribution of the Merger
Consideration is conditioned upon receipt by Eller of evidence that the only
remedy available to the Van Wagner Group in the litigation is monetary damages.
See " - Contingencies and Adjustments Affecting the Merger Consideration." In
such event, the Escrow Agent will distribute the Merger Consideration in the
Specific Performance Escrow to the Metro shareholders. Thereafter, upon a
final, non-appealable determination on damages in the Van Wagner litigation,
damages and any remaining litigation expenses will be paid from the Van Wagner
Escrow. Any amounts remaining in the Van Wagner Escrow after such payments will
be distributed to the existing Company shareholders (other than dissenting
shareholders). The length of time until satisfaction of the conditions
necessary for distribution is uncertain and may indefinitely delay distribution
of the Merger Consideration. Generally, however, the duration of such
litigation does not exceed two and one half years or, if there is an appeal, six
and one half years.
The Damages Escrow will be held in trust by the Escrow Agent, subject to
certain reductions, until the third anniversary of a Damages Escrow and
Disbursement Agreement to be entered into between Eller, EMS and the Company on
or prior to the Closing Date. See " - Contingencies and Adjustments Affecting
the Merger Consideration." As soon as practicable after such three-year period,
the Escrow Agent will distribute any funds remaining in the Damages Escrow, with
any undistributed interest accrued thereon, to the shareholders pro rata in
accordance with their respective ownership of Common Stock on the Closing Date.
Exchange of Stock Certificates. At the Closing Date, the stock transfer
books of the Company will be closed with respect to shares of the Common Stock
issued and outstanding immediately prior to the Closing Date and no transfers
will be made thereafter on the Company's stock transfer books.
As soon as practicable after the Closing Date, the Escrow Agent will mail
instructions to each shareholder of record regarding the surrender of Common
Stock certificates which are entitled to receive the Merger Consideration,
together with a letter of transmittal to be used for that purpose. The Escrow
Agent, after receiving from a shareholder a duly executed letter of transmittal,
together with certificates representing the shares being surrendered and any
other items specified in the letter of transmittal, will pay such shareholder,
by check, when such consideration may be disbursed, the Merger Consideration to
13
which he, she or it is entitled. Any Merger Consideration not distributed by
the Escrow Agent within nine months following the date on which such
consideration may be disbursed will be returned to Eller, subject to the
continuing rights of holders of unsurrendered certificates.
SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES REPRESENTING SHARES OF
COMMON STOCK WITH THE ENCLOSED PROXY CARD.
Representations and Warranties. The Merger Agreement contains certain
representations and warranties by the Company, Eller and EMS regarding, among
other things, the absence of conflict between transactions contemplated by the
Merger Agreement and other agreements, documents or judgments; the absence of
pending litigation which would affect the Merger; and consents of governmental
authorities. In addition, under the Merger Agreement, the Company has made
representations regarding, among other things, its capitalization; material
contracts and bus shelter contracts; real property leases; licenses and permits;
title to, and encumbrances on, properties; and tangible personal property. It
is a condition precedent to the consummation of the Merger that the
representations and warranties be true and correct in all material respects as
of the Closing Date, other than for those given as of a particular date or those
relating to capitalization for which indemnification has been specifically
provided through the Damages Escrow.
Covenants. The Merger Agreement contains certain covenants by the Company,
Eller and EMS regarding, among other things; conducting Company business in the
ordinary course until the Closing, and requiring Eller's consent prior to
incurring additional obligations or undertaking significant transactions; the
Company transferring certain assets to BSON prior to the Merger; executing the
Litigation Responsibility Agreement and Consulting Agreement. See "Interests of
Certain Persons; Related Transactions - Litigation Responsibility Agreement;"
and "Interests of Certain Persons; Related Transactions - Consulting Agreement."
Conditions to Merger. The respective obligations of the Company, Eller and
EMS to consummate the Merger are subject to the satisfaction or waiver of, among
other things, the following conditions: (a) the approval and adoption of the
Merger Agreement by the shareholders of the Company; (b) the procurement of
necessary government and third-party approvals; (c) the absence of any action or
proceeding instituted to restrain or prohibit the Merger; (d) the execution of
the Damages Escrow Agreement, the Litigation Responsibility Agreement, and the
Consulting Agreement, and, if necessary, execution of the Van Wagner Escrow
Agreement; and (e) the representations and warranties are true and correct in
all material respects as of the Closing Date, other than for those given as of a
particular date or those for which indemnification has been specifically
provided through the Damages Escrow. In addition, the obligations of the
Company to consummate the Merger are further subject to receipt of a letter from
the Securities and Exchange Commission that the Distribution does not constitute
a sale or that the staff will not recommend enforcement action if the
Distribution is effected without registration; and delivery by Eller of the
Merger Consideration.
The respective obligations of Eller and EMS to consummate the Merger are
further subject to, among other things, the satisfaction of the following
conditions, on or prior to the Closing date: (a) all representations and
warranties of the Company are true and correct as of the Closing date, other
than for those given as of a particular date or those for which indemnification
has been specifically provided through the Damages Escrow; (b) all covenants of
the Company required to be performed or complied with prior to the Closing date
will have been performed or complied with as of the Closing date; (c) all
options and stock rights of the Company will have been exercised, unless
indemnification has been specifically provided through the Damages Escrow; (d)
the parties have procured the necessary government and third party approvals,
including municipality approvals for the transfer of certain bus shelter
contracts and the approval of a lessor for the transfer of a lease; (e) counsel
for the Company has given a legal opinion; (f) BSON will have undertaken in
writing to reimburse Eller for certain employee
14
costs; and (g) Eller will have received a price adjustment schedule from the
Company detailing the expenses to be paid in reduction of the Merger
Consideration. In addition, the obligations of the Escrow Agent to distribute
the Merger Consideration are subject to the Company providing for or resolving
certain pending litigation and other matters. See " - Distribution of the
Merger Consideration."
There can be no assurance that all of the conditions to the obligations of
Eller and EMS to consummate the Merger will be satisfied. In such event, even
if the shareholders approve and adopt the Merger Agreement, it is possible that
the Merger would not be consummated and that the Merger Agreement would be
terminated.
Confidentiality; Press Releases. Eller and EMS, as one, and the Company,
as another, agree to keep non-public information regarding each other
confidential and agree that such party will only use such information regarding
the other in connection with the Merger and not disclose any of such information
other than (i) to such party's directors, officers, employees, representatives
and agents involved with the Merger transactions, (ii) to the extent such
information presently is or hereafter becomes available, on a non-confidential
basis, from a source other than the other party, and (iii) to the extent
disclosure is required by law, regulation or judicial order by any governmental
authority, in which case such party will advise the other of such requirement so
that a protective order may be sought. In addition, neither of such parties
will make any press release or public announcement in connection with the Merger
without the prior written consent of the other party or, if required by law,
without prior consultation with the other party.
Termination. The Merger Agreement may be terminated (a) at any time on or
prior to the Effective date by the mutual consent of the parties in writing; (b)
at any time prior to the Closing Date (i) by Eller and EMS giving written notice
to the Company if the Company has breached any material representation, warranty
or covenant in any material respect, for which indemnification has not been
provided through the Escrow Consideration, and the breach has continued without
cure for 30 days following notice from Eller or EMS, or if the Closing will not
have occurred on or before January 31, 1998 by reason of failure of any covenant
of the parties (unless the failure results primarily from a breach by Eller or
EMS); (ii) by the Company giving written notice to Eller and EMS if Eller or EMS
has breached any material representation, warranty or covenant in any material
respect and the breach has continued uncured for 30 days following notice from
the Company, or if the Closing will not have occurred on or before January 31,
1998 by reason of failure of any covenant of the parties (unless the failure
results primarily from a breach by the Company); or (c) at any time after the
Annual Meeting by any party in the event that the Merger Agreement fails to
receive the requisite shareholder approval.
Amendment. The parties may amend the Merger Agreement by agreement in
writing at any time prior to the Closing Date; provided that any amendment
subsequent to shareholder approval of the Merger Agreement will require approval
by the Board of Directors of each party and will not alter or change the amount
of Merger Consideration or any of the terms and conditions of the Merger
Agreement if such alteration or change would adversely affect the shareholders
of the Company.
Expenses. Whether or not the Merger is consummated, the parties will pay
their own respective legal, accounting, out-of-pocket and other expenses, except
that Eller and the Company will divide and share equally filing fees in
connection with government filings necessary to consummate the Merger. If the
Merger is consummated, the expenses of the Company will be paid by the
Disbursement Agent from the Merger Consideration.
Indemnification. The Company will indemnify Eller and its stockholders,
directors and officers against any and all liabilities and losses arising out of
or related to the execution, delivery or performance by Eller of the Interim
Sales Representation Agreement entered into by Eller and the
15
Company dated as of May 27, 1997. See "Interests of Certain Persons; Related
Transactions - Interim Sales Representation Agreement."
STOCKHOLDER REPRESENTATIVES
From the Closing Date until the appropriate distribution of all of the
Merger Consideration, certain stockholder representatives (the "Stockholder
Representatives") will act on behalf of the Company's shareholders to oversee
the effectuation of the Merger Agreement terms and the resolution of the Van
Wagner litigation. By approving and adopting the Merger Agreement, the
shareholders of the Company will be deemed to have appointed the Stockholder
Representatives as each such shareholder's true and lawful attorney in fact and
agent, for such shareholder and in such shareholder's name, (i) to receive all
notices and communications directed to such shareholder under the Merger
Agreement, any exhibit thereto and any document executed in connection
therewith, (ii) to execute and deliver any and all documents required to be
executed and delivered by such shareholder pursuant to the Merger Agreement and
any exhibit thereto in order to effect the transactions contemplated thereby,
and (iii) execute and deliver all instruments and documents of every kind
incident to the foregoing with the same effect as such shareholder could do
personally.
The initial Stockholder Representatives will be Allan L. Ross, M.D., the
Company's current Chairman of the Board; Scott A. Kraft, the Company's current
President and Chief Executive Officer; and Robert C. Lamb, the Company's current
General Manager. The Stockholder Representatives will act pursuant to a
majority vote of the Stockholder Representatives. All actions of the
Stockholder Representatives will be valid and effective for all purposes if
signed by any two Stockholder Representatives.
The Stockholder Representatives will (i) manage the conduct of the Van
Wagner litigation, subject to consultation with Eller and Metro, (ii) approve
all costs, expenditures and settlements relating to the Van Wagner litigation
prior to payment, (iii) enter into the escrow agreements necessary, including
the Specific Performance Escrow, Damages Escrow and Van Wagner Escrow
substantially in accordance with the terms and conditions set forth in
"Contingencies and Adjustments Affecting the Merger Consideration" above, (iv)
verify claims made by Eller for payment out of the escrows, which claims are
subject to arbitration if disputed by the Stockholder Representatives and
unresolved with Eller, (v) manage any arbitration or any other dispute or matter
on behalf of the shareholders which is necessary for carrying out the terms and
provisions of the Merger Agreement and (vi) provide annual reports to the Metro
shareholders regarding the status of the Van Wagner litigation and the escrows.
The shareholders entitled to receive a majority of the Merger Consideration
may remove the Stockholder Representatives at any time. If a Stockholder
Representative should die, resign, refuse to serve, become incapacitated or be
removed by the shareholders, his successor will be Mark R. Boileau; and if he or
another Stockholder Representative should die, resign, refuse to serve, become
incapacitated or be removed by the shareholders, the next successor will be
Michael W. Slater. Thereafter, the shareholders entitled to receive a majority
of the Merger Consideration will appoint each successor within 21 days of the
death, resignation, refusal to serve, incapacitation or removal of a Stockholder
Representative. Such successor shall be either a shareholder or otherwise
acceptable to Eller. If the shareholders fail to appoint a successor within
such 21 day period, then Eller will have the right to appoint the successor from
among the shareholders. The appointment of a successor Stockholder
Representative according to any manner permitted above will be final and binding
upon all of the shareholders.
The Stockholder Representatives will not be liable for any error in
judgment, unless it is the result of their gross negligence or willful
misconduct.
16
All expenses incurred by the Stockholder Representatives in connection with
their duties under the Merger Agreement and the exhibits thereto will be paid
out of the Merger Consideration and, by approving the Merger Agreement, the
Metro shareholders will agree to indemnify the Stockholder Representatives
against all claims, liabilities and costs for anything done or omitted by them
in the performance of the Merger Agreement or any exhibit thereto, except as a
result of their own gross negligence or willful misconduct.
TRANSFER OF ASSETS TO BSON AND DISTRIBUTION OF BSON STOCK
Prior to the Closing Date, and subject to approval and adoption of the
Merger Agreement by the Company's shareholders, the Company will transfer the
following assets to BSON: (a) the capital stock of Bay Area Transit Shelters,
Inc. ("BATS") owned by Metro; (b) Monterey/Salinas Transit Agreement by and
between Monterey/Salinas Transit and a joint venture consisting of Metro and
BATS; (c) Metro's pending lawsuits with the cities of Lake Forest, Laguna Hills
and Victorville regarding violations of First Amendment Rights, and any
financial settlements derived therefrom (See "Interests of Certain Persons;
Related Transactions - Litigation Responsibility Agreement"); (d) bus shelter
contracts with the City of North Las Vegas, the City of Las Vegas and Clark
County; (e) Regional Transportation commission, Joyce & Associates and BSON Bus
Wrap Agreement by and between Metro and Regional Transportation Commission; (f)
accounts receivable through the Closing Date; (g) Media Asia Agreement by and
between Metro and Media Asia; (h) lease for postage meter by and between Pitney
Bowes Credit Corporation and Metro; (i) lease for burglar alarm by and between
ADT and Metro; (j) certain vehicles, computers and software, and office
equipment and furniture; (k) the 536 bus shelters of Metro which are leased by
BSON. For further information regarding BSON, see "Bustop Shelters of Nevada,
Inc. (BSON)."
In addition, prior to the Closing Date, and subject to approval and
adoption of the Merger Agreement by the Company's shareholders, the Company will
declare a pro rata dividend on shares of Common Stock of the Company pursuant to
which the Company will distribute to the Company's shareholders shares of common
stock of BSON so that BSON will become a corporation separate and distinct from,
and no longer a subsidiary of, the Company. The shareholders of the Company
will become the shareholders of BSON. BSON currently has 2,500 shares of common
stock authorized, issued and outstanding. It is contemplated that prior to the
Distribution the Articles of Incorporation of BSON will be amended to authorize
1,500,000 shares of common stock and that the Board of BSON will then issue a
sufficient number of shares of BSON common stock to provide for a dividend on
each share of Metro Common Stock of one share of BSON common stock. The
Articles of Incorporation of BSON, as they will be amended prior to the
Distribution, are attached hereto as Exhibit C. The common stock of BSON is
subject to various restrictions on transferability. See "Special Considerations
Regarding Merger and Related Transactions - Risks Associated With BSON -
Illiquid Stock of BSON." BSON will not participate in the Merger, other than as
described in this Proxy Statement. Neither the transfer of assets nor the
Distribution are part of the Merger Consideration.
The current officers and directors of Metro are Allan L. Ross, M.D.,
Chairman of the Board and a director; Scott A. Kraft, President and Chief
Executive Officer; William M. Slater, Secretary and a director; and Mark R.
Boileau, director. Prior to the Distribution, and subject to shareholder
approval of the nominees for the Board Directors set forth in PROPOSAL TWO, it
is anticipated that Metro, as sole shareholder of BSON, will elect the directors
of Metro to be the directors of BSON and that the directors of BSON will appoint
the officers of Metro to be the officers of BSON. The Articles of Incorporation
and Bylaws of BSON, as they will be amended prior to the Distribution, are
attached hereto as Exhibits C and D.
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REGULATORY APPROVALS
The parties to the Merger will take appropriate action with respect to any
requisite approvals or other action of any court, administrative agency or
commission or other government authority or instrumentality, whose consent,
approval, order or authorization, or with whom registration, declaration or
filing of the Merger Agreement is required to consummate the Merger, subject to
the provisions of the Merger Agreement. The Merger Agreement provides that the
obligation of Eller and EMS to consummate the Merger is conditioned upon Eller
receiving any necessary approvals or orders from the United States Bankruptcy
Court for the Central District with respect to the Merger. Such approvals or
orders have not yet been sought.
DISSENTERS' RIGHTS
Pursuant to Chapter 13 of the California General Corporation Law ("GCL"),
holders of shares of Company Common Stock are entitled to rights of dissent and
appraisal of the value of their shares of Common Stock in connection with the
Merger. The failure of a dissenting shareholder to follow the appropriate
procedures may result in the termination or waiver of such dissenters' rights.
Pursuant to the terms of the Merger Agreement, if holders of Common Stock
of the Company have exercised dissenters' rights under Chapter 13 of the GCL in
connection with the Merger, any Dissenting Shares (as defined below) will not be
converted into the right to receive the Merger Consideration, but will become
entitled to such consideration as may be determined to be due with respect to
such Dissenting Shares pursuant to the laws of the State of California.
If the Merger is approved by the required vote of the shareholders and is
not abandoned or terminated, each shareholder who has not voted in favor of the
Merger and who follows the procedures set forth in Chapter 13 will be entitled
to have his shares of Common Stock purchased by the Company for cash at their
fair market value. The fair market value of shares of Common Stock will be
determined as of the date before the first announcement of the terms of the
proposed Merger, excluding any appreciation or depreciation in consequence of
the proposed Merger. The shares of Common Stock with respect to which holders
have perfected their purchase demand in accordance with Chapter 13 and have not
effectively withdrawn or lost such dissenters' rights are referred to in this
Proxy Statement as the "Dissenting Shares."
Within 10 days after approval of the Merger by the shareholders, the
Company must mail a notice of such approval (the "Approval Notice") to all
shareholders who have not voted in favor of approval and adoption of the Merger
Agreement, together with a statement of the price determined by the Company to
represent the fair market value of the applicable Dissenting Shares (determined
in accordance with the immediately preceding paragraph), a brief description of
the procedures to be followed in order for the shareholder to pursue his or her
dissenters' rights, including the date by which action must be taken, and a copy
of Sections 1300-1304 of the GCL. The statement of price by the Company
constitutes an offer by the Company to purchase all Dissenting Shares at the
stated amount. Only a holder of record of shares of Common Stock of the Company
on the Record Date (or his duly appointed representative) is entitled to assert
a purchase demand for the shares registered in that holder's name. The
Company's determination of the fair market value of the Dissenting Shares may be
more or less than the Merger Consideration.
A shareholder electing to exercise dissenters' rights must demand in
writing from the Company the purchase of his shares of Common Stock and payment
to the shareholder of their fair market value and must submit the certificate(s)
representing the Dissenting Shares to the Company for endorsement as Dissenting
Shares. A holder who elects to exercise dissenters' rights should mail or
deliver his or her written demand to the Company at 15265 Alton Parkway, Suite
100, Irvine, California 92618, directed
18
to the attention of William M. Slater, Secretary. The demand should specify the
holder's name and mailing address, the number of shares of Common Stock owned by
such shareholder and state that such holder is demanding purchase of his shares
and payment of their fair market value, and must also contain a statement as to
what the shareholder claims to be the fair market value of such shares,
determined in accordance with the second preceding paragraph. Such statement of
the fair market value of the shares constitutes an offer by the shareholder to
sell the shares to the Company at that price. The demand must be received by
the Company not later than 30 days after the date the Approval Notice was mailed
to the shareholder. The certificate(s) representing the Dissenting Shares must
be submitted for endorsement within 30 days after the date of the Approval
Notice.
If the Company and the shareholder agree that the shares are Dissenting
Shares and agree upon the purchase price of the shares, the dissenting
shareholder is entitled to the agreed upon price with interest thereon at the
legal rate on judgements from the date of such agreement. Payment for the
Dissenting Shares must be made within 30 days after the later of the date of
such agreement or the date on which all statutory and contractual conditions to
the Merger are satisfied, and is subject to surrender to the Company of the
certificate(s) for the Dissenting Shares.
If the Company denies that the shares are Dissenting Shares, or if the
Company and the shareholder fail to agree upon the fair market value of the
shares, then within six months after the date the Approval Notice was mailed to
shareholders, any shareholder who has made a valid written purchase demand and
who has not voted in favor of approval and adoption of the Merger Agreement may
file a complaint in the Superior Court of Orange County (the "Court") requesting
a determination as to whether the shares are Dissenting Shares or as to the fair
market value of such holder's shares of Common Stock, or both, or may intervene
in any pending action brought by any other shareholder.
In a trial of the action, the Court will determine first whether the shares
are Dissenting Shares, if their status is an issue. If the fair market value of
the Dissenting Shares is an issue, the Court will determine, or appoint one or
more impartial appraisers to determine, the fair market value of the shares.
If any holder of shares of Common Stock who demands the purchase of his
shares under Chapter 13 of the GCL fails to perfect, or effectively withdraws or
loses his or her right to such purchase, the shares of such holder will be
converted into a right to receive the Merger Consideration multiplied by the
number of shares of Common Stock held by such person in accordance with the
Merger Agreement.
The foregoing summary does not purport to be a complete statement of the
provisions of Chapter 13 of the GCL and is qualified in its entirety by
reference to such Chapter, a copy of which is attached hereto as Exhibit B.
Shareholders who are considering dissenting should consult legal counsel.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
General. The following is a summary of the material federal income tax
considerations of the Merger and the Distribution that are generally applicable
to holders of Common Stock. The discussion does not address all of the federal
income tax consequences that may be relevant to a holder in light of such
holder's particular circumstances or to holders subject to special rules, such
as certain financial institutions, insurance companies, dealers in securities,
foreign corporations, nonresident alien individuals and persons who do not hold
their Common Stock as a capital asset and persons who are subject to the
alternative minimum tax. Moreover, the effect of any applicable state, local or
foreign tax laws is not discussed.
The discussion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), including the Taxpayer Relief Act of 1997 (the "1997 Tax Act"),
Treasury regulations, Internal Revenue Service ("IRS") rulings and
pronouncements and judicial decisions all in effect as of the date hereof, all
19
of which are subject to change at any time, and any such change may be applied
retroactively in a manner that could adversely affect a holder of the Common
Stock. The Company has not sought and will not seek any rulings from the IRS
with respect to the positions of the Company discussed below. Consequently, the
IRS is not precluded from taking a different position concerning the tax
consequences of the Merger and the Distribution.
IN VIEW OF THE SUMMARY AND LIMITED NATURE OF THE DISCUSSION, PROSPECTIVE
INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION
OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR SITUATIONS AS WELL
AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS.
