1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ELLER MEDIA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7312 86-0812139
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2850 E. CAMELBACK ROAD, SUITE 300
PHOENIX, ARIZONA 85016
(602) 957-8116
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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KARL ELLER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ELLER MEDIA CORPORATION
2850 E. CAMELBACK ROAD, SUITE 300
PHOENIX, ARIZONA 85016
(602) 957-8116
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
THOMAS W. DOBSON, ESQ. R. W. SMITH, JR., ESQ.
LATHAM & WATKINS PIPER & MARBURY L.L.P.
633 WEST FIFTH STREET, SUITE 4000 36 SOUTH CHARLES STREET
LOS ANGELES, CALIFORNIA 90071 BALTIMORE, MARYLAND 21201
(213) 485-1234 (410) 539-2530
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH AMOUNT MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
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Common Stock, par value $.01 per share... $ $ $200,000,000 $60,606
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(1) Includes shares subject to an over-allotment option granted to the
Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
DECEMBER 11, 1996
SHARES
LOGO
ELLER MEDIA CORPORATION
COMMON STOCK
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Of the shares of Common Stock ("Common Stock") offered hereby (the
"Offering"), shares are being sold by Eller Media Corporation (the
"Company") and shares are being sold by certain selling stockholders
named herein (the "Selling Stockholders"). See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale of
Common Stock by the Selling Stockholders. Prior to this offering, there has been
no public market for the Common Stock of the Company. It is currently
anticipated that the initial public offering price will be between and
per share. See "Underwriting" for the factors to be considered in
determining the initial public offering price.
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "ELLR."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 HEREOF.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS PROCEEDS
TO DISCOUNTS AND TO TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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Per Share..................... $ $ $ $
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Total(2)...................... $ $ $ $
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(1) Before deducting expenses of the Offering, payable by the Company, estimated
at $ .
(2) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to additional shares of Common Stock
solely to cover over-allotments, if any. To the extent that the option is
exercised, the Underwriters will offer the additional shares at the Price to
Public shown above. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about ,
1997.
ALEX. BROWN & SONS
INCORPORATED
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ
THE DATE OF THIS PROSPECTUS IS , 1997.
3
[Map of United States indicating the existing markets in which
the Company owns and operates outdoor advertising display faces/photos]
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET, THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. As used herein, "EMC" or the "Company" means Eller
Media Corporation, together with its consolidated subsidiaries, unless the
context otherwise requires. The Company is a holding company and conducts all of
its operations through its subsidiaries, including Eller Media Company
("Eller"), Patrick Media Group, Inc. ("PMG") and the subsidiaries of Eller
Investment Company, Inc. ("EIC"), which collectively operate under the name
"Eller Media Company." PMG and EIC are collectively referred to herein as the
"Predecessors." Unless otherwise specified, the Prospectus assumes, (i) a
for split and reclassification of the Common Stock of the Company which will
be effective immediately prior to the Offering of Common Stock contemplated
hereby and (ii) no exercise of the Underwriters' over-allotment option.
"Operating Cash Flow" has the meaning set forth in footnote 5 on page 7 hereof
and "Operating Cash Flow Margin" has the meaning set forth in footnote 6 on page
7 hereof. The term "market" refers to the geographic area constituting a
Designated Market Area as defined by the A.C. Nielsen Company.
THE COMPANY
Eller Media Corporation is the largest outdoor advertising company in the
United States based on its total U.S. advertising display inventory of
approximately 50,000 display faces. The Company provides outdoor advertising
services in 15 major metropolitan markets located in six operating regions:
Southern California, Texas, the Midwest, Northern California, the Southeast and
the Southwest. The Company believes it is the largest provider of outdoor
advertising services in 12 of its 15 markets based on total display faces. The
markets in which the Company operates represent approximately 22% of the total
U.S. population and approximately 50% of the rapidly growing U.S. Hispanic
population. For the nine month period ended September 30, 1996, the Company had
net revenues, Operating Cash Flow and an Operating Cash Flow Margin of $178.7
million, $70.8 million and 39.6%, respectively. For the fiscal year ended
December 31, 1995, on a pro forma basis as if the acquisition of the
Predecessors had occurred on January 1, 1995, the Company had net revenues,
Operating Cash Flow and an Operating Cash Flow Margin of $218.0 million, $76.2
million and 35.0%, respectively.
According to estimates by the Outdoor Advertising Association of America
(the "OAAA"), the trade association for the outdoor advertising industry,
outdoor advertising generated total revenues of approximately $1.8 billion in
1995, or approximately 1.1% of the total advertising expenditures in the United
States, and the out-of-home advertising industry generated revenues in excess of
$3.0 billion in 1995. Outdoor advertising's 1995 revenues represent growth of
approximately 8.2% over estimated total 1994 revenues, which compares favorably
to the growth of total U.S. advertising expenditures of approximately 7.7%
during the same period. In addition, for the first half of 1996, outdoor
advertising generated total revenues of approximately $915 million, up 7.0% from
the same 1995 period, according to recent estimates by the OAAA. Outdoor
advertising offers repetitive impact and a lower cost-per-thousand impressions,
a commonly used media measurement, as compared to competitive media, including
television, radio, newspapers, magazines and direct mail marketing. As a result,
outdoor advertising is attractive to both national and local advertisers either
seeking mass market exposure or targeting specific geographic areas or sets of
specific demographic characteristics.
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The following table sets forth for the nine month period ended September
30, 1996 certain information with respect to each of the Company's 15 major
metropolitan markets (dollars in thousands):
PREMIER
PANELS(TM)
AND
PERCENTAGE PREMIER TOTAL
MARKET NET OF NET PLUS(TM) 30-SHEET 8-SHEET TRANSIT DISPLAY
MARKET RANK(1) REVENUES REVENUES BULLETINS PANELS POSTERS POSTERS DISPLAYS FACES
- ----------------------------------- ------- -------- ---------- --