Merger Treated as a Sale of Common Stock. The Merger will be treated as a
sale of the holder's Common Stock to Eller in exchange for the holder's share of
the Merger Consideration (as it may be adjusted as of the Closing). The Merger
Consideration, although it will all likely be all held in escrow, will give rise
to the recognition of gain or loss to the extent of the difference between the
holder's share of the Merger Consideration and the adjusted basis of the
holder's Common Stock. After the holder's taxable year in which the gain or
loss on the Merger has been recognized, any subsequent downward adjustment to
the Merger Consideration (e.g., by withdrawals from the Damages Escrow or the
Van Wagner Escrow) would represent a capital loss to a holder to the extent of
the holder's share thereof in the holder's taxable year in which the adjustment
occurs.
Under the 1997 Tax Act, capital gains of an individual holder who has held
the Common Stock for more than one year, but not more than 18 months, will be
subject to a maximum federal income tax rate of 28% and, if the Common Stock has
been held by such holder for more than 18 months, a maximum rate of 20%.
Capital gains of a corporate holder are subject to tax at normal corporate
federal income tax rates.
The Code limits the deductibility of capital losses. For corporate
taxpayers, capital losses may be deducted only to the extent of capital gains;
and unused capital losses may, in general, be carried back three years and
carried forward five years. For individual taxpayers, capital losses are
deductible in each taxable year as an offset against capital gains and as an
ordinary deduction for up to an additional $3,000; and any unused capital losses
may be carried forward indefinitely.
Interest; Backup Withholding. Interest received out of the escrows will be
taxable as ordinary income to the recipient.
A holder receiving such interest may be subject to backup withholding at a
rate of 31% with respect to interest (and original issue discount) unless such
holder (i) is a corporation or other exempt recipient and, when required,
demonstrates that fact, or (ii) provides, when required, a correct taxpayer
identification number, certifies that backup withholding is not in effect and
otherwise complies with applicable requirements of the backup withholding rules.
Backup withholding is not an additional tax; any amounts so withheld are
creditable against the holder's federal income tax, provided the required
information is provided to the IRS.
The Distribution of BSON Stock. As a result of the application of either
section 311(b) of the Code or new section 355(e) of the Code, added by the Act,
Metro will be required to recognize gain on the Distribution to the extent of
the excess, if any, of the value of the BSON Stock over its adjusted basis.
Based on the appraisal of BSON made by Peck & Lopez and the determination of
Peck & Lopez of the adjusted basis of the BSON Stock prior to the Distribution,
little or no such excess should exist and, accordingly, little or no gain is
anticipated to be recognized.
20
It is unclear whether the Distribution (a) will be subject to
nonrecognition treatment to the holders of Common Stock by reason of the
fulfillment of the requirements of section 355 of the Code or (b) subject to
treatment as taxable because such requirements have not been met. In the case
of (a), no gain or income would be recognized to the holder on the receipt of
BSON Stock; and the adjusted basis of the Common Stock at the time of the
Distribution would be apportioned between the holder's Common Stock and the BSON
Stock received in the Distribution, based on their relative fair market values.
Under case (b), in view of the determination of Peck & Lopez that Metro has no
accumulated earnings and profits and is not anticipated to have any current
earnings and profits through the Closing, the Distribution should not give rise
to dividend income to the holder. The holder would, however, be required to
reduce the adjusted basis of the holder's Common Stock to the extent of the
value of such BSON Stock received in the Distribution (and recognize gain if and
to the extent that the value of the BSON Stock exceeded the adjusted basis of
the holder's Common Stock). The adjusted basis of the BSON Stock to the holder
would be its value at that time.
In both case (a) and case (b), whichever is applicable, the adjusted basis
of the holder's Common Stock will be reduced for the purpose of computing gain
on the Merger.
In light of the fact that the Distribution is not likely to give rise to a
significant immediate tax cost to a holder, the uncertainty of the issue of
establishing the satisfaction of the strict requirements of section 355 of the
Code permitting nonrecognition treatment for certain spinoff transactions, and
the cost to Metro of attempting to do so, Metro does not intend to report the
Distribution as qualifying under case (a). It is therefore recommended that
each shareholder report the Distribution as falling under case (b).
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of accounting
whereby the purchase price will be allocated among the Company's assets and
liabilities based on the fair value of the assets acquired and liabilities
assumed.
BUSINESS OF THE COMPANY
GENERAL
The Company, a California corporation, was incorporated in 1984 and
subsequently reincorporated in 1987. On January 22, 1992, the Company
voluntarily entered into bankruptcy proceedings. On January 7, 1994, the
Company emerged from bankruptcy under entirely new management.
The Company is primarily in the business of renting advertising space on
panels located in bus stop shelters. Each bus stop shelter ("shelter") consists
of a covered bus stop bench and two advertising panels protected by acrylic.
The shelters are owned, installed and maintained by the Company and are
currently located in approximately 60 municipalities throughout Southern
California.
The Company also rents advertising space in shelters located in Clark
County, Nevada, including the City of Las Vegas, through BSON, its wholly-owned
subsidiary.
BACKGROUND/PRIOR BANKRUPTCY
The Company was incorporated in California in 1984 and subsequently
reincorporated in 1987. Until early in 1992, the Company was controlled and
managed by persons no longer associated with the Company ("Prior Management").
Under Prior Management, the Company was in the business of
21
designing, manufacturing, selling, installing and maintaining shelters and
renting advertising space in such shelters. In particular, however, until the
end of December 1991, the Company's primary business and source of revenues was
the "sale" of shelters to unaffiliated investors. The shelters were "sold" to
investors by the Company, generally for $10,000 per shelter, and then were
"leased" back by the Company. The Company, in turn, agreed to install and
maintain the shelters on behalf of the owner/investors and to pay the
owner/investors a fixed monthly rental. Prior Management, however, was unable
to derive sufficient advertising revenues from the shelters it leased to make
the promised monthly rent payments to the owner/investors of the shelters. (As
of December 1991, the Company generated approximately $200,000 per month from
shelter advertising revenues, while its monthly obligation to its shelter
owner/investors was approximately $1,300,000.) Accordingly, the Company
attempted to cover the cash shortfall through increased sales of additional
shelters (many of which were never installed).
In 1991, the Securities and Exchange Commission (the "Commission")
commenced an investigation of Prior Management and the Company for the alleged
sale of unregistered securities and other possible causes of action. The
Commission alleged that the sale and leaseback of the shelters constituted an
unlawful sale of securities. In January 1992, the Commission obtained an
injunction in the United States District Court for the Central District of
California against Prior Management to prevent the sale of additional shelters.
In conjunction with the Commission's investigation, the Federal Bureau of
Investigation commenced an investigation of Prior Management.
On January 22, 1992, the Company and Continental Shelters, Inc., a
California corporation then owned and controlled by Prior Management, filed a
voluntary petition before the United States Bankruptcy Court for the Central
District of California (the "Bankruptcy Court") for relief under Chapter 11 of
Title 11 of the United States Code (the "Bankruptcy Code"). On January 29,
1992, Prior Management resigned as officers of the Company. On February 1,
1992, the Company entered into a Consent to Entry of Permanent Injunction with
the Commission which, in general, permanently restrained and enjoined the
Company and its officers from engaging in activities in violation of Section 5
of the Securities Act of 1933, as amended.
On November 24, 1993, the Bankruptcy Court entered an order confirming the
Company's Sixth Amended Joint Plan of Reorganization (the "Plan"), and on
January 7, 1994, the Company emerged from bankruptcy. The following is a
summary of some of the major aspects of the Plan:
(a) All of the capital stock of the Company outstanding prior to the
filing of the bankruptcy petition (i.e., the capital stock owned by
Prior Management and a small group of other investors) was cancelled.
(b) All of the "leases" with the owner/investors of the shelters were
cancelled, the Company acquired ownership of all of the "leased"
shelters, and the claims of the shelter owner/investors (approximately
$105,000,000 in the aggregate) were exchanged for a total of 820,578
shares of the Company's Common Stock.
(c) Prior to the bankruptcy petition, BSON operated as an independent
company that leased bus stop shelters from the Company. The Plan
stated that BSON owed the Company in excess of $2,500,000, that BSON
had minimal asset value, and that BSON's primary value would be as a
going concern owned by the Company. Accordingly, the Plan permitted
the Company to acquire 88% of the outstanding capital stock of BSON
from Prior Management in exchange for token consideration ($22.00).
The Company also obtained the right to acquire the remaining 12% of
BSON's outstanding capital stock from the other BSON stockholders in
exchange for 46,000 shares of Common Stock.
22
The Company acquired the remaining 12% interest in BSON in November
1995 in exchange for 5,004 shares of Common Stock.
In addition to the foregoing, under the Plan (i) the Company's President
and most of the current members of the Board of Directors were appointed, (ii)
the Company's current credit facility with Dr. Allan Ross, a director of the
Company, was authorized and implemented, and (iii) a total of 242 additional
shares of Common Stock were issued to the Company's other creditors. All
currently issued and outstanding shares of Common Stock were issued pursuant to
the Plan. In accordance with the Plan, the Company also acquired the remaining
assets of Continental Shelters, Inc. (consisting primarily of shelters and
shelter parts) in exchange for token consideration ($85.00). Continental
Shelters, Inc. had been in the business of manufacturing and installing shelters
exclusively for the Company until the Company ceased ordering shelters from
Continental Shelters, Inc. in early 1992. Continental Shelters, Inc. no longer
conducts any business and has been dissolved as of June 13, 1996.
While Prior Management's focus was on the sale of shelters to
owner/investors, the Company's new management recognized that, if properly
operated, the sale of advertising space on bus stop shelter advertising panels
could be a viable and profitable business. Accordingly, new management changed
the Company's focus from the sale of shelters to (i) increasing advertising
revenues, (ii) decreasing the Company's operating costs, and (iii) converting
the Company's un-installed shelters into revenue generating assets.
OUTDOOR ADVERTISING
Historically, outdoor advertising has consisted primarily of large painted
billboards and a vast array of smaller billboards and placards. Recently,
legislation has been enacted throughout the United States to reduce the number
and size of outdoor billboards. Many municipalities throughout the United
States, including in particular Fountain Valley, Tustin, Mission Viejo, Lake
Forest, Newport Beach and other municipalities within the Company's current
target market area, have prohibited or severely limited the use of outdoor
billboards. As a result of the restrictive legislation, advertisers have been
looking for outdoor advertising alternatives to the billboard. One such
alternative is advertising on bus stop shelters.
While the use of billboards and other forms of outdoor advertising is being
prohibited or restricted in many localities, many municipalities actively
encourage private shelter owners and operators to install shelters in their
localities. As described below, because the shelter owners build, install,
maintain and insure bus stop shelters at their own cost, the municipalities that
allow such bus stop shelters to be installed by private companies are relieved
of the costs related to providing convenient and well-maintained bus stop
shelters for their residents. In addition to the money saved by obtaining bus
stop shelters from private companies at no cost to the municipalities, the
municipalities also profit by receiving a fee from the shelter owners and/or a
percentage of the advertising revenues generated by the shelters. As a result
of the restrictive legislation affecting traditional forms of outdoor
advertising and the benefits derived by municipalities from the installation of
bus stop shelters by private companies, advertising on bus stop shelters has
been rapidly increasing in recent years.
OPERATIONS
The Company's bus stop shelters are located at the bus stops established by
cities, counties, and other municipalities along the regular bus routes in such
municipalities and a small number are located at shopping malls and other
private locations. Each shelter contains two or four advertising panels. Some
of the shelters and advertising panels are illuminated at night. The Company
leases the space in each of the panels to advertisers for an amount of the rent
that varies depending on the location of the panel and on the rating of the
shelter. Each shelter is rated based on the municipality in which the shelter
is located, the location of the shelter within the municipality, and on its
visibility and the estimated number
23
of patrons likely to pass the shelter. The higher rated shelters command higher
rental prices. In addition, advertising panels that are illuminated at night
are more attractive to advertisers and typically receive higher rentals. The
Company currently controls and operates more than 2,600 shelters in
approximately 60 municipalities in Southern California.
Advertising space is rented to national advertisers whose products are
nationally known (including such household names as Coca Cola, IBM, McDonald's,
AT&T, etc.) and to local advertisers. Local advertisers typically rent panels
at selected locations (i.e., near their place of business), whereas national
advertisers typically rent advertising space based on rating points. Under the
rating points system, a national advertiser will specify the minimum number of
rating points its advertisements must meet, without designating the location of
the advertisements. Accordingly, for national advertisers, provided that the
national advertiser's overall rating point requirements are satisfied, the
Company selects the shelters in which the posters will be placed. National
advertisers have the right to audit the placement of their advertisements to
confirm compliance with their rating point requirement. The Company keeps track
of the location of each advertisement and the rating of each shelter location
through its computer system. When necessary or desirable, the Company can, with
their permission, move a national advertiser's poster from one shelter to
another shelter, provided that the rating points requirements continue to be
met.
The advertising posters are provided to the Company by the advertiser at
the advertiser's cost. Other than placing the advertisements in the Company's
shelters, the Company is not otherwise involved in the form or content of the
advertisements. Occasionally, the Company will, however, assist smaller, local
advertisers with the development and preparation of advertising posters.
The Company is exploring additional means to increase per shelter
advertising revenues. One method for increasing per shelter revenues is to
increase the shelter's rating points, which can be accomplished by illuminating
the advertising panels. Accordingly, the Company is installing more lighted
panels in its shelters. Another potential method of increasing advertising
revenues is to rent advertising space on shelters in increments of days or even
hours and to charge a different price for the panel depending on the day or hour
of the day. For example, an advertising panel at a busy commercial intersection
could be rented for a certain price on weekends and holidays, for a higher price
during business days, and for an even higher price during the rush hours of such
business days. In addition, the advertisement could be changed to suit the
advertiser or the time period. For example, during business days the panel
could advertise a business product, while on weekends or evenings, the panel
could advertise recreational or leisure-time opportunities or products.
Because of the time required to change an advertising panel and the
employee expense related to changing panels, it is not currently practical or
cost effective to change panels daily or even hourly. In order to overcome this
limitation, the Company has developed and built an automatic, remote controlled
panel changer (the "Remote Panel Changer"). The Remote Panel Changer contains a
number of advertising posters that can be scrolled through the display area of
the panel by means of a small motor located in the panel. The motor can be
actuated to quickly scroll to any of the advertising posters contained on the
scroll at any time. Furthermore, the Remote Panel Changer can be controlled
from the Company's offices via a telephone line. The Company is currently field
testing seven of the Remote Panel Changers.
Marketing. In January 1993, the Company entered into a Sales
Representation Agreement, which was amended as of June 1994, with Van Wagner.
Pursuant to the Sales Representation Agreement, the Company appointed Van Wagner
as its exclusive representative for leasing advertising space to national and
regional advertisers. In exchange, Van Wagner received a variable percentage of
net sales generated by Van Wagner until 1995, when the Sales Representation
Agreement provided for a
24
flat rate commission of 25% of net sales generated by Van Wagner. The Sales
Representation Agreement provided the Company with both a regional and national
sales force. The Sales Representation Agreement's term would have expired in
March 1999, subject to an automatic five-year renewal. The Company had the
right to not renew the Sales Representation Agreement if Van Wagner did not
generate certain levels of net sales. Van Wagner had 90 days to exercise a
right of first refusal to purchase the assets of the Company if the Company
desired to sell the assets to a third party.
In addition, as of November 18, 1994, the Company and Van Wagner entered
into a joint venture agreement (the "Joint Venture") for the purposes of (i)
seeking additional franchises and/or licenses for bus shelters from
municipalities throughout California and the United States (both through direct
negotiations and by purchasing franchises and/or licenses from competitors) and
(ii) managing, developing and operating all such bus stop shelters and selling
advertising space in connection therewith. The Joint Venture conducted business
under the name "VW-MDA Bus Shelter Co." The Company and Van Wagner each own an
equal one-half interest in all of the assets and property owned by the Joint
Venture. In January, 1995, the Joint Venture obtained a contract with the City
of La Habra in which the Joint Venture currently has 19 bus stop shelters. The
Joint Venture's joint venture agreement provided for a fifteen-year term,
subject to earlier termination.
In April 1997, OSI, a New York corporation and competitor of the Company,
announced that it was acquiring Van Wagner. The Company subsequently terminated
the Sales Representation Agreement and Joint Venture based on various alleged
breaches and on its conclusion that OSI and its affiliates had conflicts of
interest.
The termination of the Sales Agreement and other issues are the subject of
pending litigation. See "The Merger - Van Wagner Litigation and Disputes."
Due to the effective lack of a sales representative, the Company has
entered into an Interim Sales Representation Agreement dated May 27, 1997,
whereby the Company has engaged Eller as its representative for leasing
advertising space to national and regional advertisers. Pursuant to the
agreement, Eller has assigned a Sales Manager to provide exclusive sales and
marketing services to Metro and to report solely to, and be subject to the
direction and control of, Metro's chief executive officer. In exchange for
Eller's services, Metro has agreed to pay to Eller a 10% commission on the gross
amount of sales placed by Eller through an advertising agency and a 15%
commission on the gross amount of sales placed by Eller directly with the
advertiser and without an agency commission. The agreement will terminate upon
the consummation of the Merger, within 60 days of written notice that a
condition precedent to the Merger has failed and the Merger will not be
consummated, or in no event later than November 27, 1997. Pursuant to an
amendment to the Interim Sales Representation Agreement dated December 29, 1997,
the parties are continuing to perform under the terms of the agreement until the
earlier of a Closing of the Merger or March 31, 1998.
The Company also markets shelter advertising space to local advertisers
through an in-house salesperson.
OPERATIONS IN ABSENCE OF MERGER
Currently, the Company's advertising sales revenues are generated almost
exclusively by Eller under the Interim Sales Representation Agreement pursuant
to which Eller serves as the Company's sales representative. See "Interests of
Certain Persons; Related Transactions - Interim Sales Representation Agreement."
The Company has only one employee assisting in securing advertising sales. In
the absence of a Merger, it is likely that Eller, a competitor of the Company,
would terminate its representation of Metro. The Company would then have to
engage a new sales representative. The Company's previous sales representative,
Van Wagner, has been acquired by OSI, another competitor of
25
the Company, and is therefore undesirable. See "- Van Wagner Litigation and
Disputes." The Company is not aware of other potential sales representatives as
prominent as Eller or OSI with which the Company could contract. Alternatively,
the Company could attempt to develop its own national sales force, but it is
believed that such an effort would require at least two years and the securing
of additional financing, which would not be readily available. Therefore, in
the absence of a Merger, the Company believes that initially it would experience
financial results substantially below those of previous years.
CONTRACTS WITH MUNICIPALITIES
The right to install and the obligation to maintain shelters in any
municipality is normally contained in a contract ("Municipal Contracts") entered
into between the municipality and the shelter advertising company or a permit
("Municipal Permits") granted by a municipality to a shelter advertising
company. Under a Municipal Contract, the shelter operator's rights and
obligations are defined by the written contract, whereas the municipality's
ordinances define the operator's rights and obligations under a Municipal
Permit.
Municipalities typically grant Municipal Contracts on the basis of
responses to requests for proposals ("RFPs") that are distributed by the
municipalities to competing shelter owners. The RFPs contain the minimum terms
pursuant to which a municipality is willing to grant a Municipal Contract. Each
competitor is required to submit its bid for the right to install and maintain
shelters in the municipality. Municipal Contracts then are awarded to the
bidder that submits the bid most suitable for the municipality. In considering
RFPs, municipalities evaluate, among other things, the fee that the shelter
operator is willing to pay the municipality, the shelter operator's ability to
maintain the shelter, the design and aesthetic appeal of the shelter proposed to
be installed, and the shelter operator's ability to rent the advertising panels.
The term of Municipal Contracts ordinarily is for a period of five years,
although the term can range from one to ten years. The contracts either grant a
shelter operator the exclusive right to install and maintain bus stop shelters
throughout the municipality or grant the operator rights to certain specified
locations. The Municipal Contracts require the shelter operator, at the
operator's cost and expense, to maintain and repair the shelters, to regularly
clean the shelters, to provide and maintain liability insurance, to include the
municipalities as a named insured on such insurance policy, and various other
terms ordinarily contained in government contracts, such as compliance with
equal opportunity laws and worker safety laws. All Municipal Contracts require
the shelter operator to pay the municipality a fee for the privilege of
maintaining shelters in the municipality. These fees are either fixed minimum
monthly payments, variable payments based on the gross advertising revenues
received by the shelter operator from the shelters located in the municipality,
or a combination of a fixed minimum payment and a percentage payment for
advertising revenues.
The Municipal Contracts usually require the bus stop shelter operator to
post a performance bond or to pledge a certificate of deposit to the
municipality in an amount sufficient to cover the expected cost of removing any
installed shelters should the shelter owners fail to do so upon the termination
of the Municipal Contracts. The bonds or certificates of deposit are required
to be returned to the shelter operator when the shelters are removed from the
municipalities. As of February 28, 1997, the Company had made cash bond
deposits or had pledged certificates of deposit to municipalities in an
aggregate amount of $637,200.
Municipal Permits are typically granted to bus stop shelter operators based
on a perceived need by the municipality for a shelter at a particular location
and other factors, such as the ability of the shelter operator to build and
maintain the shelter. Municipal Permits typically last only six months, but are
automatically renewed unless notice is given prior to such renewal. Each
Municipal Permit grants the shelter operator the right to install and maintain
one shelter at a specified location within the
26
municipality. As of February 28, 1997, the Company held Municipal Permits in
approximately 12 municipalities in Southern California. The Company has held
permits in some municipalities for more than ten years and believes that it
generally will be able to continue to renew the Municipal Permits because of the
continuing need for shelters in these municipalities.
On November 15, 1995, the Company filed a complaint against the City of
Victorville as well as two of its City Council members and one member of the
staff. The Company alleges that the City of Victorville objected to certain
advertising by the UFCW Union relating to a labor dispute with a food
supermarket chain located within the City of Victorville. When the Company did
not remove this advertising at the request of the City of Victorville, the
Company claims that the City of Victorville retaliated by canceling the
Company's contract to operate the shelters. The Company has requested damages
in excess of $1,000,000 as well as punitive damages, attorneys' fees and court
costs. See "Legal Matters - Litigation with Municipalities."
The Company believes that if municipalities are allowed to regulate the
political content of the Company's advertising, then its business will be
adversely affected. The Company makes its advertising signs available to
national and local advertisers on a non-discriminatory basis in a fashion
similar to newspaper, magazine and broadcast advertising. Although the Company
has strived to work with municipalities to avoid advertising that is offensive
in nature, should the content of its advertising, especially advertising that is
political in nature, become regulated by the municipalities in which it places
bus stop shelters, the Company's ability to provide effective advertising may be
compromised.
The Company believes that advertising companies generally avoid placing
advertising in a media that may become the target of negative publicity. As a
result of the Company's litigation with Victorville, advertisers may choose to
use other advertising media to avoid being entangled in or associated with a
First Amendment conflict.
Furthermore, in entering bids to try to obtain the right to place
additional bus shelters, the Company must now disclose that for the first time
it has had a contract canceled by a municipality because Victorville is the
first municipality to ever have such a dispute with the Company. Unless the
Company is successful in overcoming the negative aspects of a contract
cancellation, the success of the Company's future bids for contracts may be
negatively impacted.
COMPETITION
The Company faces intense competition for both (i) Municipal Contracts and
Municipal Permits, and (ii) advertising to be placed in the installed shelters.
The Company's principal competitors for Municipal Contracts and Municipal
Permits in Southern California are Outdoor Systems Advertising, Inc. and Clear
Channel Communications, Inc. Both corporations have significantly greater
financial and marketing resources and name recognition than the Company. The
Company also competes for Municipal Contracts with many other smaller shelter
owner/operators.
The Company's reputation has been damaged by the ongoing litigation with
certain municipalities, principally the ongoing Victorville litigation, and
competitors of the Company using this factor against the Company in responding
to RFPs. The Company believes that it may, in fact, have recently lost certain
Municipal Contracts due to this situation. No assurance can be given that the
Company will be able to successfully compete for Municipal Contracts in the
future due to this currently ongoing litigation with municipalities.
27
The advertising industry is highly competitive, and competition for
advertisers is intense. The Company competes not only with other shelter
owner/operators for advertising revenues, but also with all other forms of
advertising, including outdoor billboards, television, radio, and direct mail.
The Company's ability to compete effectively for national advertisers is
dependent on the abilities of Eller, the Company's national advertising
representative. See "- Operations - Marketing" above.
EMPLOYEES
As of September 10, 1997, the Company employed 26 full-time and part-time
persons. The Company believes that its employee relations are good.
PROPERTIES
The Company's principal executive offices are located at 15265 Alton
Parkway, Suite 100, Irvine, California, where it leases 4,169 square feet of
office space. The lease expires June 30, 1998. However, if the covenants under
the lease are met in a timely fashion, the Company has the option to extend the
lease term until June 30, 2003. The Company currently pays base rent of
approximately $3,174 per month plus its share of certain expenses related to the
operation of the business center in which the office is located.
The Company has also entered into a month-to-month real property lease for
1,903 square feet of storage space at 15273 Alton Parkway, Irvine, California,
which requires payments of approximately $950 per month.
The Company also leases 13,500 square feet of storage space at 16221
Construction Circle East, Irvine, California. Such lease expires October 31,
1998 and obligates the Company to make payments of $1,780 per month.
BUSTOP SHELTERS OF NEVADA, INC. (BSON)
HISTORY
The Company currently conducts business in Clark County, Nevada, including
the City of Las Vegas, through BSON, its wholly-owned subsidiary. BSON, a
Nevada corporation, was incorporated on April 28, 1987. Until March 1992, all
of the Company's capital stock was owned by Prior Management (88%) and by
certain others, including Dr. Ross, a director of the Company (12%). In March
1992, in connection with the Company's bankruptcy proceedings, the Company
acquired the 88% of the outstanding shares of capital stock of BSON then owned
by Prior Management. Also in connection with the Company's bankruptcy
proceedings, the Company obtained the right, exercisable at the Company's
option, to acquire the remaining outstanding shares of BSON in exchange for
46,000 shares of Common Stock. Subsequently, in November 1995, the Company was
able to renegotiate the terms of its acquisition of the remaining 12% of BSON
and completed such acquisition for 5,004 shares of Common Stock.
OPERATIONS
Pursuant to three Municipal Contracts, BSON has the right to install and
maintain bus stop shelters in the State of Nevada in (i) Clark County, (ii) the
City of Las Vegas, including on the "Las Vegas Strip," and (iii) the City of
North Las Vegas. As of February 28, 1997, BSON had installed 554 shelters in
Nevada. Other than 60 shelters owned by BSON, BSON leases its shelters from the
Company. Except for one other shelter operator in Clark County, the Company
believes that BSON
28
currently is the exclusive provider of shelters in these three municipalities.
The Clark County agreement expires in February, 2001 and is renewable by BSON,
with the consent of Clark County, for two additional five-year periods. The
Municipal Contract with Las Vegas expired in July 1996, and the Company has
successfully negotiated a new contract with the City of Las Vegas to extend such
contract for an additional 15 years. The Municipal Contract with North Las
Vegas expires in February 2000.
BSON is managed by a general manager who reports to Scott Kraft, President
of both the Company and BSON. In addition, an operations manager and sales
manager assist in the operation of BSON and report to the President. As of
September 10, 1997, BSON employed 21 full time persons and one part time person.
Approximately 80% of BSON's advertising revenues were generated by Van
Wagner under the Company's Sales Representation Agreement with Van Wagner. The
in-house sales staff of BSON accounted for the remaining 20% of advertising
sales. Currently, Eller is providing BSON with sales representation and
generates approximately 80% of BSON's advertising revenues.
POST-MERGER OPERATIONS
Subject to shareholder approval of the Merger, and prior to consummation of
the Merger, the Company will transfer certain of its assets to BSON and will
distribute the stock of BSON pro rata to the shareholders of the Company. See
"The Merger - Transfer of Assets to BSON and Distribution of BSON Stock." BSON
will then operate as an independent company. See "The Merger - Transfer of
Assets to BSON and Distribution of BSON Stock." The BSON common stock is
subject to a right of first refusal and various restrictions on transferability.
See "Special Considerations Regarding Merger and Related Transactions - Risks
Associated With BSON - Illiquid Stock of BSON." Prior to the Distribution, and
subject to shareholder approval of the nominees for the Board Directors set
forth in PROPOSAL TWO, it is anticipated that the Company, as sole shareholder
of BSON, will elect the directors of the Company to be the directors of BSON and
that the directors of BSON will appoint the officers of the Company to be the
officers of BSON. The current officers and directors of the Company are Allan
L. Ross, M.D., Chairman of the Board and a director; Scott A. Kraft, President
and Chief Executive Officer; William M. Slater, Secretary and a director; and
Mark R. Boileau, director. It is contemplated that the Articles of
Incorporation and Bylaws of BSON will be amended prior to the Distribution. The
Articles of Incorporation and Bylaws of BSON as they will be amended are
attached hereto as Exhibits C and D.
Upon consummation of the Merger and termination of the sales representation
obligations of Eller to the Company and BSON, BSON initially will rely solely on
its in-house sales staff to generate advertising sales.
Pro forma financial statements of BSON and Metro are attached hereto in the
Financial Statements.
PROPERTIES
BSON has entered into a real property lease for approximately 3,820 square
feet of office and warehouse in Las Vegas, Nevada. This lease commenced on
March 1, 1995 and ends on February 29, 2000, and BSON has an option to extend
the term of the lease for five years. BSON currently pays base rent of $1,910
per month plus real property taxes, utilities insurance expenses, a share of
common area expenses and maintenance, repairs and alternations. This lease also
provides for cost of living increases of up to 3% a year beginning in the third
year of the lease.
29
BSON's headquarters are located at 5425 South Valley View, Suite 103, Las
Vegas, Nevada 89118, (702) 893-6456.
BUSINESS OF ELLER AND EMS
ELLER
Eller is a holding company and conducts all of its operations through its
subsidiaries, which collectively operate under the name "Eller Media Company."
Eller is also a subsidiary of Clear Channel Communications, Inc. ("Clear
Channel"), which is a diversified media company that currently owns or programs
112 radio stations and 18 television stations in 28 domestic markets, as well as
owns substantial equity interests in other significant domestic and
international broadcasting companies.
Eller is one of the largest outdoor advertising companies in the United
States based on its total U.S. advertising display inventory of approximately
50,000 display faces. Eller provides outdoor advertising services in 15 major
metropolitan markets located in five operating regions: California, Texas, the
Midwest, the Southeast and the Southwest. Eller currently has both outdoor
advertising and broadcasting assets in twelve domestic markets. The markets in
which Eller operates represent approximately 22% of the total U.S. population.
Eller operates the following types of outdoor advertising billboards and
displays:
(a) Bulletins generally are 14 feet high by 48 feet wide (672 square feet
wide) or 20 feet high by 60 feet wide (1,200 square feet) and consist
of panels on which advertising copy is displayed. Bulletin
advertising copy is either printed with computer-generated graphics on
a single sheet of vinyl that is "wrapped" around the structure, or is
hand painted and attached to the outdoor advertising structure.
Bulletins also include "wallscapes" that are painted on vinyl surfaces
or directly in the sides of buildings, typically four stories or less.
Because of their greater impact and higher cost, bulletins are usually
located on major highways and freeways. In addition, wallscapes are
located on major freeways, commuter and tourist routes and in downtown
business districts.
(b) Premier Panels(TM) generally are 12 feet high by 25 feet wide (300
square feet) and have vinyl wrapped around the display face. Premier
Panels(TM) are built on superior 30-sheet poster locations that
deliver a "bulletin-like" display. Eller also offers unique Premier
Plus(TM) panels, 25 feet high by 25 feet wide (625 square feet), that
consist of two stacked 30-sheet posters which are converted into one
larger individual display face.
(c) 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. Thirty-sheet posters are
typically concentrated on major surface arteries.
(d) 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. Most 8-sheet posters, because of their smaller size,
are concentrated on city streets targeting pedestrian traffic.
(e) Transit displays are lithographed or silk-screened paper sheets
located on bus and commuter train exteriors, commuter rail terminals,
interior train cars, bus shelters and
30
subway platforms. Eller's transit customers include the San Francisco
Bay Area Rapid Transit (BART) and the Metropolitan Rail (METRA) in
Chicago.
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. Bus shelters are usually
constructed, owned and maintained by the outdoor service provider under revenue-
sharing arrangements with an municipality or transit authority. Eller owns or
has permanent easements on relatively few parcels of real property that serve as
the sites for its outdoor displays. Eller's remaining approximately 18,43
billboard sites are leased.
Eller also maintains a fully-staffed sales and marketing office in New York
which services national outdoor advertising accounts and supports Eller's local
sales force in each market. Eller has a diversified customer base in its
outdoor advertising segment of over 3,000 advertisers and advertising agency
clients. The size and geographic diversity of Eller's markets allow it to
attract national advertisers, often by packaging displays in several of its
markets in a single contract to allow a national advertiser to simplify its
purchasing process and present its message in several markets. National
advertisers generally seek wide exposure in major markets and therefore tend to
make larger purchases. Eller competes for national advertisers primarily on the
basis of price, location of displays, availability and service.
As of December 31, 1996, Eller employed approximately 973 people in its
outdoor advertising segment, of whom, approximately 192 were primarily engaged
in sales and marketing, 588 were engaged in painting, bill positing and
construction and maintenance of displays and the balance were employed in
financial, public affairs, real estate, administrative and other capacities.
Eller was incorporated in Delaware in 1995 and its principal executive
office is located at 2850 E. Camelback Road, Suite 300, Phoenix, Arizona 85016,
(602) 381-5702.
EMS
EMS is a wholly-owned subsidiary of Eller and was incorporated in
California on August 29, 1997 for the purpose of effectuating the Merger. On
the Closing Date, EMS will merge with and into the Company and its separate
corporate existence will cease. The principal executive office of EMS is
located at 2850 E. Camelback Road, Suite 300, Phoenix, Arizona 85016, (602) 381-
5702.
SPECIAL CONSIDERATIONS REGARDING MERGER AND RELATED TRANSACTIONS
NO FAIRNESS OPINION
The Merger Agreement contemplates that shareholders will exchange their
Company Common Stock for cash consideration. The Board of Directors has
determined that the Merger Consideration is fair to the shareholders of the
Company. The Board of Directors did not consult with a financial advisor or
investment banker with respect to the adequacy of the Merger Consideration, nor
did it receive any professional opinion concerning the fairness of such
consideration. The absence of a public market for Company Common Stock causes
difficulty in valuing the Company. There can be no assurance that a
professional or market valuation of the Company would not determine the Merger
Consideration to be inadequate or unfair to the shareholders of the Company.
31
MERGER CONSIDERATION IN ESCROW
Pursuant to the Merger Agreement, Eller will deliver the Merger
Consideration in cash to the Escrow Agent on the Closing Date. The Escrow Agent
will disburse the Merger Consideration in the Specific Performance Escrow, if
any, to the Company's shareholders only after the Stockholder Representatives
have delivered written evidence acceptable to Eller in its sole reasonable
discretion that the only remedy available to the Van Wagner Group is monetary
damages. See "The Merger -Contingencies and Adjustments Affecting the Merger
Consideration." It can take years before litigation is resolved, and any
subsequent use of the appeals process can further lengthen the time until such a
resolution. There can be no assurance that the Condition will be satisfied at
any time in the near future. Furthermore, until such time, the Merger
Consideration will be used to pay the costs, expenses and, ultimately, any
damages resulting from the Van Wagner litigation. There can be no assurance of
how much, if any, of the Merger Consideration in the Specific Performance Escrow
will remain for disbursement when the Condition is satisfied. In addition,
after the Closing Date of the Merger, the shareholders will be entitled to
receive the Merger Consideration only and will not share in any appreciation in
the value of the Surviving Corporation.
DAMAGES ESCROW
The Escrow Agent will hold $5,000,000 of the Merger Consideration for a
period of three years as a separate escrow called the Damages Escrow. Out of
the Damages Escrow, the Escrow Agent will disburse to Eller, from time to time,
any amounts owing to Eller for monetary damages, if any, suffered by Eller with
respect to (i) any breach of a representation or warranty by, or covenant or
agreement of, the Company set forth in the Merger Agreement, (ii) any litigation
pending against the Company as of the Closing date other than litigation between
the Company and the Van Wagner Group (iii) any undisclosed rights requiring the
issuance of capital stock of the Company, (iv) the loss of the ability to
utilize any net operating carry forwards of the Company resulting from the
transfer of assets from the Company to BSON, (v) fees under bus shelter
contracts resulting from the Merger or (vi) the termination of bus shelter
contracts. Only after the third anniversary of an Escrow and Disbursement
Agreement to be entered into between Eller, EMS and the Company on or prior to
the Closing Date, and after payment of any sums then owing to Eller, will the
Escrow Agent distribute the remaining funds of the Damages Escrow, if any, pro
rata to the shareholders. There can be no assurance as to how much, if any, of
the Damages Escrow will remain for distribution to the shareholders after
payments to Eller.
VAN WAGNER ESCROW
The Escrow Agent will hold up to $5,000,000 of the Merger Consideration in
a separate escrow called the Van Wagner Escrow. The Van Wagner Escrow will
consist of an amount equal to the sum of $5,000,000, less the Merger
Consideration adjustment for legal fees and costs incurred by the Company in
connection with the litigation with the Van Wagner Group through the Closing
Date. Upon a final, non-appealable determination on damages in the litigation
with the Van Wagner Group, the Escrow Agent will pay such damages and any
remaining litigation expenses out of the Van Wagner Escrow and subsequently
distribute any amounts remaining in the Van Wagner Escrow pro rata to the
shareholders. There can be no assurance that, after payments of any damages and
litigation expenses, any of the Van Wagner Escrow will remain for distribution
to the shareholders.
NET REDUCTIONS
At the Closing, the aggregate amount of the Merger Consideration will be
reduced by an amount equal to the sum of (i) the Company's aggregate net
accounts receivable balance as of the Closing Date of the Merger, (ii) the
amount by which the Company's liabilities as of the Closing Date exceed
$2,343,741.64, (iii) any accounts receivable written off by the Company after
June 30, 1997 and through
32
the Closing Date, (iv) amounts equal to the cost of certain obligations incurred
by the Company up until the Closing Date (the aggregate amount of clauses (iv)
and (vi) not to exceed $400,000), (v) the amounts to be paid as bonuses to
Metro's employees, (vi) an amount equal to the legal fees and costs incurred by
Metro through the Closing Date, (vi) the amounts Metro is obligated to pay for
federal and state taxes related to employee bonuses and the exercise of any
Metro stock options; and, subsequent to the Closing, will be (i) further reduced
by the costs and expenses incurred by the Stockholder Representatives, (ii)
further reduced by any damages awarded against the Company as a result of the
Van Wagner litigation or payable in settlement of such litigation and (iii)
increased by the amount, if any, recovered by the Company in connection with the
Van Wagner litigation (all such reductions and increases together called the Net
Reductions). Since the Net Reductions are not capped or limited, there can be
no assurance, after accounting for all Net Reductions, how much, if any, of the
Merger Consideration will remain for distribution to the shareholders.
REGULATORY APPROVALS
The Merger Agreement provides that the obligation of Eller and EMS to
consummate the Merger is conditioned upon Eller receiving appropriate approvals
or orders from the United States Bankruptcy Court for the Central District with
respect to the Merger. There can be no assurance that the court will approve or
take any other required action with respect to the Merger, and if approval is
received or action is taken, that such approval or action will not be
conditioned upon matters that would cause the parties to abandon the Merger. In
addition, there can be no assurance that an action will not be brought
challenging such approval or action, or if such a challenge is made, with
respect to the result thereof.
THIRD PARTY CONSENTS
The Merger Agreement provides that as a condition to closing certain
municipalities and Hanano-Hanano, a landlord leasing certain property to the
Company, will each have given its respective consent to the transfer of the
respective bus shelter contract or lease, as the case may be, from the Company
to Eller in accordance with the terms of the Merger. There can be no assurance
that such third parties will promptly consent, or consent at all, to the
transfer of its respective contract or lease, or take any other required action
with respect to the Merger, and if consent is received or action is taken, that
such consent or action will not be conditioned upon matters that would cause the
parties to abandon the Merger. In addition, if certain municipalities fail to
renew or terminate bus shelter contracts prior to the third anniversary from the
date of the Damages Escrow and Disbursement Agreement to be entered into between
the parties, then, subject to offsetting such lost advertising space with the
addition of new advertising space, Eller is entitled to distributions of certain
fixed amounts out of the Damages Escrow. There can be no assurance that such
municipalities will renew or continue the bus shelter contracts with the
Surviving Corporation, or that any additional advertising space will be obtained
by the Surviving Corporation so as to offset any such lost advertising space.
RISKS ASSOCIATED WITH BSON
Limited Operating History; Smaller Operations. Subject to shareholder
approval of the Merger, prior to the Closing Date, the Company will distribute
the capital stock of BSON to its shareholders as a dividend on the Common Stock.
Thereafter, BSON will operate as an independent company. BSON has a limited
history of independent operations. Prior to becoming a wholly-owned subsidiary
of the Company in 1995, BSON operated as an independent company which leased bus
stop shelters from the Company. At the time of the Company's bankruptcy, BSON
owed the Company in excess of $2,000,000.
33
BSON does not have a recent independent operating history. There can be no
assurance that BSON will operate profitably, if at all, as an independent
company. BSON has substantially less assets and resources than the Company
currently has. BSON has installed and maintains, and subsequent to the Merger
will own, only approximately 21 percent of the shelters currently owned by the
Company. BSON currently operates in only three counties in Nevada, which
represents a significantly smaller market than Southern California. In
addition, the Merger requires the termination of all contracts between the
Company and Van Wagner. During fiscal 1996, through an advertising and
marketing agreement, Van Wagner effected sales on behalf of the Company which
accounted for 80 percent of the Company's advertising revenues, with the
remaining 20 percent being effected by in-house staff. As an independent
company, BSON initially will rely completely on sales effected by in-house
staff. There can be no assurance that the in-house sales force will effectively
generate advertising revenues, if at all.
Moreover, it is anticipated that the management of the Company will become
the management of BSON. The management of the Company has focused most of its
resources and time into developing bus stop shelter advertising in Southern
California. There can no assurance that management will be able to effectively
apply its experience and skills to the Nevada market or any other market into
which BSON expands.
Need for Additional Funding. BSON currently operates as a subsidiary of
Metro. BSON has historically received certain funding from Metro. Although
BSON will receive certain assets from Metro prior to the Merger, it will not
receive any cash or monetary consideration for working capital from Metro or
from the Merger. After the spinoff of BSON and the consummation of the Merger,
BSON will have sufficient capital to fund its initial operations, but it is
anticipated that BSON will require additional funding for its near-term capital
needs. BSON does not currently have a source of financing in place and there
can be no assurance that financing will be available on terms acceptable to
BSON, or that BSON will be able to obtain financing at all. If BSON is not able
to obtain financing on acceptable terms, or at all, its ability to operate the
bus stop shelters and generate advertising revenues will be materially adversely
affected.
Concentration of Operations. Currently, all of BSON's operations are
located in Nevada, and BSON derives 100 percent of its revenues from shelters in
the Las Vegas area. Subsequent to the Merger, and accounting for the addition
of any revenues from its association with BATS in Northern California, BSON's
results of operations will remain substantially dependent upon the general
economic conditions of Nevada, and of Las Vegas in particular.
Issuance of Stock. Subject to shareholder approval of the Merger
Agreement, the Articles of Incorporation of BSON will be amended. The Articles
of Incorporation of BSON, as to be amended, are attached hereto as Exhibit C.
The Amended Articles of Incorporation of BSON will authorize the issuance of up
to 1,500,000 shares of common stock. The issuance of additional common stock of
BSON could have a substantial dilutive effect on existing shareholders.
Pursuant to an employment agreement entered into by and between BSON and Scott
Kraft dated September 29, 1997, Mr. Kraft will receive a stock option to
purchase 35,000 shares of BSON common stock at $3.10 per share, which option is
exercisable at any time within twelve months following the expiration of such
employment contract. Other than upon exercise of Mr. Kraft's stock option, BSON
does not currently intend to issue additional common stock or additional
preferred stock.
No Market for Stock. There has never been and there does not now exist any
public market for the Common Stock of BSON. The capital stock of BSON is not
listed on any securities exchange or quoted or traded on any over-the-counter
market. No broker maintains a position in or deals in any shares of BSON, and
no bid or asked prices are quoted for any shares of BSON in any newspaper,
electronic bulletin board or other medium. Furthermore, the BSON common stock
will be subject to
34
substantial transfer restrictions, ensuring that a public market for BSON common
stock will not develop. See "- Illiquid Stock of BSON."
Illiquid Stock of BSON. Pursuant to the Distribution, shareholders will
receive common stock of BSON. A public market for the stock of BSON does not
exist and there are restrictions on the transferability of the stock to prevent
a public market from developing prior to the time such securities are registered
under the Securities Act. Prior to the time BSON becomes a reporting company
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
Articles of Incorporation of BSON will not permit a transfer of BSON common
stock, except for (a) transfers to BSON; (b) transfers to existing BSON
shareholders; (c) transfers by gift, bequest or operation of the laws of
descent; (d) transfers to an entity unaffiliated with BSON pursuant to a merger,
consolidation, stock for stock exchange, or similar transaction involving BSON;
(e) transfers by a partnership to its partners; (f) transfers which would be
exempt from the registration requirements of Section 5 of the Securities Act by
virtue of the exemption provided by Section 4(2) of the Securities Act if the
transferor were the issuer of the BSON common stock, provided that the
transferee is an "accredited investor" within the meaning of Rule 501(a) under
the Securities Act; or (g) transfers pursuant to an effective registration under
the Securities Act simultaneous with a registration of the BSON Common Stock
under Section 12 of the Exchange Act. The transfers described in (b), (c), (e)
and (f) will be permitted only if the BSON Common Stock in the hands of the
transferee remain subject to the same restrictions on transfer as they were when
held by the transferor. In addition, the transfers described in (b) and (f)
will be further subject to the right of first refusal described below. The
foregoing restrictions will expire as to all holders on the date BSON becomes a
reporting company.
Right of First Refusal. The common stock of BSON will be subject to a
right of first refusal. Before any shareholder ("selling shareholder") can sell
or transfer any shares of BSON common stock (other than pursuant to a
transaction described under items (a), (c), (d) or (e) of "Illiquid Stock of
BSON" above), the selling shareholder must give a written offer to the Company
stating the number of shares to be sold or transferred and the price, terms and
conditions of the proposed sale or transfer. The Company will then have the
right to purchase all or any number of the shares offered at the price and on
the terms as stated in the offer. If the Company does not elect to purchase
such shares, the selling shareholder may sell or transfer such shares to the
third party at the price and on the terms of the original offer, subject to the
restrictions referred to above. The stock certificates evidencing the BSON
common stock will bear legends conspicuously noting that the shares are subject
to such restrictions.
No SEC Registration. BSON does not currently contemplate the registration
of its stock. Even if BSON registered its stock, there can be no assurance that
a public market will ever develop, or if developed, that it will continue. In
addition, BSON does not currently contemplate a public offering of its stock.
In the event BSON does desire to engage in a public offering of its stock, the
ability of BSON to complete a public offering will depend upon its then current
financial condition and results of operations and market conditions at the time
such an offering is planned. Many of the factors which will influence BSON's
ability to conduct a public offering are outside of the control of BSON. BSON
may have difficulty in obtaining registration of its common stock for a public
offering in certain states where the securities or "blue sky" laws provide wide
discretion to state securities regulators to review the "merits" of an offering.
The failure to obtain registration of an initial public offering in one or more
states may make it more difficult or impossible for holders to sell their stock
if they should desire to do so. In addition, there are substantial restrictions
on the sale or transfer of such common stock imposed by federal and state
securities laws. There can be no assurance that holders will be able to sell
their BSON stock at any price, if at all. Even if a public offering of BSON
common stock occurs, there can be no assurance that a liquid public market will
result.
35
BSON Not a Reporting Company. Because BSON's total assets are expected to
have a value of less than $10,000,000, BSON will not be required to register
under Section 12 of the Exchange Act. The Company has registered under Section
12 of the Exchange Act and, therefore, is obligated to file annual, quarterly
and periodic reports with the Securities and Exchange Commission ("SEC").
Although BSON will not be required to file reports with the SEC subsequent to
the Distribution, BSON intends to distribute annual reports to its shareholders.
Value of Stock. As a result of the distribution of BSON common stock, the
shareholders of the Company will directly own the common stock of BSON.
Although a valuation of BSON as an independent company is being done for
purposes of determining tax obligations, such valuation will be based on
numerous assumptions and conditions. Furthermore, the valuation of BSON as a
company is not necessarily indicative of the value of BSON's common stock.
There is no prediction as to the present or future value, if any, of BSON common
stock.
Litigation Responsibility Agreement. As a condition precedent to the
Merger, Metro and BSON will enter into a Litigation Responsibility Agreement
pursuant to which Metro will assign to BSON, and BSON will assume from Metro,
Metro's rights and obligations under three lawsuits currently pending against
certain municipalities. In the event a counterclaim or cross-claim is asserted
in one of the assigned lawsuits, Metro has the option to assume the rights and
obligations under such lawsuit whereupon BSON will relinquish all rights and
obligations under such lawsuit. There can be no assurance that counterclaims or
cross-claims will not be asserted or that, if asserted, such claims will not
result in obligations which have a material adverse effect on the operations of
BSON. Further, if a counterclaim or cross-claim is asserted, there can be no
assurance that Eller will not exercise its option to assume the rights and
obligations of such lawsuit and succeed to monetary damages, if any, recovered
in such lawsuit.
Consulting Agreement. As an inducement to the Company to enter into the
Merger Agreement, Eller will enter into a Consulting Agreement with BSON on or
prior to Closing, pursuant to which BSON will provide Eller with such consulting
services as Eller from time to time will reasonably request in connection with
Eller's efforts to expand its bus shelter advertising business within the
greater Los Angeles metropolitan area, and in connection with procuring
contracts and permits for that purpose. In exchange, Eller will pay to BSON 50%
of gross revenues in excess of certain amounts, which payments do not begin
until March 31, 2002. There can be no assurance that the delayed compensation
for BSON's services will not have a material adverse effect on the operations of
BSON. In addition, there can be no assurance that Eller will not, prior to
paying its obligations under the Consulting Agreement, experience a decline in
its financial condition or business operations such that it will lack sufficient
financial resources to pay BSON for services provided.
36
PROPOSAL TWO
------------
ELECTION OF DIRECTORS
The Company's Bylaws provide that the number of directors of the
Corporation will not be less than three nor more than five, the exact number of
directors being fixed at three. Directors are elected at each Annual Meeting
and hold office until their successors are elected and qualified.
The persons named below, all of whom are current members of the Company's
Board of Directors, have been nominated for election as directors at the Annual
Meeting to serve until consummation of the Merger or until the next Annual
Meeting of Shareholders and until their successors are duly elected and
qualified. Directors are elected by a plurality of the votes present in person
or represented by proxy and entitled to vote at the Annual Meeting. Shares
represented by executed proxies will be voted, if authority to do so is not
withheld, for the election of the three nominees named below.
In the event that any of the nominees should be unable to serve as a
director, it is intended that the proxyholders will vote for the election of
such substitute nominee, if any, as will be designated by the Board of
Directors. The Board of Directors has no reason to believe that any nominees
named below will be unable to serve if elected.
The Board of Directors recommends a vote FOR each of the named nominees.
The names of the nominees are:
Allan L. Ross, M.D. William M. Slater Mark R. Boileau
OFFICERS AND DIRECTORS
The following table sets forth the names of the officers of the Company and
the persons to be nominated by the Board of Directors for election as directors
of the Company:
NAME AGE POSITION
Allan L. Ross, M.D. 48 Director and Chairman of the Board
Scott A. Kraft 38 Chief Executive Officer and President
William M. Slater 60 Director and Secretary
Mark R. Boileau 33 Director
Allan L. Ross, M.D., has been the Chairman of the Board of Directors of the
Company since January 1994. Dr. Ross has been a practicing anesthesiologist at
the Sharp Chula Vista Medical Center since 1985 and has been Chairman of the
Department of Anesthesiology since 1987. From 1990 to 1992, Dr. Ross served as
the director of the surgical intensive care unit. Dr. Ross founded the cardiac
anesthesia program in 1987 and the obstetrical anesthesia program in 1992. Dr.
Ross is the founder of Anesthesiology Medical Consultants of San Diego, a
medical corporation of anesthesiologists serving the San Diego area, and has
served as President since its inception in 1991.
Scott A. Kraft has been the Chief Executive Officer and President of the
Company since January 1993 and its Chief Operating Officer since February 1992.
Prior to joining the Company, Mr. Kraft served as an engineer and manager at
Ferranti Aerospace from July 1987 to February 1992.
37
William M. Slater has been a director of the Company since March 1994 and
Secretary of the Company since July 1994. Mr. Slater is also currently a
business analyst with Geneva, Inc. Mr. Slater was a real estate broker
associated with CB Commercial Real Estate Group, Inc. from December 1992 to
November 1996. From May 1989 to December 1992, he was a mortgage broker with
American Mortgage Bankers.
Mark R. Boileau has been a director of the Company since January 1994. Mr.
Boileau has been an engineering manager at Curtis PMC since October 1992. From
June 1987 to October 1992, he was an engineering manager at Marconi Dynamics.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1996, the Board of Directors held
five meetings and acted by unanimous written consent on four occasions. Each
director attended at least 75% of such meetings. The Board of Directors has not
appointed any committees.
38
PROPOSAL THREE
--------------
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
The Board of Directors has appointed Peck & Lopez as the independent
auditors of the Company for the fiscal year ending December 31, 1997, subject to
ratification by the shareholders. A representative of Peck & Lopez will be
available at the Annual Meeting of Shareholders and will be given the
opportunity to make a statement, if desired, and to respond to appropriate
questions.
Shareholder ratification of the selection of Peck & Lopez as the Company's
independent auditors is not required by the Company's bylaws or otherwise.
However, the Company is submitting the selection of Peck & Lopez to the
shareholders for ratification as a matter of good corporate practice. If the
shareholders fail to ratify the selection, the Company will reconsider whether
or not to retain that firm. Even if the selection is ratified, the Company in
its discretion may direct the appointment of different independent auditors at
any time during the year if the Board of Directors determines that such a change
would be in the best interests of the Company and its shareholders.
The affirmative vote of the holders of a majority of the shares present or
represented at the Annual Meeting and entitled to vote will be required to
ratify the selection of Peck & Lopez. The Board of Directors recommends a vote
in favor of ratification of Peck & Lopez as the Company's independent
accountants.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto which begin on page F-1.
GENERAL
From January 22, 1992 until January 7, 1994, the Company was in bankruptcy.
In addition, since 1992, management of the Company has been implementing a
revised business plan.
During fiscal 1993, the Company's principal focus was on merely maintaining
the Company's existence, on resolving the various bankruptcy claims, and on
confirming the Company's plan of reorganization. During fiscal 1994, the
Company commenced its transition from a company operating under the supervision
of the Bankruptcy Court to a company operating pursuant to a revised business
plan. Accordingly, during fiscal 1994, the Company reduced its work force,
revised its marketing agreement with Van Wagner, entered into the Joint Venture
agreement with Van Wagner, and turned its focus to renting and maintaining the
advertising space available at the Company's shelters. Other than changing or
entering into agreements with Van Wagner, the Company continued the
implementation of its business plan throughout fiscal 1996. The Company
believes that the new business plan will, in the long turn, increase the
Company's revenues, reduce its overall operating costs, and increase the
Company's presence in additional geographic markets. Accordingly, the enclosed
financial statements may not necessarily be indicative of the Company's expected
on-going operating results under its revised business plan.
RESULTS OF OPERATIONS
Year ended December 31, 1996 compared to December 31, 1995
Revenues during fiscal 1995 and fiscal 1996 were derived from advertising
fees received by the Company from the rental of the advertising panels located
in the Company's installed shelters. Revenues for fiscal 1996 exceeded fiscal
1995 revenues by $134,058, or 2%, due to the implementation of management's new
business plan, which plan was adopted in 1992 and has been incrementally
implemented during fiscal 1995 and fiscal 1996. In accordance with the new
business plan, the Company's objectives were to increase (i) the number of
installed shelters, (ii) the occupancy rate for advertising in the panels of
each shelter, and (iii) the average rental rate paid per advertising panel. The
increased revenues in fiscal 1996 were the result of an increase in the per
panel rental rate during fiscal 1996 over fiscal 1995.
The Company's total costs of sales in fiscal 1996 increased by $52,677, or
1%, over 1995. Cost of sales as a percentage of revenues increased slightly
from 64% in fiscal 1995 to 66% in fiscal 1996. Advertising commissions
increased in fiscal 1996 as the result of increased advertising sales. Since
the Company pays commissions based on a percentage of advertising sales, such
commissions will increase as advertising sales increase. Gross profit percentage
for fiscal 1996 and 1995 remained stable at 34% of sales.
Installation and maintenance expenses for fiscal 1996 increased 20%
compared to the prior fiscal year due primarily to new bus shelter
installations. City advertising fees decreased by 19% in fiscal 1996, due to a
decrease in fees to cities on a percentage basis. In addition, the Company had
discovered certain overpayments in prior years to the city of Clark County,
which were taken as credits in the current year. Since the Company pays fees to
cities and municipalities for the right to maintain shelters in the cities and
municipalities, such fees will increase as advertising revenues increase.
40
The Joint Venture obtained its first city contract in 1995. However, only
minimal revenues were received in fiscal 1995 as the shelter installations were
not completed until late in the year. Revenues for fiscal 1996 were also
minimal due to the lack of market recognition by advertising clients. On April
14, 1997, the Company learned that OSI, a competitor of the Company, had entered
into an agreement to acquire Van Wagner. The Company immediately notified such
parties that the acquisition would cause a termination of the Joint Venture. In
late May and early June of 1997, OSI indicated that Outdoor Systems, Inc.-New
York ("OSI-NY") intended to assume the obligations of Van Wagner under the Joint
Venture. On June 12, 1997, the Company filed a complaint in Bankruptcy Court
against Van Wagner, OSI, OSI-NY and Richard Schaps alleging, among other things,
breach of contract of the Joint Venture and seeking termination of the Joint
Venture. On June 20, 1997, OSI-NY filed a complaint against the Company in the
Superior Court of Orange County alleging a breach of contract and seeking
declaratory relief. The continued existence of the Joint Venture depends upon
the outcome of such pending litigation. See "The Merger - Van Wagner Litigation
and Disputes." The revenues generated from the Joint Venture during fiscal 1996
amounted to $87,538.
The Company's total operating expenses increased in fiscal 1996 by
$165,115. The primary reasons for this increase was an increase in professional
fees of $96,342 and an increase in wages and related expenses of $31,749.
In fiscal 1996, the Company incurred $224,407 of interest expense compared
to $180,301 in fiscal 1995. The increase in interest expense is primarily
attributable to an increase in debt.
For the fiscal year ended December 31, 1996, the Company recorded a net
loss of $41,091 compared to a net income of $79,997 for fiscal 1995. This
represents a change of $121,088 in fiscal 1996 over fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company's current liabilities exceeded the
Company's current assets by $393,456. This represents an increase of $117,669
in fiscal 1996 over fiscal 1995. Approximately $412,155 of the current
liability consists of indebtedness owed to Dr. Ross under the Plan. On January
6, 1994, Dr. Allan Ross entered into a loan agreement with the Company (the
"Loan Agreement") pursuant to which Dr. Ross provided the Company with a line of
credit of up to $1,200,000 and made available to the Company irrevocable letters
of credit in an amount up to $300,000 (together, the "Credit Facility"). See
"Interests of Certain Persons; Related Transactions - Credit Facility and
Loans." Dr. Ross is a Director and principal shareholder of the Company. The
Company and Dr. Ross restructured this current liability in order to allow the
Company the opportunity to implement its new business plan. Under this
restructured agreement with Dr. Ross, the Company believes that it can fund the
remaining portion of its working capital deficit through borrowings under the
unused portion of its Credit Facility and through cash generated from
operations. However, no assurances can be given that the Company will be able
to continue to fund its current working capital deficit. Failure to satisfy its
vendors and other creditors could result in the loss of business with such
vendors/creditors, could cause a change in the terms the Company receives from
such vendors/creditors, and could result in the initiation of bankruptcy
proceedings against the Company.
During fiscal 1996, the Company had a positive cash flow from operating
activities of $880,621. This represents an increase of $245,555 in fiscal 1996
over fiscal 1995. This was primarily due to the increase in cash received from
advertising clients. In addition, the Company used a total of $561,967 to fund
its purchases of new property and equipment and for other investing activities.
41
At December 31, 1996, the Company's outstanding accounts receivable
decreased the amount of accounts receivable outstanding as of December 31, 1995
by $388,055. The decrease is due to an increase in collections.
Pursuant to the Plan, the Company borrowed $800,000 under the Credit
Facility in January 1994. Under the Credit Facility, the Company was required
to make monthly payments of principal and interest and did not do so until the
Company restructured the Credit Facility effective September 1, 1995. Since
September 1, 1995, the Company has made all required payments of $20,000 per
month and is current under the terms of the Credit Facility. The current
balance as of December 31, 1996 was $317,935.
As of December 31, 1996, the Company had approximately 650 shelters in its
inventory. Accordingly, the Company's future capital expenditures related to
the installation of additional shelters is expected to be insignificant, and its
marginal cost of maintaining additional shelters is expected to be low. Because
the Company's marginal cost of installing and maintaining additional shelters is
low, the Company could increase its operating cash flow by installing additional
shelters (directly or through the Joint Venture) and by renting the space on
such additional shelters. Based on its currently pending RFPs and on increased
shelter installation in existing municipalities, the Company believes that it
will be able to increase its base of installed shelters during the current
fiscal year.
In connection with obtaining additional Municipal Contracts and Municipal
Permits, the Company is typically required to post a performance bond with the
municipality to guarantee the removal of the shelter upon the termination of the
Municipal Contract. Under the Credit Facility, the Company is entitled to
obtain up to $300,000 in irrevocable letters of credit to satisfy future bonding
requirements. The Company has funded all such bonding requirements to date with
operating capital, and as such all $300,000 is available for use for such
bonding. As of the date hereof, the Company believes that the letter of credit
portion of the Credit Facility is sufficient to satisfy the Company's needs for
at least 12 months.
COMPARISON OF NINE-MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Sales for the nine-month period ended September 30, 1997 (the "Current
Period") decreased by $372,993, or 6%, in comparison to the nine-month period
ended September 30, 1996 (the "Prior Period"). This decrease in sales in the
Current Period is attributable to a significant decline in revenues during the
Current Quarter. As previously mentioned, the Company's litigation with Van
Wagner has affected national sales significantly, resulting in lower panel
occupancy.
Cost of sales decreased by $204,148 or 5% over the Prior Period primarily
due to decreases of $58,233, or 4% in City fees, and a decrease of $149,117, or
10% in advertising commissions and expenses.
The Company's gross profit percentage decreased from 28% in the Prior
Period to 26% in the Current Period. The decline of $168,845 or 10% is the
result of lower occupancy and decreases in national account sales.
An increase of $748,393 was incurred in operating expenses during the
Current Period principally due to increases in Professional fees of $284,765, an
increase in bad debts of $132,341 written off during the second quarter, and a
general increase in other operating expenses of $122,202.
Due to the significant increase in operating expenses coupled with a
decline in sales of $372,993 during the Current Period, the Company posted a
$996,156 net loss, before income taxes, during the Current Period compared to a
$78,918 net loss before taxes during the Prior Period.
42
LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 30, 1997
As of September 30, 1997, the Company's current liabilities exceeded its
current assets by $989,823. Approximately $670,000 of the current liabilities
consists of the current portion of indebtedness owed to Dr. Allan Ross, a
Director of the Company. The Company's working capital position worsened by
$527,169 during the Current Period, primarily the result of increases in
operating expenses of $748,393. Cash flows from operating activities decreased
by $754,379 over the Prior Period, principally due to the net loss of $996,156
for the Current Period. The Company utilized $480,000 against the credit line
facility during the Current Quarter to fund current operations. The Company
believes that it will be able to fund its current working capital needs from (1)
cash generated from operating activities and (2) draws against the credit line
facility.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information as of December 15, 1997,
with respect to the beneficial ownership of Common Stock of the Company by (i)
the Chief Executive Officer and each Named Executive Officer (as defined under
"Executive Compensation" below), (ii) each nominee for director of the Company,
(iii) all directors and executive officers of the Company as a group and (iv)
all those known to the Company to be beneficial owners of more than five percent
of the Company's voting securities.
SHARES BENEFICIALLY OWNED (2)
---------------------------------
NAME AND ADDRESS OF NUMBER PERCENT
BENEFICIAL OWNER (1) ---------------- --------------
- --------------------------------
Scott A. Kraft................ 20,704(3) 2.1%
Allan L. Ross, M.D............ 140,584 14.9%
Mark R. Boileau............... 528 *
William M. Slater............. 5,456 *
All directors and executive
officers as a group........... 167,272(4) 17.4%
________________
* Represents less than 1%
(1) The address for all persons listed is c/o Metro Display Advertising, Inc.
at 15265 Alton Parkway, Suite 100, Irvine, California 92168.
(2) Nature of beneficial ownership of securities is direct and arises from sole
voting power and sole investment power, subject to community property laws
where applicable.
(3) Includes 20,000 shares subject to options exercisable by Mr. Kraft within
60 days.
(4) Includes 20,000 shares subject to options exercisable within 60 days.
CHANGE IN CONTROL
Approval of Proposal 1 of this Proxy Statement will result in a change in
control of the Company as described in Proposal 1. See "The Merger - The Merger
Agreement."
43
INTERESTS OF CERTAIN PERSONS; RELATED TRANSACTIONS
TRANSFER OF ASSETS TO BSON AND THE DISTRIBUTION OF BSON STOCK
Prior to the Closing, Metro will transfer certain assets to BSON and will
declare a pro rata dividend on the shares of Common Stock of Metro pursuant to
which Metro will distribute to Metro's shareholders, as a spinoff, all shares of
BSON. See "The Merger - Transfer of Assets to BSON and Distribution of BSON
Stock."
LITIGATION RESPONSIBILITY AGREEMENT
As a condition precedent to the Merger, the Company and BSON will enter
into a Litigation Responsibility Agreement pursuant to which the Company will
assign to BSON, and BSON will assume from the Company, the Company's rights and
obligations under lawsuits currently pending against the cities of Victorville
and Laguna Hills. See "Litigation - Litigation with Municipalities." Each of the
lawsuits concerns the required removal of advertising and a breach of
municipality obligations, and seeks monetary damages. In the event a
counterclaim or cross-claim is asserted in one of the assigned lawsuits, the
Company has the option to assume the rights and obligations under such lawsuit
whereupon BSON will relinquish all rights and obligations under such lawsuit.
44
INTERIM SALES REPRESENTATION AGREEMENT
The Company and Eller entered into an Interim Sales Representation
Agreement effective as of May 27, 1997, pursuant to which the Company has
engaged Eller as its representative for leasing advertising space to national
and regional advertisers. Pursuant to the agreement, Eller has assigned a Sales
Manager to provide exclusive sales and marketing services to the Company and to
report solely to, and be subject to the direction and control of, the Company's
chief executive officer. In exchange for Eller's services, the Company has
agreed to pay to Eller a 10% commission on the gross amount of sales placed by
Eller through an advertising agency and a 15% commission on the gross amount of
sales placed by Eller directly with the advertiser and without an agency
commission. The agreement will terminate upon the consummation of the Merger,
within sixty days of written notice that a condition precedent to the Merger has
failed and the Merger will not be consummated, or in no event later than
November 27, 1997. Pursuant to an amendment to the Interim Sales Representation
Agreement dated December 29, 1997, the parties are continuing to perform under
the terms of the agreement until the earlier of a Closing of the Merger or March
31, 1998.
CONSULTING AGREEMENT
As an inducement to the Company to enter into the Merger Agreement, Eller
will enter into a Consulting Agreement with BSON on or prior to Closing,
pursuant to which BSON will provide Eller with such consulting services as Eller
from time to time will reasonably request in connection with Eller's efforts to
expand its bus shelter advertising business within the greater Los Angeles
metropolitan area, and in connection with procuring contracts and permits for
that purpose.
In compensation for providing such consulting services, Eller will pay to
BSON (a) on March 31, 2002 and March 31, 2005, a sum equal to 50% of an amount
determined as follows: 50% of the gross revenue actually received by Eller, any
subsidiaries and any affiliates during the immediately preceding calendar year
from the sale of advertising on bus shelter display faces operated by Eller in
the greater Los Angeles metropolitan area, minus $10,796,000.00, and (b) on
March 31, 2003 and March 31, 2004, a sum equal to 50% of an amount determined as
follows: the gross revenue actually received by Eller, any subsidiaries and any
affiliates during the immediately preceding calendar year from the sale of
advertising on bus shelter display faces operated by Eller in the greater Los
Angeles metropolitan area, minus $21,592,000. The Consulting Agreement will
terminate on March 31, 2004, subject to the final payment on March 31, 2005.
CREDIT FACILITY AND LOANS
On January 6, 1994, Dr. Allan Ross, a director of the Company, entered into
a loan agreement with the Company (the "Loan Agreement") pursuant to which Dr.
Ross provided the Company with a line of credit of up to $1,200,000 and made
available to the Company irrevocable letters of credit in an amount up to
$300,000 (together, the "Credit Facility"). The initial rate for monies
borrowed under the Loan Agreement was 8% per annum; the interest rate under the
Loan Agreement adjusts semi-annually on February 1 and August 1 to a rate that
is equal to 5% above the Federal Discount Rate in effect on the date of
adjustment. The Company is obligated to make equal monthly payments of
principal and interest, which is adjusted when additional amounts are borrowed
and/or the interest rate changes, such that the Company will fully repay the
outstanding balance of all amounts borrowed under the Loan Agreement by the end
of December 2000. In addition to the foregoing interest rate, the Company has
agreed to pay Dr. Ross, on each anniversary of the Loan Agreement, an amount
equal to 2% of the difference between the amount borrowed under the Credit
Facility and the Credit Facility limit. In consideration for entering into the
Loan Agreement, the Company agreed to grant Dr. Ross the opportunity, through
stock options or otherwise, to purchase 4% of the capital stock (40,000 shares)
of the Company for a total purchase price of $100.
45
The amounts borrowed under the Loan Agreement are secured by a first lien
on all of the assets of the Company, including without limitation, all of the
capital stock of BSON owned by the Company, and all accounts receivable,
inventory, cash, contract rights and other tangible and intangible assets. The
Loan Agreement also contains certain negative covenants pursuant to which the
Company, among other things, is prohibited from declaring any dividend on its
Common Stock, from repurchasing or redeeming its shares, from incurring
additional indebtedness other than in the usual course of its business, from
further encumbering its assets, from selling its assets, or from expending more
than $300,000 for acquisition of fixed or capital assets during any year. A
breach of any of the foregoing covenants would cause all principal and interest
to be immediately due and payable. The Company borrowed $800,000 under its line
of credit. The Company had not made any of the monthly payments that it was
required to make pursuant to the Loan Agreement until September 1995 when the
Company and Dr. Ross restructured the Credit Facility. The Company and Dr. Ross
entered into a Loan Modification in September 1995 that required the Company to
pay Dr. Ross $360,000 which was treated as a reduction of principal, reduced the
Company's loan payments to $20,000 per month, increased the number of shares of
the Company's Common Stock that Dr. Ross would receive upon exercise of his
option from 40,000 to 80,000 and made the loan current as of September 1, 1995.
The Company has paid the $20,000 monthly payments since the date of such loan
modification. In late 1995, Dr. Ross exercised the options to purchase 80,000
shares of Common Stock of the Company.
The Board of Directors believes that the terms of the Loan Agreement are,
at this time, the most favorable terms that are reasonably available to the
Company. Ordinarily, credit facilities are extended to companies by
institutional lenders based on both the Company's prior operations and on the
amount of assets that can be used as collateral. Unfortunately, because (i) the
Company was in bankruptcy a few years ago, (ii) its business has changed
significantly (i.e., the Company no longer generates cash from the sale of bus
----
stop shelters to investors), and (iii) its inventory and other assets are not
preferred types of collateral, the Company does not believe that it could
currently obtain a similar loan from an unaffiliated lender. If the Company's
financial condition and credit worthiness improve and, as a result, additional
loan opportunities become available, the Company will evaluate replacing the
Loan Agreement with a credit facility from an unaffiliated lender.
The Company and Baron LLC, of which Dr. Ross is the managing partner and
majority owner, entered into a Memorandum of Understanding effective as of
January 1, 1994 pursuant to which the Company can accrue the $11,237.17 monthly
payments owed by the Company to Baron LLC. Such accrued amounts bear interest
at the same interest rate as the Credit Facility, and Baron LLC can demand at
any time that the accrued amounts be paid in full over 48 equal monthly payments
of principal and interest.
Upon consummation of the Merger, the Surviving Corporation, as a wholly-
owned subsidiary of Eller, will remain obligated under the loans described
above.
EMPLOYMENT AGREEMENTS
BSON and Scott A. Kraft entered into an employment agreement dated
September 29, 1997 pursuant to which Mr. Kraft will serve BSON as President and
Chief Executive Officer beginning on the date on which the Company completes the
Merger with Eller and EMS and concluding three years thereafter. Mr. Kraft will
receive as compensation a salary of $3,000 per week, with minimum increases in
accordance with the Consumer Price Index on January 1, 1999 and each year the
employment agreement is in effect. In addition, Mr. Kraft will receive a bonus
of $2,500 for any month in which the gross advertising revenue for such month
exceeds by 10% the gross advertising revenue for such month of the prior year,
and bonuses increasing from $40,000 to $70,000 (less any monthly bonuses paid)
for the years ending December 31, 1998 through December 31, 2001 for any such
calendar year in which the gross advertising revenue for the year exceeds by 10%
the gross advertising revenue for the
46
preceding year. Mr. Kraft will also receive a stock option to purchase 35,000
shares of BSON common stock at an exercise price of $3.10 per share, which
option is exercisable at any time prior to twelve months following the
expiration of the employment contract. BSON will also provide certain benefits,
including $6,000 per month for disability insurance. BSON may terminate the
employment contract for cause. If BSON terminates the employment contract
without cause, Mr. Kraft will remain entitled to the compensation set forth in
the employment agreement for the remainder of the term or a minimum of one year.
BONUSES
After the Closing of the Merger, the Company intends to pay bonuses to
certain key employees of the Company, including the executive officers. The
Company has not yet determined the persons who will receive bonuses nor the
amounts of such bonuses, but the aggregate amount of all such bonuses will not
exceed $800,000.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than 10% of a registered class of the Company's equity securities, to file
with the SEC initial reports of the Company. Officers, directors and greater
than ten percent shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996, to its
officers, directors and greater than 10% shareholders complied with all
applicable Section 16(a) filing requirements; except that Scott A. Kraft failed
to file a Form 4 with respect to the receipt of 20,000 stock options in December
1996 and he failed to file a subsequent Form 5 for such transaction; and Allan
L. Ross failed to file a Form 5 for the fiscal year ended December 31, 1995
relating to the failure to file a Form 4 for the exercise of 80,000 stock
options in 1995.
47
EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended December 31, 1996,
1995 and 1994, compensation awarded to, or earned by, the Company's Chief
Executive Officer and each of its other most highly compensated executive
officers earning at least $100,000 in salary and bonus at December 31, 1996 (the
"Named Executive Officers"):
Long Term
Compensation
------------
Annual Compensation (1) Awards
--------------------------------- ------------
Fiscal Year Securities
Name and Ended Underlying
Principal Position December 31, Salary Bonus Options
- ------------------------ ------------ -------- ------- ------------
Scott A. Kraft 1996 $115,103 0 0
President and Chief 1995 111,293 0 20,000
Executive Officer 1994 75,000 $25,000 0
_____________
(1) The compensation described in this table does not include medical
insurance, retirement benefits and other benefits received by the foregoing
executive officer which are available generally to all employees of the
Company and certain perquisites and other personal benefits received by the
foregoing executive officer of the Company, the value of which did not
exceed the lesser of $50,000 or 10% of the executive officer's cash
compensation in the table.
STOCK OPTION PLAN
In February 1995, the Board of Directors approved and in April 1995, the
Company's shareholders ratified the Company's 1995 Incentive Stock Option Plan
(the "Option Plan"). The Option Plan provides for the grant of options to
officers, directors and other key employees of the Company to purchase up to an
aggregate of 200,000 shares of Common Stock. The Option Plan is to be
administered by the Stock Option Committee of the Board of Directors, which has
complete discretion to select the optionee and to establish the terms and
conditions of each option, subject to the provisions of the Option Plan. The
Stock Option Committee has not yet been appointed. Options granted under the
Option Plan may be "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified
options, and will be designated as such.
The exercise price of incentive stock options may not be less than 100% of
the fair market value of the Company's Common Stock as of the date of grant
(110% of the fair market value if the grant is to an employee who owns more than
10% of the total combined voting power of all classes of capital stock of the
Company). The Code currently limits to $100,000 the aggregate value of Common
Stock that may be acquired in any one year pursuant to incentive stock options
under the Option Plan or any other option plan adopted by the Company. Non-
qualified options may be granted under the Option Plan at an exercise price less
than the fair market value of the Common Stock on the date of grant. Non-
qualified options also may be granted without regard to any restrictions on the
amount of Common Stock that may be acquired pursuant to such options in any one
year.
In general, upon termination of employment of an optionee, all options
granted to such person which were not exercisable on the date of such
termination would immediately terminate, and any options that are exercisable
would terminate 90 days (one year in the case of termination by reason of
disability) following termination of employment except in the event of
termination for cause. In the event of termination for cause, all unexercised
options would terminate 30 days after termination.
48
Options may not be exercised more than ten years after the grant (five
years after the grant if the grant is an incentive stock option to any employee
who owns more than 10% of the total combined voting power of all classes of
capital stock of the Company). Options granted under the Option Plan are not
transferable and may be exercised only by the respective grantees during their
lifetime or by their heirs, executors or administrators in the event of death.
Under the Option Plan, shares subject to canceled or terminated options are
reserved for subsequently granted options. The number of options outstanding
and the exercise price thereof are subject to adjustment in the case of certain
transactions such as mergers, recapitalization, stock splits or stock dividends.
The Option Plan is effective for ten years, unless sooner terminated or
suspended.
STOCK OPTION GRANTS AND EXERCISES
No stock options were granted to Named Executive Officers in 1996.
AGGREGATED OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 1996
AND FISCAL YEAR-END OPTION VALUE
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options at
Held at Fiscal Year-End ($) Fiscal Year End ($)
------------------------------ ----------------------------
Shares Acquired Value
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ---------------- ------------ ------------- -------------- ------------ -------------
Scott A. Kraft 0 0 20,000 0 $(1) $0
President and Chief
Executive Officer
(1) The exercise price of Mr. Kraft's stock options is $5.00 per share. There
currently is, however, no public trading market for the Company's Common
Stock. Information regarding any market value of the Company's Common
Stock is unavailable. The Company did not obtain a professional valuation
of the Common Stock for the Merger. The actual Merger Consideration
allocable to each share of Common Stock does not represent a market
valuation of the Common Stock because of the particularities involved in
the Merger, such as potential reductions and adjustments to the Cash
Consideration or Escrow Consideration, contribution of the Capital
Contribution, and exclusion of BSON and the assets to be transferred to
BSON.
EMPLOYMENT AGREEMENTS
Effective March 4, 1995, the Company entered into a three year employment
agreement with Scott Kraft. Pursuant to such agreement, Mr. Kraft is currently
serving as President and Chief Executive Officer of the Company at a salary of
$2,433 per week. In addition, Mr. Kraft received stock options to purchase
20,000 of Common Stock at $5.00 per share. Such options must be exercised
within twelve months of the expiration of the employment agreement. This
agreement will terminate upon consummation of the Merger. Mr. Kraft has agreed
to exercise his options prior to the Merger.
On September 29, 1997, BSON and Scott A. Kraft entered into an employment
agreement pursuant to which Mr. Kraft will serve BSON as President and Chief
Executive Officer beginning on the date on which the Company completes the
Merger with Eller and EMS and concluding three years thereafter. Mr. Kraft will
receive as compensation a salary of $3,000 per week, with minimum increases in
accordance with the Consumer Price Index on January 1, 1999 and each year the
employment agreement is in effect. In addition, Mr. Kraft will receive a bonus
of $2,500 for any month in which the gross advertising revenue for such month
exceeds by 10% the gross advertising revenue for such month of the prior year,
and bonuses increasing from $40,000 to $70,000 (less any monthly bonuses paid)
for the years ending December 31, 1998 through December 31, 2001 for any such
calendar year in which the gross advertising revenue for the year exceeds by 10%
the gross advertising revenue for the preceding year. Mr. Kraft will also
receive a stock option to purchase 35,000 shares of BSON common stock at an
exercise price of $3.10 per share, which option is exercisable at any time prior
to twelve
49
months following the expiration of the employment contract. BSON will
also provide certain benefits, including $6,000 per month for disability
insurance. BSON may terminate the employment contract for cause. If BSON
terminates the employment contract without cause, Mr. Kraft will remain entitled
to the compensation set forth in the employment agreement for the remainder of
the term or a minimum of one year.
BONUSES
After the Closing of the Merger, the Company intends to pay bonuses to
certain key employees of the Company, including the executive officers. The
Company has not yet determined the persons who will receive bonuses nor the
amounts of such bonuses, but the aggregate amount of all such bonuses will not
exceed $800,000.
COMPENSATION OF DIRECTORS
The directors did not receive any compensation from the Company during the
past fiscal year, and directors are not currently compensated for services
rendered to the Company as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1996, the Board of Directors had
no compensation committee and decided all matters of executive compensation as a
full Board of Directors. The members of the Board of Directors for the last
completed fiscal year were Allan L. Ross, M.D., William M. Slater and Mark R.
Boileau. There are no interlocks between the Company and other entities
involving the Company's executive officers and board members who served as
executive officers or board members of other entities.
LITIGATION
LITIGATION WITH VAN WAGNER
The Company's pending litigation with the Van Wagner Group is described in
"The Merger -Van Wagner Litigation and Disputes."
LITIGATION WITH MUNICIPALITIES
On November 15, 1995, the Company filed a complaint in the Eighth Judicial
District Court of Nevada against the City of Las Vegas. The Company had entered
into a contract with the City of Las Vegas in July 1985 pursuant to which the
Company was obligated to provide bus stop shelters. As such contract approached
its expiration date of July 1995, the Company and the City of Las Vegas
disagreed as to who would own the shelters upon expiration of such contract.
They agreed to extend the contract while the Company filed an action for
declaratory relief to determine their respective rights with respect to the
shelters. In September, 1996, the City and the Company agreed to a settlement
of their dispute, providing for the Company to retain ownership of the shelters
and the award of a new long-term contract.
On November 15, 1995, the Company filed a complaint against the City of
Victorville as well as two of its City Council members and one member of the
staff. The Company alleges that the City of Victorville objected to certain
advertising by the UFCW Union relating to a labor dispute with a food
supermarket chain located within the City of Victorville. When the Company did
not remove this advertising at the request of the City of Victorville, the
Company claims that the City of Victorville
50
retaliated by canceling the Company's contract to operate the shelters. The
Company has requested damages in excess of $1,000,000 as well as punitive
damages, attorneys' fees and court costs.
In December 1995, the Company filed a complaint against the City of Laguna
Hills. The complaint alleges that (i) in January 1995, the City required the
Company to execute a Memorandum of Understanding that would prohibit certain
types of advertising and (ii) in September 1995, the City of Laguna Hills
decided to eliminate all bus stop shelters and require their removal. The
Company alleges that such actions violated its First Amendment rights and
deprived it of its civil rights. The Company seeks as relief from the court the
following: (i) a declaration that certain actions of the City of Laguna Hills
are unconstitutional, (ii) compensation for the elimination of the bus shelters,
(iii) an injunction against the enforcement of its decision to do away with the
bus shelters and against the Memorandum of Understanding limiting the content of
advertising and (iv) $250,000 in general damages, plus attorneys' fees and costs
accrued.
On or about May 23, 1996, the Company filed a complaint against the City of
Lake Forest. The complaint alleges that the City, first demanded that certain
advertising copies be removed by the multiple companies doing business in the
City and later decided to award an exclusive franchise to one of the Company's
competitors. The Company alleges that this action was taken in part to
retaliate due to the Company's refusal to remove certain advertising copies
which the City found objectionable and to obtain better content control overall.
The complaint seeks that the Company be given the right to continue to do
business in the City of Lake Forest. Furthermore, damages of at least
$1,000,000 are sought, as well as the recovery of attorney fees and court costs,
which have accrued.
LITIGATION WITH BUSLINE MEDIA
On June 27, 1996, via an order issued by the United States District Court
of Northern California approving a Settlement Plan between Busline Media and its
former shelter owners, the Company acquired a 25% interest in a newly formed
corporation, Bay Area Transit Shelters ("BATS"), with operations in Northern
California. The 25% ownership was in exchange for debt obligations to the
Company for cash and services rendered by the Company to the Busline Media
Receivership as delineated in the Settlement Plan approved by the court on June
20, 1996. The Company assigned its interest (200,000 shares of BATS stock) to
BSON on March 7, 1997. BSON, through an agreement with Bay Area Transit
Shelters, will operate and manage the affairs of the new corporation, expanding
its operations into this newly acquired advertising market.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There currently is no public trading market for the Company's securities,
although the Company has approximately 1,195 holders of record of its Common
Stock.
The Company has not, to date, paid any cash dividends upon its Common
Stock. The Company has no current plans to pay dividends on its Common Stock
and intends to retain earnings, if any, for working capital purposes. Any
future determination as to the payment of dividends on the Common Stock will
depend upon the results of operations, capital requirements, the financial
condition of the Company and other relevant factors.
AVAILABLE INFORMATION
THE COMPANY IS PROVIDING HEREWITH A COPY OF THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, INCLUDING THE FINANCIAL
STATEMENTS AND SCHEDULES THERETO.
51
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1996 included in
this Proxy Statement have been audited by Peck & Lopez, independent auditors, as
stated in their report appearing herein. The financial statements of the
Company for the years ended December 31, 1995 and 1994 included in this Proxy
Statement have been audited by Stinchfield & Co., independent auditors.
A representative of Peck & Lopez will be available at the Annual Meeting of
Shareholders and will be given the opportunity to make a statement, if desired,
and to respond to appropriate questions.
Effective as of December 10, 1996, the Company advised Stinchfield & Co.,
its prior certifying accountants, that it had decided to change accounting
firms. Stinchfield & Co.'s report dated April 12, 1996 does not contain an
adverse opinion or a disclaimer of opinion, and was not qualified as to
uncertainty, audit scope or accounting principles. The decision to change
accounting firms was made by the Company's Board of Directors. There have been
no disagreements with Stinchfield & Co. on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
during the fiscal year ending December 31, 1995 or the subsequent interim period
preceding the dismissal of Stinchfield & Co., which disagreements, if not
resolved to the satisfaction of Stinchfield & Co., would have caused it to make
reference to the subject matter of the disagreement in connection with its
reports.
Effective as of December 10, 1996, the Company engaged Peck & Lopez as its
new certifying accountants. The Company has not, during the fiscal years ended
December 31, 1995 and December 31, 1996 or the subsequent interim period,
consulted with Peck & Lopez regarding the application of accounting principles
to a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements.
OTHER MATTERS
The Board of Directors does not know of any matters to be presented at the
Annual Meeting other than those set forth above. However, if other matters come
before the Annual Meeting, it is the intention of the persons named in the
accompanying Proxy to vote the shares represented by the Proxy in accordance
with the recommendations of the Board of Directors on such matters, and the
discretionary authority to do so is included in the Proxy.
SUBMISSION OF SHAREHOLDER PROPOSALS
Shareholders are advised that any shareholder proposal, including
nominations to the Board of Directors, intended for consideration at next year's
Annual Meeting must be received by the Company no later than September 7, 1998,
to be included in the proxy material for next year's Annual Meeting. It is
recommended that shareholders submitting proposals direct them to the Secretary,
Metro Display Advertising, Inc., 15265 Alton Parkway, Irvine, California 92168,
and utilize certified mail, return-receipt requested in order to ensure timely
delivery. If the Merger is consummated, the Company's Annual Meeting of
Shareholders for 1998 will not occur, other than as a subsidiary of Eller.
52
THE SHAREHOLDERS ARE URGED TO COMPLETE, SIGN AND RETURN PROMPTLY THE
ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE.
By Order of the Board of Directors
William M. Slater
Secretary
January 5, 1998
53
INDEX TO FINANCIAL STATEMENTS
Page
----
Annual Financial Data of the Company
Report of Peck & Lopez......................................................... F-1
Report of Stinchfield & Co..................................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995...................... F-3
Consolidated Statements of Operations for Years Ended
December 31, 1996 and 1995.............................................. F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996 and 1995........................................ F-5
Consolidated Statements of Cash Flows for Years Ended
December 31, 1996 and 1995.............................................. F-6
Notes to Consolidated Financial Statements..................................... F-8
Interim Financial Data of the Company
Condensed Consolidated Balance Sheets at September 30,
1997 (Unaudited) and December 31, 1996.................................. F-17
Condensed Consolidated Statements of Operations for the Nine Months
Ended September 30, 1997 and 1996 (Unaudited)........................... F-18
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 (Unaudited)........................... F-19
Notes to Condensed Consolidated Financial Statements (Unaudited)............... F-20
Annual Financial Data of BSON
Report of Peck & Lopez......................................................... F-21
Balance Sheets at December 31, 1996 and 1995................................... F-22
Statements of Income for the Years Ended December 31, 1996 and 1995............ F-23
Statements of Stockholders' Equity for the Years Ended
December 31, 1996 and 1995.............................................. F-24
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995........ F-25
Notes to Financial Statements.................................................. F-27
Interim Financial Data of BSON
Condensed Balance Sheets at September 30, 1997 (Unaudited)
and December 31, 1996................................................... F-32
Condensed Statements of Operations for the Year Ended
December 31, 1996 and Nine Months Ended
September 30, 1997 and 1996 (Unaudited)................................. F-33
Condensed Statements of Cash Flows for the Year Ended
December 31, 1996 and Nine Months Ended
September 30, 1997 and 1996 (Unaudited)................................. F-34
Notes to Condensed Financial Statements (Unaudited)............................ F-35
Pro Forma Condensed Financial Statements
Introduction............................................................................ F-36
Metro Display Advertising, Inc.
Pro Forma Condensed Balance Sheet as of September 30, 1997....................... F-37
Pro Forma Condensed Statement of Loss for the Year Ended December 31, 1996....... F-38
Pro Forma Condensed Statement of Loss for the Nine Months
Ended September 30, 1997.................................................. F-39
Bustop Shelters of Nevada, Inc.
Pro Forma Condensed Balance Sheet as of September 30, 1997....................... F-40
Pro Forma Condensed Statement of Income for the Year Ended December 31, 1996..... F-41
Pro Forma Condensed Statement of Loss for the Nine Months
Ended September 30, 1997.................................................. F-42
Notes to Pro Forma Condensed Financial Statements....................................... F-43
[LETTERHEAD OF PECK & LOPEZ]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Metro Display Advertising, Inc.
We have audited the accompanying consolidated balance sheets of Metro Display
Advertising, Inc., and subsidiary as of December 31, 1996 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. The consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits. The financial statements
of Metro Display Advertising, Inc. and subsidiary as of December 31, 1995, were
audited by other auditors whose report dated April 15, 1996, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metro Display
Advertising, Inc. and the subsidiary as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Peck & Lopez
Certified Public Accountants
Newport Beach, CA
May 20, 1997
F-1
[LETTERHEAD OF STINCHFIELD & CO.]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Metro Display Advertising, Inc.
We have audited the accompanying consolidated balance sheets of Metro Display
Advertising, Inc., (a California corporation) and subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of income, stockholder's
equity, and cash flows for the years then ended. The consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metro Display
Advertising, Inc. and the subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
STINCHFIELD & CO.
Certified Public Accountants
/s/ STINCHFIELD & CO.
Laguna Niguel, CA
April 12, 1996
F-2
METRO DISPLAY ADVERTISING, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS December 31,
1996 1995
------------ ------------
CURRENT ASSETS:
Cash $ 74,947 $ 225,524
Accounts receivable, net of allowances
of $143,539 and $117,775 (Note 1) 989,804 1,377,859
Prepaid expenses and other assets (Note 7) 226,844 39,330
Deferred taxes - current portion (Note 5) 196,000 235,000
----------- -----------
TOTAL CURRENT ASSETS 1,487,595 1,877,713
----------- -----------
PROPERTY AND EQUIPMENT: (Note 1 and 4)
Office furniture and equipment 343,472 282,230
Leasehold improvements 24,280 24,280
Machinery and equipment 82,588 70,500
Vehicles 463,470 397,305
Bus stop shelters 7,892,783 7,813,534
----------- -----------
8,806,593 8,587,849
Less: accumulated depreciation (2,633,934) (1,821,408)
----------- -----------
6,172,659 6,766,441
----------- -----------
OTHER ASSETS:
Performance bond deposits (Note 3) 734,722 694,722
Deferred taxes - less current portion (Note 5) 3,052,000 2,924,000
Other assets (Note 2 and 6) 186,528 102,033
----------- -----------
3,973,250 3,720,755
----------- -----------
$11,633,504 $12,364,909
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4) $ 693,065 $ 751,622
Accounts payable and other accrued liabilities 269,746 372,237
Due to municipalities 596,052 757,569
Due to joint venture (Note 6) 87,538 -
Accrued payroll and related taxes 77,781 57,954
Advanced payments 226,067 214,118
----------- -----------
TOTAL CURRENT LIABILITIES 1,950,249 2,153,500
LONG TERM DEBT - LESS CURRENT PORTION (Note 4) 833,785 1,320,848
COMMITMENTS AND CONTINGENCIES (Note 7 and 8)
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized,
no par value, no shares issued
Common stock, 5,000,000 shares authorized,
no par value, 823,030 shares issued 9,504,532 9,504,532
Accumulated deficit (655,062) (613,971)
----------- -----------
8,849,470 8,890,561
----------- -----------
$11,633,504 $12,364,909
=========== ===========
See notes to consolidated financial statements
F-3
METRO DISPLAY ADVERTISING, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1996 1995
------------ ------------
REVENUES: $7,571,268 $7,437,210
COST OF SALES:
City fees (Note 7) 1,455,660 1,805,548
Advertising commissions and expenses 2,192,772 2,101,507
Installation and maintenance 1,099,513 913,700
Other costs 198,675 73,188
---------- ----------
TOTAL COST OF SALES 4,946,620 4,893,943
---------- ----------
GROSS PROFIT 2,624,648 2,543,267
---------- ----------
OPERATING EXPENSES:
Wages and related expenses 589,873 558,124
Professional fees 163,425 67,083
Bad debts 62,814 72,500
Office expenses 218,769 192,314
Depreciation (Note 1) 923,299 911,332
Other operating expenses 501,685 493,397
---------- ----------
TOTAL OPERATING EXPENSES 2,459,865 2,294,750
---------- ----------
INCOME FROM OPERATIONS 164,783 248,517
---------- ----------
OTHER INCOME (EXPENSE):
Gain (Loss) on sale of assets (73,897) 2,060
Investment loss (27,882) -
Interest income 20,638 11,033
Other income 11,474 45,688
Interest expense (224,407) (180,301)
---------- ----------
TOTAL OTHER INCOME (EXPENSE) (294,074) (121,520)
INCOME (LOSS) BEFORE TAXES (129,291) 126,997
PROVISION (BENEFIT) FOR INCOME TAXES (NOTE 5) (88,200) 47,000
---------- ----------
NET INCOME (LOSS) $ (41,091) $ 79,997
========== ==========
NET INCOME (LOSS) PER SHARE $ (0.04) $ 0.09
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 983,030 906,364
========== ==========
See notes to consolidated financial statements
F-4
METRO DISPLAY ADVERTISING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
========== =========== ==========
Balance at January 1, 1995 $4,027,358 $(693,968) $3,333,390
Net Income - 79,997 79,997
Exchange for Minority Interest 19,139 - 19,139
Stock Options (Note 9) 79,880 - 79,880
Deferred tax adjustment (Note 5) 5,378,155 - 5,378,155
---------- --------- ----------
Balance at January 1, 1996 $9,504,532 $(613,971) $8,890,561
Net Income - (41,091) (41,091)
---------- --------- ----------
Balance at December 31, 1996 $9,504,532 $(655,062) $8,849,470
========== ========= ==========
See notes to consolidated financial statements
F-5
METRO DISPLAY ADVERTISING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 7,919,931 $ 7,044,080
Cash paid to suppliers and employees (6,841,155) (6,280,225)
Interest received 20,638 11,798
Interest paid (217,993) (139,787)
Franchise tax paid (800) (800)
----------- -----------
Net cash provided by operating activities 880,621 635,066
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 158,646 -
Purchase of property and equipment (570,063) (361,251)
Performance bond deposits (71,500) (25,000)
Investment in joint venture (20,000) -
Proceeds from joint venture 87,538 -
Loans made (72,052) -
----------- -----------
Net cash used in investing activities (487,431) (386,251)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans - 360,000
Payments on notes payable (543,767) (504,559)
----------- -----------
Net cash used in financing activities (543,767) (144,559)
----------- -----------
NET INCREASE IN CASH (150,577) 104,256
CASH AT BEGINNING OF YEAR 225,524 121,268
----------- -----------
CASH AT END OF YEAR $ 74,947 $ 225,524
=========== ===========
SUPPLEMENTAL DISCLOSURE SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of vehicle in exchange for debt $ 30,000 $ -
=========== ===========
Issuance of common stock options in exchange
for loan and debt service costs $ - $ 79,880
=========== ===========
Increased deferred tax asset due to a change
in tax attributes (Note 5) $ - $ 3,205,200
=========== ===========
Decrease deferred tax liability due to a
change in tax attributes (Note 5) $ - $ 2,172,155
=========== ===========
Exchange of minority interest for common stock
of parent $ - $ 19,139
=========== ===========
See notes to consolidated financial statements
F-6
METRO DISPLAY ADVERTISING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - SUPPLEMENTAL SCHEDULE
Years Ended December 31,
1996 1995
---------- ----------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
NET INCOME (LOSS) $ (41,091) $ 79,997
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
Depreciation 923,299 911,332
(Gain) loss on sale of assets 73,897 (2,060)
Investment loss in joint venture 27,882 -
(Increase) decrease in accounts receivable 388,055 (370,568)
(Increase) in other receivables (19,029) -
Decrease (increase) in other assets (150,810) 44,373
(Decrease) increase accounts payable &
accrued liabilities (282,444) (155,237)
Increase in advance payments 11,949 4,250
(Increase) decrease in deferred tax (89,000) 46,200
Increase in accrued interest 6,413 41,279
Bonds paid to cities 31,500 35,500
---------- ----------
Net cash provided by operating activities $ 880,621 $ 635,066
========== ==========
See notes to consolidated financial statements
F-7
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Metro Display Advertising, Inc., "the Company", incorporated in
California in 1984. The Company has agreements with municipalities
to install and maintain bus stop shelters and benches. Revenue is
generated by renting advertising space on the installed shelters.
The shelters are owned, installed and maintained by the Company and
are currently located in approximately 63 municipalities throughout
Southern California. The Company also rents advertising space in
shelters located in Clark County, Nevada, including the City of Las
Vegas, through its wholly owned subsidiary.
Advertising sales for the Company's shelters are effected primarily
by a national outdoor advertising agency under an advertising and
marketing agreement dated January 1993. The marketing agreement
provides the Company with both regional and national advertisers.
The marketing agreement term expires March 1999, subject to an
automatic five-year renewal. Approximately 80 percent of the
Company's sales are generated through this marketing and sales
agreement.
The Company and its wholly owned subsidiary Continental Shelters,
Inc., a California Corporation, files a consolidated voluntary
petition for relief under Chapter 11 of Title 11 of the United
State Code on January 22, 1992. Continental Shelters, Inc., in the
business of manufacturing and installing bus stop shelters
exclusively for the Company, ceased operations February of 1992.
All assets and liabilities of the subsidiary were transferred to
the Company. On November 19, 1993, the Bankruptcy Court confirmed
the Company's plan of reorganization, effective January 7, 1994.
The accounting for the bankruptcy and the forgiveness of debt and
adjustment to assets were recorded on a fresh start reporting basis
for the year ending December 31, 1993.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements present the consolidated
accounts of the Company and its wholly-owned subsidiary, Bustop
Shelters of Nevada, Inc., a Nevada Corporation. All significant
inter-company transactions and balances have been eliminated.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses.
Actual results could vary from the estimates that were assumed in
preparing the financial statements.
REVENUE RECOGNITION
The Company's revenue is derived primarily from providing
advertising services under contract arrangements. The Company
prepares its financial statements on the accrual basis of
accounting in accordance with generally accepted accounting
principles. Advertising revenue is recognized when earned, and
expenses are recorded when incurred.
F-8
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company has adopted the allowance for doubtful accounts method of
accounting for losses from uncollectible accounts. Under this method,
an allowance is provided based on historical experience and
management's evaluation of outstanding accounts receivable at the end
of each year.
PROPERTY AND EQUIPMENT
Property and equipment were re-stated at their estimated fair market
value at January 7, 1994, the effective date of the Company's plan of
reorganization, in accordance with fresh-start reporting. For years
ended December 31, 1995 and 1996, property and equipment are
depreciated over the remaining estimated useful lives, generally one
to seven years, of the related assets using the straight-line method.
The bus stop shelters are depreciated over ten years, using the
straight-line method.
NET INCOME PER SHARE
Net income per common and common share equivalent share is computed on
the basis of the weighted average number of common shares outstanding
and dilutive common equivalent shares. Common stock equivalent shares
include dilutive stock options.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, investments,
and trade accounts receivable. Investments that potentially subject
the Company to credit risk include investments in joint ventures and
partnerships. Future changes in economic conditions may make the
investments less valuable. A majority of the Company's trade
receivables are derived from sales generated by a national outdoor
advertising agency to whom payments are made. The national outdoor
advertising agency then remits collections to the Company on a monthly
basis. Amounts due from the national outdoor agency accounted for 70
percent and 72 percent of accounts receivables at December 31, 1996
and 1995 respectively. The company performs ongoing credit evaluations
of its customers' financial condition and limits its exposure to
accounting losses by limiting the amount of credit extended whenever
deemed necessary and generally does not require collateral. Reserves
are maintained for potential credit losses, and such losses have been
within management's expectations.
The carrying amounts reported on the balance sheet for cash,
investments, and trade accounts receivable approximate fair value.
INCOME TAXES
Effective January 1, 1993, the Company adopted statement of Financial
Accounting Standards No. 109, the objective of accounting for income
taxes is to recognize the amount of current and deferred taxes payable
(or refundable) at the date of the financial statements as measured by
the provision of the enacted tax laws.
Deferred income taxes have been provided for the future tax effects of
temporary differences between financial reporting and tax basis of
assets, liabilities, and operating loss carryforwards.
F-9
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECLASSIFICATIONS
Certain reclassifications to the year-end 1995 income statement have
been made to conform to classifications adopted in 1996. These
classifications have no effect on net income.
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), Accounting for the
impairment for Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. The adoption of SFAS 121 did not have a material impact on
the results of operations or financial position of the Company.
NOTE 2 - OTHER ASSETS
The Company entered into an agreement with Busline Media to provide
administrative services and support. Busline Media is a sole
proprietorship that became subject to a receivership by order of the
United States District Court on or about July 1993. As part of this
agreement, the Company agreed to make operating expense advances to
Busline Media. As of December 31, 1996, the Company advanced $156,410
to Busline Media. On June 20, 1996, the plan was approved, a new
corporation called Bay Area Transit Shelters, Inc. ("BATS"), was
formed.
The Company is expected to receive 25 percent of the new issue common
stock of BATS in exchange for services and the amount owed. The stock
will be issued May 1997.
NOTE 3 - PERFORMANCE BOND DEPOSITS
The Company, under terms of its agreements with various municipalities,
is required to maintain either cash bond deposits or certificates of
deposit pledged to municipalities, which guarantee the removal of
shelters. The bond deposits are required for the duration of the
agreements, generally five to ten years.
NOTE 4 - LONG TERM DEBT
The long term debt at December 31, 1996, consists of the following:
Current Long Term Total
------- --------- --------
Notes payable to bank, secured by
vehicle, payable in monthly
installments of $944, including
interest at 8 percent maturing
October 1999. $ 9,378 $ 19,224 $ 28,602
Note payable to National Display
Advertising, Inc., secured by 124
bus stop shelters, payable in
monthly installments of $8,067,
including interest at 10%,
maturing January 1997. 7,992 0 7,992
F-10
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 4 - LONG TERM DEBT, CONTINUED
Current Long Term Total
-------- --------- ---------
Unsecured note payable to National
Display Advertising, Inc. payable in
monthly installments of $12,000,
including interest at 7 percent
maturing November 1997. See Note 7
for contingent liability relating to
this loan. $119,361 $ 0 $ 119,361
Line of credit provided by a related
party. See Note 9 and 10. 201,022 116,913 317,935
Note payable secured by corporate
assets. Interest only at 10 percent
for four years, thereafter monthly
installments of $9,130, maturing
September, 2003. See Note 9 and 10. 0 326,351 326,351
Settlement of a loan guarantee,
payable in monthly installments of
$3,000, discounted at 7% maturing
December, 1997. 33,913 0 33,913
Trade and other miscellaneous
obligations, payable in monthly
installments of $1,689, discounted
at 7 percent, maturing, January, 1998. 19,486 1,679 21,165
Trade obligations due to a related
party payable in monthly installments
of $11,237, discounted at 7 percent
through January 1998. See Note 10
for additional information. 211,133 312,438 523,571
Obligations to municipalities, payable
in monthly installments of $7,944,
discounted at 7 percent, maturing 1998
and 1999. 90,780 57,180 147,960
-------- -------- ----------
$693,065 $833,785 $1,526,850
======== ======== ==========
Future maturities of long-term debt are as follows:
Year Ended December 31
----------------------
1998 $281,922
1999 118,530
2000 184,562
2001 82,260
2002 and after 166,511
--------
$833,785
========
F-11
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 5 - INCOME TAXES
Under SFAS 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes and operating loss carryforwards.
The tax effects of significant items composing the Company's net
deferred tax assets are as follows:
December 31,
---------------------------
1996 1995
----------- ----------
Deferred tax liabilities:
Difference between book and tax basis property $ (260,995) $ (311,913)
----------- -----------
Deferred tax assets:
Doubtful accounts allowance not currently
deductible 54,847 36,648
Shareholder interest not currently deductible 28,214 46,268
Federal net operating loss carryforward 4,062,155 4,060,815
State net operating loss carryforward 564,332 508,957
Other 16,207 34,985
----------- -----------
4,725,755 4,687,673
----------- -----------
Valuation allowance (1,216,760) (1,216,760)
----------- -----------
Net deferred tax asset $ 3,248,000 $ 3,159,000
=========== ===========
Reflected in the consolidated balance sheets as:
Current deferred asset-net $ 196,000 $ 235,000
Noncurrent deferred asset-net 3,052,000 2,924,000
----------- -----------
Net deferred tax asset $ 3,248,000 $ 3,159,000
=========== ===========
The income tax components of the provision (benefit) for income taxes
consist of the following:
December 31,
---------------------------
1996 1995
----------- ----------
Current:
State $ 800 $ 800
Deferred:
Federal (28,500) 38,000
State (60,500) 8,200
-------- -------
$(89,000) $46,200
-------- -------
$(88,200) $47,000
======== =======
The (benefit) provision for income taxes differs from the amount
computed by applying the statutory federal rate to pretax income
as follows:
December 31,
---------------------------
1996 1995
----------- ----------
Expected income tax (benefit) provision at
The U.S. federal statutory rate (35)% 35 %
Adjust inter-company activity (31)% -
(Benefit) provision for state income taxes,
net of federal effect (6)% 6 %
Other 4 % (4)%
-------- -------
(Benefit) provision for income tax (68)% 37 %
======== =======
F-12
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 5 - INCOME TAXES, CONTINUED
The Company has a federal net operating loss carryforward of
approximately $12 million and a state net operating loss carryforward
of approximately $6 million. The federal net operating loss
carryforward expires beginning 2004 through 2009 and the state net
operating loss carryforwards expires beginning 2000 through 2004.
Due to additional information regarding the bankruptcy and treatment
of the leasehold creditors, the Company, on the advice of counsel, is
applying Internal Revenue Code Section 108 and 382. Based upon the
rule of Section 108, the exchange of stock for debt by the
corporation does not result in any recognition of income for the
Company, therefore there is no reduction in tax attributes from that
exchange. Section 382 requires the Company to reduce it's net
operating loss carryforwards by 50 percent. This resulted in an
increase to deferred tax asset of $3,205,200 and a decrease to
deferred tax liability of $2,172,955 providing a total tax benefit of
$5,378,155 to common stock for year ended December 31, 1995.
NOTE 6 - JOINT VENTURE AND PARTNERSHIP
On November 18, 1994, the Company and a national outdoor advertising
agency entered into a joint venture agreement (the "Joint Venture")
for the purpose of seeking additional franchises and/or licenses for
bus shelters advertising from municipalities throughout the United
States, and to manage, develop, and operate all such bus stop
shelters and sell advertising space in connection therewith. The
national outdoor advertising agency made an initial capital
contribution of $30,000 to the Joint Venture while the Company will
contribute all fabricated shelters and shelter parts needed by the
Joint Venture. Under a separate marketing agreement, the agency also
provides sales support for the Company.
The Joint Venture agreement provides for a fifteen-year term, subject
to earlier termination by mutual consent of the parties, a default in
the performance of obligations under the joint venture agreement
which is not cured within the time to cure such default or the
insolvency of one of the parties. The Joint Venture will include all
new agreements with municipalities and will also include the
assignment of the Company's agreement with the city of La Habra to
the extent that such city permits the assignment of such contract.
All other territories under pre-existing contracts that the Company
has entered into shall remain outside of the Joint Venture. The
investment value at December 31, 1996 is $4,051. The amount due to
the joint venture at December 31, 1996 is $87,538 for revenue
collected on behalf of the joint venture.
In October 1996, the Company entered into a partnership, which is
primarily involved in operating, maintaining, and managing aircraft
transportation used by each partner. The investment represents a 50
percent ownership in the partnership. The investment value in the
partnership - income tax basis at December 31, 1996 is $26,067.
The Company uses the equity method of accounting for joint venture
and partnership investments.
F-13
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 7 - COMMITMENTS
The future minimum rental payments required by operating leases that
have non-cancelable lease terms beyond the balance sheet date are as
follows:
Fiscal year ended
-----------------
1997 $ 92,478
1998 42,654
1999 23,604
2000 3,934
--------
Total $162,670
========
The Company's lease for the office in Irvine, California expires June
30, 1998. The subsidiary's lease for an office in Las Vegas, Nevada
expires February 29, 2000. The Company also rents storage space on a
month-to-month basis.
Rent expense was approximately $101,708 and $95,410 for the years
ended December 31, 1996 and 1995 respectively.
The Company had entered into an agreement, pursuant to the terms of a
settlement and compromise in the plan of reorganization, with
National Display Advertising, Inc. Under the terms of the settlement,
the debt will increase by at most $500,000 if $250,000 is not paid
against principal on or before January 1998. The Company is currently
making payments and expects to have the loan paid off prior to its
maturity date to avoid any further liability. See Note 4 for loan
balance.
MUNICIPAL CONTRACTS
The Company and its subsidiary have contracts with various
municipalities in southern California and Nevada for the installation
and maintenance of bus shelters. Many of these contracts provide
exclusive rights to operate advertising bus shelters, while others
allow other bus shelter companies to share the area.
The municipalities receive a guarantee fee and/or a percentage of the
advertising revenue depending on the respective agreement. The
contracts extend three to ten years, with options to renew upon
approval by both parties. The guaranteed payments for the next five
years, according to current contracts, are approximately $1,410,000
per year. The guaranteed payments, included in city fees, for year
ended December 31, 1996, were approximately $1,400,000. Included in
prepaid expenses and other assets are overpayments of $113,046 to
Clark County for payments made for the periods 1994 through 1996.
NOTE 8 - CONTINGENCIES
The Company was the plaintiff in an action filed against the City of
Las Vegas, filed November 15, 1995. The Company provided shelters
located in the City pursuant to a contract entered into July 3, 1985.
As the contract approached its expiration, the City asserted the
contract provided for the City's retention and ownership of the
shelters. The Company asserted the shelters remained property of the
Company, and could be removed by the Company in the event the
contract was not renewed. The matter was resolved through
negotiations that resulted in the signing of a long-term contract. A
stipulation order dismissing the case without prejudice was filed on
September 20, 1996.
F-14
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTES 8 - CONTINGENCIES, CONTINUED
On December 20, 1995, the Company filed a complaint against the City
of Laguna Hills. The complaint involves the Company's bus shelters
located in the City of Laguna Hills. The lawsuit was commenced as a
result of action taken by the City on or about September 12, 1995,
to eliminate all bus shelters within the City. As a result of this
decision, the City has made demand that the Company remove all of
its shelters immediately.
On May 23, 1996, the Company filed a complaint against the City of
Lake Forest. The complaint was based on the decision by the City of
Lake Forest to terminate the Company's operations within the City
and to grant an exclusive franchise to a competitor of the Company.
On November 15, 1995, the Company filed a complaint against the City
of Victorville, two of its City Council members and one member of
the staff. This dispute arose as a result of efforts by the City of
Victorville to have the Company's bus shelters removed after a
dispute regarding the Company's display of advertising by the
U.F.C.W. Union. The City officials strongly objected to the Union's
advertisement and placed pressure on the Company to remove such
advertising.
The Company presently believes that the resolution of these matters
will not have a material adverse effect on its financial condition
as reported in the accompanying financial statements.
NOTE 9 - STOCK OPTION PLANS
In February 1995, the Board of Directors approved and in April 1995,
the Company's shareholders ratified the Company's 1995 Incentive
Stock Option Plan (the "Option Plan"). The Option Plan provides for
the grant of options to officers, directors and other key employees
of the Company to purchase up to an aggregate of 200,000 shares of
Common Stock. The Option Plan is to be administered by the Stock
Option committee of the Board of Directors, which has complete
discretion to select the optionee and to establish the terms and
conditions of each option, subject to the provisions of the Option
Plan.
As of December 31, 1996, the board of directors of the Company
authorized the President to be eligible to participate in an
incentive stock option plan. Under the Plan, the Company has offered
the President an option to purchase 20,000 shares of common stock
for a price of $5 per share. This option expires December 31, 1999
one year after expiration of his employment contract.
In 1994, as part of an exclusive sales representation agreement, a
national outdoor advertising agency received an option to purchase
20,000 shares of new issue common stock at $21 per share. The option
expires January 1, 1998.
In 1994, as part of the terms of acquiring a line of credit, a
related party received an option to purchase 40,000 shares of new
issue common stock for a total purchase price of $100. On September
1, 1995, the original loan agreement was modified, increasing the
option to include a total of 80,000 shares of new issue common
stock. A discount of $40,000 was recorded for the additional 40,000
stock options to be amortized over the life of the loan. See Note 10
for additional details of the credit line.
F-15
METRO DISPLAY ADVERTISING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 9 - STOCK OPTION PLANS, CONTINUED
As part of the terms of acquiring a $360,000 loan, a related party
received an option to purchase 40,000 shares of new issue common stock
for a total price of $100. A discount of $39,880 was recorded for the
40,000 stock options to be amortized over the life of the loan. The
option expires December 31, 1998.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company had an unsecured debt of $523,571, discounted at 7
percent, payable to a corporate stockholder in 48 equal installments.
The Company has not made the scheduled payments on the stockholder's
unsecured debt as required by the agreement. The Company modified the
loan agreement on April 11, 1996 to allow the Company to either accrue
or pay the stated monthly amount. Accrued payments will accrue
interest at the 8 percent, adjusted on February 1, and August 1, each
year, to 5 percent above the Federal Discount Rate. Stockholder can
demand payments, start at any time, to be paid over 48 equal
installments. Total interest payments were $67,423 for the year ended
December 31, 1996.
The same stockholder has provided a credit line to finance the
implementation of the bankruptcy plan. On January 7, 1994, the
effective date of the plan, $1,200,000 was made available, secured by
all the assets of the Company, subordinate only to holders of secured
debt. Interest is at an initial rate of 8 percent, adjusted on
February 1 and August 1, each year, to 5 percent above the Federal
Discount Rate. On September 1, 1995, the Company modified the terms of
its original agreement and repayment terms. Principal and interest are
payable in monthly installments of $20,000, due on the first day of
each month, until paid in full. The amount utilized at December 31,
1996 was $317,935. Total payments made including interest and
principal were $240,000 for the year ended December 31, 1996.
As part of the loan modification dated September 1, 1995, the same
stockholder loaned the Company $360,000, secured by all the assets of
the Company payable interest only at 10 percent for four years,
thereafter, monthly installments of $9,130 until paid in full. Total
interest payments were $36,000 for the year ended December 31, 1996.
NOTE 11 - SUBSEQUENT EVENT
Subsequent to year-end, the Company signed a memorandum of
understanding with a buyer for the sale of all of the Company's stock.
The transaction is subject to stockholder ratification and completion
of due diligence procedures to be performed by the buyer.
F-16
METRO DISPLAY ADVERTISING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1996 1997
(unaudited)
-------------- --------------
ASSETS
CURRENT ASSETS
Cash $ 74,947 $ (5,254)
Accounts Receivable, net of allowance 989,604 991,788
Prepaid expenses 226,844 11,704
Deferred taxes-current portion 196,000 196,000
----------- -----------
TOTAL CURRENT ASSETS 1,487,595 1,194,238
PROPERTY AND EQUIPMENT, net 6,172,659 5,659,278
OTHER ASSETS
Performance bond deposits 734,722 734,722
Deferred taxes - less current portion 3,052,000 3,052,000
Other assets 186,528 263,906
----------- -----------
TOTAL OTHER ASSETS 3,973,250 4,050,628
----------- -----------
$11,833,504 $10,904,144
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt $ 693,065 $ 865,079
Accounts payable and accrued liabilities 1,031,117 1,168,982
Advance payments 226,067 150,000
----------- -----------
TOTAL CURRENT LIABILITIES 1,950,249 2,184,051
LONG-TERM DEBT, net of current portion 833,785 866,459
SHAREHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized,
no par value, no shares issued
Common stock, 5,000,000 shares authorized,
no par value, 943,030 shares issued 9,504,532 9,504,832
Accumulated deficit (655,062) (1,651,218)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 8,849,470 7,853,614
----------- -----------
$11,633,504 $10,804,144
=========== ===========
See accompanying Notes to condensed Financial Statements
F-17
METRO DISPLAY ADVERTISING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
1996 1997
------------ -------------
SALES $5,819,975 $5,446,982
COST OF SALES
City fees 1,566,425 1,508,192
Advertising commissions and expenses 1,489,241 1,340,124
Installation and maintenance 1,010,378 1,072,935
Other costs 142,439 83,084
---------- ----------
TOTAL COSTS OF SALES 4,208,483 4,004,335
GROSS PROFIT 1,611,492 1,442,647
---------- ----------
OPERATING EXPENSES
Sales and administration 1,014,621 1,680,186
Depreciation 714,840 705,657
Interest expense 105,223 92,778
Other expense (income) (144,274) (39,818)
---------- ----------
TOTAL OPERATING EXPENSES 1,690,410 2,438,803
---------- ----------
NET INCOME (LOSS) $ (78,918) $ (996,156)
========== ==========
COMMON SHARES OUTSTANDING 906,364 990,030
NET INCOME (LOSS) PER SHARE (0.09) (1.01)
========== ==========
See accompanying Notes to Condensed Financial Statements
F-18
METRO DISPLAY ADVERTISING, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1996 1997
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (Loss) $ (78,918) $(996,156)
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 714,840 705,657
Changes in operating assets and liabilities:
Accounts receivable (248,127) (1,984)
Prepaid expenses and other 27,607 215,140
Deposits and other - -
Accounts payable and accrued expenses 344,348 61,798
Loss on sale of assets (20,916) -
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 738,834 (15,545)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (354,678) (192,276)
Advances to joint venture (40,570) (77,378)
Performance bond deposits (36,500) -
--------- ---------
NET CASH PROVIDED FROM INVESTING ACTIVITIES (431,748) (269,654)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions of long term debt (398,410) (275,302)
Loan proceeds - 480,000
Proceeds from stock options granted - 300
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (398,410) 204,998
NET INCREASE (DECREASE) IN CASH (91,324) (80,201)
Beginning of period 225,524 74,947
--------- ---------
CASH, End of period $ 134,200 $ (5,264)
========= =========
See accompanying Notes to Condensed Financial Statements
F-19
METRO DISPLAY ADVERTISING, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Introduction.
The accompanying condensed consolidated financial statements of Metro
Display Advertising, Inc. (the "Company") have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the consolidated financial statements and related footnotes
included in the Company's latest Annual Report on Form 10-KSB. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company as of
September 30, 1997, and the statements of its operation and its cash flows for
the three month periods ended September 30, 1997 and 1996 have been included.
The results of operations for interim periods are not necessarily indicative of
the results, which may be realized for the full year.
F-20
[LETTERHEAD OF PECK & LOPEZ]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Bustop Shelters of Nevada, Inc.
We have audited the accompanying balance sheets of Bustop Shelters of Nevada
Inc., as of December 31, 1996 and 1995, and the related statements of income,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1996. The financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with genrally accepted auditing standards.
Those standards require that we plan and perform the audits 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bustop Shelters of Nevada, Inc.
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Peck & Lopez
Certified Public Accountants
/s/ Peck & Lopez
Newport Beach, CA
May 20, 1997
F-21
BUSTOP SHELTERS OF NEVADA, INC.
BALANCE SHEETS
ASSETS
December 31,
1996 1995
---------- ----------
CURRENT ASSETS:
Cash $ 16,173 $ 31,025
Accounts receivable, net of allowances
of $67,300 and $62,425 249,055 250,148
Prepaid expenses and other assets 131,472 6,307
Deferred taxes 17,000 -
----------- ----------
TOTAL CURRENT ASSETS 413,700 287,480
----------- ----------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 37,224 18,735
Leasehold improvements 21,068 21,068
Machinery and equipment 29,688 15,967
Vehicles 68,687 35,644
Bus stop shelters 676,240 334,520
----------- ----------
Less: accumulated depreciation 832,907 425,934
(181,838) (119,932)
----------- ----------
651,069 306,002
----------- ----------
OTHER ASSETS:
Performance bond deposits 129,022 129,022
Other assets 67,317 87,186
----------- ----------
196,339 216,208
----------- ----------
$ 1,261,108 $ 809,690
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 81,757 $ 70,070
Due to municipalities 109,078 -
Accrued payroll and related taxes 24,172 16,571
Advanced payments 47,136 28,858
Due to parent - 390,390
Deferred taxes - 105,800
----------- ----------
TOTAL CURRENT LIABILITIES 262,143 611,689
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, no par value, 2500 shares authorized
issued and outstanding 10,000 10,000
Additional paid-in capital 838,545 -
Retained earnings 150,420 188,001
----------- ----------
998,965 198,001
----------- ----------
$ 1,261,108 $ 809,690
=========== ==========
See notes to financial statements
F-22
BUSTOP SHELTERS OF NEVADA, INC.
STATEMENTS OF INCOME
ASSETS
Years Ended December 31,
1996 1995
---------- ----------
REVENUES: $ 2,320,593 $ 2,005,210
COST OF SALES:
City fees 598,281 611,019
Shelter lease fees 431,640 431,640
Advertising commissions and expenses 461,145 424,790
Installation and maintenance 295,921 119,445
Other costs 18,850 3,628
----------- ----------
TOTAL COST OF SALES 1,805,837 1,590,522
----------- ----------
GROSS PROFIT 514,756 414,688
----------- ----------
OPERATING EXPENSES:
Wages and related expenses 153,999 133,018
Bad debts 41,924 39,800
Office expenses 79,436 54,408
Depreciation and amortization 103,166 56,400
Other operating expenses 203,836 114,787
----------- ----------
TOTAL OPERATING EXPENSES 582,361 398,413
----------- ----------
INCOME FROM OPERATIONS (67,605) 16,275
----------- ----------
OTHER INCOME (EXPENSE):
Investment income 6,067 -
Interest income 4,575 3,275
Other income 629 13,737
Interest expense (47) (270)
----------- ----------
TOTAL OTHER INCOME (EXPENSE) 11,224 16,742
----------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES (56,381) 33,017
PROVISION FOR INCOME TAXES (18,800) 11,800
----------- ----------
NET INCOME $ (37,581) $ 21,217
=========== ==========
See notes to financial statements
F-23
BUSTOP SHELTERS OF NEVADA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
ADDITIONAL
COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
------ --------- ---------- ---------- ----------
Balance, January 1, 1995 2,500 $ 10,000 $ - $ 166,784 $ 176,784
Net Income 21,217 21,217
------- -------- ---------- ---------- ----------
Balance, January 1, 1996 2,500 $ 10,000 $ - $ 188,001 $ 198,001
Additional paid-in capital 838,545 838,545
Net Income (37,581) (37,581)
------- -------- ---------- ---------- ----------
Balance, December 31, 1996 2,500 $ 10,000 $ 838,545 $ 150,420 $ 998,965
======= ======== ========== ========== ==========
See notes to financial statements
F-24
BUSTOP SHELTERS OF NEVADA, INC.
STATEMENT OF CASH FLOWS
Years Ended December 31,
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 2,298,669 $ 1,934,197
Cash paid to suppliers and employees (1,891,076) (1,796,574)
Interest received 4,575 3,275
Interest paid (47) (270)
----------- -----------
Net cash provided by operating activities 412,121 140,628
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (406,973) (136,212)
Investment in partnership (20,000) -
Payments made on loans from parent (127,500) -
Loans from parent 127,500 -
----------- -----------
Net cash used in investing activities (426,973) (136,212)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable - (3,325)
----------- -----------
Net cash used in financing activities - (3,325)
----------- -----------
NET INCREASE (DECREASE) IN CASH (14,852) 1,091
CASH AT BEGINNING OF YEAR 31,025 29,934
----------- -----------
CASH AT END OF YEAR $ 16,173 $ 31,025
=========== ===========
SUPPLEMENTAL DISCLOSURE SCHEDULE OF
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt to parent contributed to capital $ 734,545 $ -
Current year tax liability due to parent
contributed to capital 104,000 -
----------- -----------
$ 838,545 $ -
=========== ===========
See Notes to financial statements
F-25
BUSTOP SHELTERS OF NEVADA, INC.
STATEMENTS OF CASH FLOWS - SUPPLEMENTAL SCHEDULE
Years Ended December 31,
1996 1995
----------- ------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
NET INCOME (LOSS) $ (37,581) $ 21,217
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
Depreciation and amortization 103,166 56,400
Investment income (6,067) -
Decrease (increase) in accounts receivable 1,093 (38,020)
Decrease (increase) in other assets (120,489) 3,338
(Decrease) increased accounts payable &
accrued liabilities 128,366 (10,087)
(Decrease) increase in advance payments 18,278 (6,930)
(Decrease) increase in deferred taxes (122,800) 11,800
(Decrease) increase in due to parent 344,155 102,910
Tax liability due to parent contributed to capital 104,000 -
---------- ----------
Net cash provided by operating activities $ 412,121 $ 140,628
========== ==========
See notes to financial statements
F-26
BUSTOP SHELTERS OF NEVADA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Bustop Shelters of Nevada, Inc., "the Company", incorporated in
Nevada in 1987. The Company is a wholly owned subsidiary of Metro
Display Advertising, Inc. "the Parent". The Company has agreements
with municipalities to install and maintain bus stop shelters and
benches. Revenue is generated by renting advertising space on the
installed shelters. The Company rents advertising space in shelters
located in Clark County, the City of Las Vegas and City of North Las
Vegas.
Advertising sales for the Company's shelters are effected primarily by
in-house sales representatives. In addition, a national outdoor
advertising agency, under advertising and marketing agreements dated
January 1993, produces sales of advertising space. The marketing
agreement provides the Company with both regional and national
advertisers. The marketing agreement term expires March 1999, subject
to an automatic five-year renewal. The amount of revenue generated
from this agreement is immaterial in relation to total revenues.
The Company's activities are tied to the Las Vegas area. Accordingly,
the Company's customers are all located in this same geographic area
and the Company is at risk to changes in the economic climate of the
region.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses. Actual
results could vary from the estimates that were assumed in preparing
the financial statements.
REVENUE RECOGNITION
The Company's revenue is derived primarily from providing advertising
services under contract arrangements. The company prepares its
financial statements on the accrual basis of accounting in accordance
with generally accepted accounting principles. Advertising revenue is
recognized when earned, and expenses are recorded when incurred.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company has adopted the allowance for doubtful accounts method of
accounting for losses from uncollectible accounts. Under this method,
an allowance is provided based on historical experience and
management's evaluation of outstanding accounts receivable at the end
of each year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment are
depreciated over the estimated useful lives, generally one to seven
years of the related assets using the straight-line method. The bus
stop shelters are depreciated over ten years, using the straight-line
method.
F-27
BUSTOP SHELTERS OF NEVADA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NET INCOME PER SHARE
Net income per common share is computed on the basis of the weighted
average number of common shares outstanding.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, investments,
and trade accounts receivable. Investments that potentially subject the
Company to credit risk include investment in partnership. Future
changes in economic conditions may make the investments less valuable.
The company performs ongoing credit evaluations of its customers'
financial condition and limits its exposure to accounting losses by
limiting the amount of credit extended whenever deemed necessary and
generally does not require collateral. Reserves are maintained for
potential credit losses, and such losses have been within management's
expectations.
The carrying amounts reported on the balance sheet for cash,
investments, and trade accounts receivable and current liabilities
approximate fair value.
INCOME TAXES
Effective January 1, 1993, the Company adopted statement of Financial
Accounting Standards No. 109, the objective of accounting for income
taxes is to recognize the amount of current and deferred taxes payable
(or refundable) at the date of the financial statements as measured by
the provision of the enacted tax laws.
Deferred income taxes have been provided for the future tax effects of
temporary differences between financial reporting and tax basis of
assets, liabilities, and operating loss carryforwards.
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), Accounting for the
Impairment for Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. The adoption of SFAS 121 did not have a material impact on
the results of operations or financial position of the Company.
NOTE 2 - PREPAID EXPENSES
The Company's prepaid expenses consist principally of prepaid city
fees. These prepaid fees are the result of an audit conducted by Clark
County of Nevada. The period under review was for a three-year period
from 1994 to 1996, which resulted in a credit due to the company for
overpayments, made during this period. The amount included in prepaid
expenses and other assets at December 31, 1996, is $113,046.
F-28
BUSTOP SHELTERS OF NEVADA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 3 - OTHER ASSETS
The Company, under terms of its agreements with three municipalities,
is required to maintain either cash bond deposits or certificates of
deposit pledged to municipalities, which guarantee the removal of
shelters. The bond deposits are required for the duration of the
agreements, generally five to ten years.
In October 1996, the Company entered into a partnership, which is
primarily involved in operating, maintaining, and managing aircraft
transportation used by each partner. The investment represents a 50
percent ownership in the partnership. The investment value in the
partnership - income tax basis at December 31, 1996 is $26,067. The
Company uses the equity method of accounting for partnership
investments.
NOTE 4 - INCOME TAXES
Under SFAS 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes and operating loss carryforwards.
The tax effects of significant items composing the Company's net
deferred tax assets and liabilities are as follows:
December 31,
------------
1996 1995
---- ----
Deferred tax liabilities:
Difference between book and
tax basis property $ (9,400) $ (151,100)
--------- ----------
Deferred tax assets:
Doubtful accounts allowance not
currently deductible 23,380 13,930
Federal net operating loss
carryforward - 25,570
Other 3,020 5,800
--------- ----------
26,400 45,300
--------- ----------
Net deferred tax asset (liability) $ 17,000 $ (105,800)
========= ==========
The income tax components of the provision for income taxes consist of
the following:
December 31,
------------
1996 1995
---- ----
Current $ 104,000 $ -
Deferred (122,800) 11,800
--------- ----------
$ (18,800) $ 11,800
========= ==========
The Company files a consolidated income tax return with its Parent
company. The tax liability for the year ended December 31, 1996 will be
offset by the Parent's net operating loss carryforwards. The Company's
liability for taxes due to the Parent has been contributed to capital
by the parent. See Note 8.
F-29
BUSTOP SHELTERS OF NEVADA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 5 - COMMITMENTS
The future minimum rental payments required by operating leases that
have noncancelable lease terms beyond the balance sheet date are as
follows:
Fiscal year ended
-----------------
1997 $ 38,178
1998 23,604
1999 23,604
2000 3,934
--------
Total $ 89,320
========
The Company's lease for the office in Las Vegas, Nevada expires
February 29, 2000. The Company also rents storage space on a month-to-
month basis.
Rent expense was approximately $52,136 and $29,543 for the years ended
December 31, 1996 and 1995 respectively.
MUNICIPAL CONTRACTS
The Company has contracts with three municipalities in Nevada for the
installation and maintenance of bus shelters. Many of these contracts
provide exclusive rights to operate advertising bus shelters, while
others allow other bus shelter companies to share the area.
The municipalities receive a guarantee fee and/or a percentage of the
advertising revenue depending on the respective agreement. The
contracts extend three to ten years, with options to renew upon
approval by both parties. The guaranteed payments for the next five
years, according to current contracts, are approximately $620,000 per
year. The guaranteed payments, included in city fees, for year ended
December 31, 1996, were approximately $598,281 net of overpayments.
Included in prepaid expenses and other assets are overpayments of
$113,046 to Clark County for payments made for the periods 1994 through
1996. See Note 2.
NOTE 6 - CONTINGENCIES
The Company was the plaintiff in an acting filed against the City of
Las Vegas, filed November 15, 1995. The Company provided shelters
located in the City pursuant to a contract entered into July 3, 1985.
As the contract approached its expiration, the City asserted the
shelters remained property of the Company, and could be removed by the
Company in the event the contract was not renewed. The matter was
resolved through negotiations that resulted in the signing of a long-
term contract. A stipulation order dismissing the case without
prejudice was filed on September 20, 1996.
NOTE 7 - MINORITY INTEREST
In 1995, all of the Company's minority shareholders' exchanged 300
shares of common stock for 5004 shares of common stock of the Parent.
.
F-30
BUSTOP SHELTERS OF NEVADA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company leases its bus stop shelters from its Parent. As a result,
the Company is dependent upon the Parent for its use of the
Parent's shelters, and for other assets to sustain its operations.
In 1996, the Parent restructured the Company's debt by forgiving all
debt owed to the Parent. The Parent treated this amount as additional
capital contribution and the Company recorded the transaction as
additional paid in capital. The total capital contribution amounted to
$838,545, $734,545 debt and $104,000 tax liability for the year ended
December 31, 1996.
F-31
BUSTOP SHELTERS OF NEVADA, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
(unaudited)
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 16,173 $ 14,837
Accounts Receivable, net of allowance 249,055 289,327
Prepaid expenses 131,472 7,104
Deferred taxes-current portion 17,000 17,000
------------ ------------
TOTAL CURRENT ASSETS 413,700 328,266
PROPERTY AND EQUIPMENT, net 651,069 699,127
OTHER ASSETS
Performance bond deposits 129,022 129,022
Other assets 67,317 82,708
------------ ------------
TOTAL OTHER ASSETS 196,339 191,728
------------ ------------
$1,261,108 $1,219,123
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 190,835 $ 193,764
Accrued liabilities 71,308 21,606
------------ ------------
TOTAL CURRENT LIABILITIES 262,143 215,370
SHAREHOLDERS' EQUITY
Common stock, 2,500 shares authorized,
no par value, 2,500 shares issued 10,000 10,000
Additional paid in capital 838,545 838,545
Retained earnings 150,420 155,208
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 998,955 1,003,753
------------ ------------
$1,261,108 $1,219,123
============ ============
See accompanying Notes to condensed Financial Statements
F-32
BUSTOP SHELTERS OF NEVADA, INC.
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
Year ended Nine Months Ended
December 31, September 30,
1996 1996 1997
------------ ----------- -----------
SALES $2,320,593 $1,728,411 $1,759,482
COST OF SALES
City fees 598,281 486,333 482,029
Shelter lease fees 431,640 323,730 --
Advertising commissions
and expenses 461,145 260,647 250,429
Installation and maintenance 295,921 277,397 423,375
Other costs 18,850 22,570 29,393
---------- ---------- ----------
TOTAL COST OF SALES 1,805,837 1,370,677 1,185,226
GROSS PROFIT 514,756 357,734 574,256
---------- ---------- ----------
OPERATING EXPENSES
Sales and administrative 479,195 300,997 507,894
Depreciation 103,166 46,418 70,549
Other expense(income) (11,224) (11,803) (8,975)
---------- ---------- ----------
TOTAL OPERATING EXPENSES 571,137 335,612 569,468
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (56,381) 22,122 4,788
---------- ---------- ----------
BENEFIT FOR INCOME TAXES (18,800) -- --
---------- ---------- ----------
NET INCOME (LOSS) $ (37,581) $ 22,122 $ 4,788
========== ========== ==========
See accompanying Notes to Condensed Financial Statements
F-33
BUSTOP SHELTERS OF NEVADA, INC.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Year ended Nine Months Ended
December 31, September 30,
1996 1996 1997
------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 2,298,689 $ 1,724,034 $ 1,723,813
Cash paid to suppliers and employees (1,891,076) (1,457,457) (1,610,914)
Interest received 4,578 4,575 4,372
Interest paid (47) - -
------------- ----------- -----------
Net cash provided from operating
activities 412,121 271,152 117,271
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (406,973) (300,685) (118,607)
Investment in partnership (20,000) - -
Payments made on loans from parent (127,500) - -
Loans from payment 127,500 - -
------------- ----------- -----------
Net cash used in investing
activities (428,973) (300,685) (118,607)
CASH FLOWS FROM FINANCING ACTIVITIES - - -
------------- ----------- -----------
NET DECREASE IN CASH (14,852) (29,533) (1,336)
CASH AT BEGINNING OF YEAR 31,025 31,025 16,173
------------- ----------- -----------
CASH AT END OF YEAR $ 16,173 $ 1,492 $ 14,837
============= =========== ===========
SUPPLEMENTAL DISCLOSURE SCHEDULE OF
NON-CASH INVESTING AND FINANCING ACTIVITIES
Debt to parent contributed capital $ 734,545 $ - $ -
Current year tax liability due to
parent contributed to capital 104,000 - -
------------- ----------- -----------
$ 838,545 $ - $ -
============= =========== ===========
See accompanying Notes to Condensed Financial Statements
F-34
BUSTOP SHELTERS OF NEVADA, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note 1. Interim Financial Information
-----------------------------
The accompanying condensed financial statements of Bustop Shelters of
Nevada, Inc. for the nine-month periods ended September 30, 1996 and 1997 are
unaudited. In the opinion of management, all statements have been prepared on
the same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Bustop Shelters of Nevada, Inc. as of September 30,
1997, and the statement of its operations and its cash flows for the nine month
periods ended September 30, 1997 and 1996. The results of operation for interim
periods are not necessarily indicative of the results, which may be realized for
the full year.
F-35
METRO DISPLAY ADVERTISING, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
INTRODUCTION
------------
On September 8, 1997, Metro Display Advertising, Inc. (the "Company")
entered into an agreement and plan of merger (the "Merger Agreement") with Eller
Media Company, a Delaware Corporation ("Eller") and EMS, Inc. ("EMS") a
California corporation and wholly owned subsidiary of Eller. The Merger
Agreement provides that, subject to the approval of the Merger Agreement by the
shareholders of the Company and satisfaction of certain other conditions, EMS
will be merged with and into the Company, the separate corporate existence of
EMS will cease and the Company will continue as the surviving corporation and
wholly owned subsidiary of Eller. Upon consummation of the Merger Agreement,
each outstanding share of common stock of the Company will be converted into the
right to receive, subject to the number of shares and net reductions,
$35,800,000 divided by the number of outstanding shares of common stock, and a
pro rata share of an amount to be distributed from an escrow fund (initially
$5,000,000).
Prior to the closing date, and subject to approval and adoption of the
Merger Agreement by the Company's shareholders, the Company will transfer the
following assets to Bustop Shelters of Nevada, Inc., the capital stock of Bay
Area Transit Shelters, Inc. ("BATS") owned by the Company, Monterey/Salinas
Transit Agreement by and between Monterey/Salinas Transit and a joint venture
consisting of the Company and BATS, accounts receivable as of the closing date,
certain vehicles, computers and software, and office equipment and furniture,
and 536 bus shelters. In addition, prior to the closing date, and subject to
adoption of the Merger Agreement by the Company's shareholders, the Company will
declare a pro rata dividend on shares of Common Stock of the Company pursuant to
which the Company will distribute to the Company's shareholders shares of common
stock of Bustop Shelters of Nevada, Inc., so that Bustop Shelters of Nevada,
Inc. will become a corporation separate and distinct from, and no longer a
subsidiary of, the Company.
The accompanying unaudited pro forma condensed financial statements
illustrate the effects of the Merger Agreement on the Company and Bustop
Shelters of Nevada, Inc.'s financial position and results of operations. The pro
forma condensed balance sheet as of September 30, 1997 is based on the
historical balance sheets of the Company and Bustop Shelters of Nevada, Inc. and
assumes the Merger Agreement took place on January 1, 1996. The pro forma
statements of operations for the year ended December 31, 1996 and nine months
ended September 30, 1997 are based on the historical statements of operations of
the Company and Bustop Shelters of Nevada, Inc. for those periods. The pro forma
statements of operations assume the transaction took place on January 1, 1996.
The pro forma financial statements may not be indicative of the actual results
of the Merger Agreement.
The accompanying condensed pro forma financial statements should be read in
connection with the historical financial statements of the Company.
F-36
METRO DISPLAY ADVERTISING, INC.
PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(Excluded)
Consolidated Consolidation Bustop Pro Forma
Metro Display Eliminating & Shelters of Metro Display
ASSETS Advertising, Inc. Reclassification Nevada, Inc. Pro Forma Advertising, Inc.
9/30/97 Entries 9/30/97 Adjustments 9/30/97
----------------- ---------------- ------------ ----------- -----------------
CURRENT ASSETS:
Cash $ -- 14,837 $ 14,837 $ --
Accounts receivable, net of allowances 991,788 289,327 (702,461) (1) --
Prepaid expenses and other assets 11,704 45,000 7,104 49,600
Deferred taxes-current portion 196,000 17,000 179,000
----------- ---------- -----------
TOTAL CURRENT ASSETS 1,199,492 328,268 228,600
PROPERTY AND EQUIPMENT, net 5,659,278 1,561 699,127 (1,060,832) (3) 3,900,880
OTHER ASSETS:
Performance bond deposits 734,722 129,022 605,700
Deferred taxes-less current portion 3,052,000 -- 3,052,000
Other assets 263,906 1,070,229 62,706 (1,205,007) (2) 66,422
----------- ---------- -----------
4,050,628 191,728 3,724,122
----------- ---------- -----------
$10,909,398 $1,219,123 $ 7,853,602
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 865,079 $ -- $ 865,079
Accounts payable 913,005 45,000 193,764 764,241
Overdraft 5,254 14,837 -- 20,091
Accrued liabilities 255,977 21,606 234,371
Advanced payments 150,000 -- 150,000
----------- ---------- -----------
TOTAL CURRENT LIABILITIES 2,189,315 215,370 2,033,782
LONG TERM DEBT, net of current portion 866,469 -- 866,469
STOCKHOLDERS' EQUITY:
Preferred stock -- -- --
Common stock & additional paid in capital 9,504,832 848,545 848,545 9,504,832
Accumulated earnings (deficit) (1,651,218) 223,245 155,208 (2,968,300) (4,551,481)
----------- ---------- -----------
7,853,614 1,003,753 4,953,351
----------- ---------- -----------
$10,909,398 $1,219,123 $ 7,853,602
=========== ========== ===========
See accompanying notes to pro forma financial statements
F-37
METRO DISPLAY ADVERTISING, INC.
PRO FORMA CONDENSED STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1996
(Excluded)
Historical Historical
Consolidated Consolidation Bustop Pro Forma
Metro Display Eliminating & Shelters of Metro Display
Advertising, Inc. Reclassification Nevada, Inc. Pro Forma Advertising, Inc.
12/31/96 Entries 12/31/96 Adjustments 12/31/96
----------------- ---------------- ------------ ----------- -----------------
REVENUES: $7,571,268 431,640 $2,320,593 (431,640) (4) $5,250,675
COST OF SALES:
City fees 1,455,660 598,281 857,379
Advertising commissions and expenses 2,192,772 461,145 1,731,627
Installation and maintenance 1,099,513 295,921 803,592
Shelter lease fees - 431,640 431,640 -
Other costs 198,675 18,850 179,825
---------- ---------- -----------
TOTAL COST OF SALES 4,946,620 1,805,837 3,572,423
---------- ---------- -----------
GROSS PROFIT 2,624,648 514,756 1,578,252
---------- ---------- -----------
OPERATING EXPENSES:
Sales and administrative 1,536,566 41,260 479,195 1,098,631
Depreciation 923,299 1,170 103,166 (207,576) (3) 613,727
Interest expense 224,407 47 47 224,407
Other expense (income) 69,667 (1,339) (11,271) 79,599
---------- ---------- -----------
TOTAL OPERATING EXPENSES 2,753,939 571,137 2,016,364
---------- ---------- -----------
LOSS FROM OPERATIONS (129,291) (56,381) (338,112)
---------- ---------- -----------
PROVISION (BENEFIT) FOR INCOME TAXES (88,200) (18,800) (48,900) (5) (118,300)
---------- ---------- -----------
NET LOSS $ (41,091) $ (37,581) $ (219,812)
========== ========== ===========
See accompanying notes to pro forma financial statements
F-38
METRO DISPLAY ADVERTISING, INC.
PRO FORMA CONDENSED STATEMENT OF LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(Excluded)
Consolidated Consolidation Bustop Pro Forma
Metro Display Eliminating & Shelters of Metro Display
Advertising, Inc. Reclassification Nevada Pro Forma Advertising, Inc
9/30/97 Entries 9/30/97 Adjustments 9/30/97
---------------- ---------------- ----------- ----------- ----------------
REVENUES: $5,446,982 $1,759,482 $3,687,500
COST OF SALES:
City fees 1,508,192 482,029 1,026,163
Advertising commissions and expenses 1,340,124 250,429 1,089,695
Installation and maintenance 1,072,935 423,375 649,560
Other costs 83,084 29,393 53,691
---------- ---------- ----------
TOTAL COST OF SALES 4,004,335 1,185,226 2,819,109
---------- ---------- ----------
GROSS PROFIT 1,442,647 574,256 868,391
---------- ---------- ----------
OPERATING EXPENSES:
Sales and administrative 1,680,186 507,894 1,172,292
Depreciation 705,657 10,597 70,549 (155,682)(3) 490,023
Interest expense 92,778 -- 92,778
Other expense (income) (39,818) (8,975) (30,843)
---------- ---------- ----------
TOTAL OPERATING EXPENSES 2,438,803 569,468 1,724,250
---------- ---------- ----------
LOSS FROM OPERATIONS (996,156) 4,788 (855,859)
---------- ---------- ----------
PROVISION (BENEFIT) FOR INCOME TAXES -- -- --
---------- ---------- ----------
NET LOSS $ (996,156) $ 4,788 $ (855,859)
========== ========== ==========
See accompanying notes to pro forma financial statements
F-39
BUSTOP SHELTERS OF NEVADA, INC.
PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
Pro Forma
Bustop Bustop
Shelters of Shelters of
Nevada, Inc.. Pro Forma Nevada, Inc.
ASSETS 9/30/97 Adjustments 9/30/97
------------ ----------- ------------
CURRENT ASSETS:
Cash $ 14,837 $ 14,837
Accounts receivable, net of allowances 289,327 702,461(1) 991,788
Prepaid expenses and other assets 7,104 7,104
Deferred taxes - current portion 17,000 17,000
---------- -----------
TOTAL CURRENT ASSETS 328,268 1,030,729
PROPERTY AND EQUIPMENT, NET 699,127 1,060,832(3) 1,759,959
OTHER ASSETS:
Performance bond deposits 129,022 129,022
Other assets 62,706 165,723(2) 228,429
---------- ----------
191,728 357,451
---------- ----------
$1,219,123 $3,148,139
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 193,764 $ 193,764
Accrued liabilities 21,606 21,606
---------- ----------
TOTAL CURRENT LIABILITIES 215,370 215,370
STOCKHOLDERS' EQUITY:
Common stock & additional paid in capital 848,545 1,909,534 2,758,079
Retained earnings 155,208 19,482 174,690
---------- ----------
1,003,753 2,932,769
---------- ----------
$1,219,123 $3,148,139
========== ==========
See accompanying notes to pro forma financial statements
F-40
BUSTOP SHELTERS OF NEVADA, INC.
PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
Historical Pro Forma
Bustop Bustop
Shelters of Shelters of
Nevada, Inc. Pro Forma Nevada, Inc.
12/31/96 Adjustments 12/31/96
------------ ----------- ------------
REVENUES: $ 2,320,593 $ 2,320,593
COST OF SALES:
City fees 598,281 598,281
Advertising commissions and expenses 461,145 461,145
Shelter lease fees 431,640 (431,640)(4) -
Installation and maintenance 295,921 295,921
Other costs 18,850 18,850
----------- -----------
TOTAL COST OF SALES 1,805,837 1,374,197
----------- -----------
GROSS PROFIT 514,756 946,396
----------- -----------
OPERATING EXPENSES:
Sales and administrative 479,195 479,195
Depreciation 103,166 207,576 (3) 310,742
Interest expense 47 47
Other expense (income) (11,271) (11,271)
----------- -----------
TOTAL OPERATING EXPENSES 571,137 778,713
----------- -----------
INCOME (LOSS) FROM OPERATIONS (56,381) 167,683
----------- -----------
PROVISION (BENEFIT) FOR INCOME TAXES (18,800) 48,900 30,100
----------- -----------
NET INCOME (LOSS) $ (37,581) $ 137,583
=========== ===========
NET INCOME PER SHARE 0.14
===========
WEIGHTED AVERAGE SHARES OUTSTANDING 970,030
===========
See accompanying notes to pro forma financial statements.
F-41
BUSTOP SHELTERS OF NEVADA, INC.
PRO FORMA CONDENSED STATEMENT OF LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Pro Forma
Bustop Bustop
Shelters of Shelters of
Nevada, Inc. Pro Forma Nevada, Inc.
9/30/97 Adjustments 9/30/97
------------- --------------- --------------
REVENUES: $ 1,759,482 $ 1,759,482
COST OF SALES:
City fees 482,029 482,029
Advertising commissions and expenses 250,429 250,429
Installation and maintenance 423,375 423,375
Other costs 29,393 29,393
------------- -------------
TOTAL COST OF SALES 1,185,226 1,185,226
------------- -------------
GROSS PROFIT 574,256 574,256
------------- -------------
OPERATING EXPENSES:
Sales and administrative 507,894 507,894
Depreciation 70,549 155,682 (3) 226,231
Interest expense - -
Other expense (income) (8,975) (8,975)
------------- -------------
TOTAL OPERATING EXPENSES 569,468 725,150
INCOME (LOSS) FROM OPERATIONS 4,788 (150,894)
------------- -------------
PROVISION (BENEFIT) FOR INCOME TAXES - -
------------- -------------
NET INCOME (LOSS) $ 4,788 $ (150,894)
============= =============
NET INCOME (LOSS) PER SHARE (0.16)
=============
WEIGHTED AVERAGE SHARES OUTSTANDING 970,030
=============
See accompanying notes to pro forma financial statements
F-42
METRO DISPLAY ADVERTISING, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
NOTE A - The pro forma adjustments to the condensed financial statements are
as follows:
(1) To record the transfer of accounts recievable to Bustop Shelters
of Nevada, Inc.
Accounts Receivable (as of September 30, 1997) $ 702,461
==========
(2) to record the transfer of the BATS investment, the joint venture
agreement and investment of Bustop Shelters of Nevada, Inc.
BATS investment $ 109,659
BATS joint venture 56,064
----------
165,723
----------
Investment in Bustop Shelters of Nevada, Inc. 1,039,284
----------
$1,205,007
==========
(3) To record the transfer of certain vehicles, furniture and fixtures, equipment and
536 bus shelters.
Property, at historical cost $1,739,358
Accumulated Depreciation, as January 1, 1996 (315,268)
----------
1,424,090
Depreciation expense for the year ended 12/31/96 207,576
Depreciation expense for the nine months ended 9/30/97 155,682
----------
Property, net $1,060,832
==========
(4) To record the elimination of inter-company lease shelter fees from
Metro Display Advertising, Inc. to Bustop Shelters of Nevada, Inc.
(5) To record tax adjustments related to the pro forma income
adjustments.
NOTE B - Each shareholder of Metro Display Advertising, Inc. will receive one
share of Bustop Shelters of Nevada, Inc. common stock for each share
of Metro Display Advertising, Inc. common share held.
F-43
EXHIBIT INDEX
A. Amended and Restated Agreement and Plan of Merger by and among
Eller Media Company, EMS, Inc. and Metro Display Advertising, Inc.
dated January 5, 1998; and the Specific Performance Escrow Agreement,
Van Wagner Escrow Agreement and Damages Escrow and Disbursement
Agreement related thereto
B. Chapter 13 of the California General Corporation Law
C. Form of Amended and Restated Articles of Incorporation of BSON
D. Form of Amended and Restated Bylaws of BSON
E. Letter from Stinchfield & Co. dated September 19, 1997
METRO DISPLAY ADVERTISING, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS, JANUARY 15, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF METRO DISPLAY ADVERTISING, INC.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Shareholders and Proxy Statement, each dated January 5, 1998, and does hereby
appoint Robert C. Lamb and Lawrence Bussman (the "Proxies"), and each of them,
with full power of substitution, as the proxy of the undersigned to represent
the undersigned and to vote all shares of Common Stock of Metro Display
Advertising, Inc. which the undersigned would be entitled to vote if personally
present at the Annual Meeting of Shareholders, to be held on January 15, 1998,
at the Fullerton Senior Multi-Service Center, 340 West Commonwealth Avenue,
Fullerton, California 92832, and at any adjournments thereof.
1. Approve and adopt the Amended and Restated Agreement and Plan of
Merger dated January 5, 1998, by and among Metro Display
Advertising, Inc., Eller Media Company and EMS, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Election of Directors:
[ ] FOR all nominees as listed below (except as marked to the
contrary)
INSTRUCTIONS: To withhold authority to vote for any individual nominee,
write that nominee's name on the line that follows:
_______________________________________________________________________________
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below
Allan L. Ross, M.D., William M. Slater, Mark R. Boileau
PROXIES NOT MARKED TO WITHHOLD AUTHORITY WILL BE VOTED FOR THE
ELECTION OF ALL NOMINEES WHOSE NAMES ARE NOT WRITTEN ON THE ABOVE
LINE.
3. Ratify the selection of Peck and Lopez as independent auditors for the
fiscal year ending December 31, 1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. At their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting.
The shares represented hereby will be voted as directed. WHERE NO
DIRECTION IS MADE, THE SHARES WILL BE VOTED FOR PROPOSALS 1, 2 AND 3.
_____________________________ _____________________________
(Signature) (Signature, if held jointly)
Dated: _____________, 1998
Please sign exactly as your name or names appear hereon, and when signing as
attorney, executor, administrator, trustee or guardian, give your full title as
such. If the signatory is a corporation, sign the full corporate name by a duly
authorized officer.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE
YOU MAY ALSO FAX THIS PROXY CARD TO THE COMPANY AT
(714) 727-4444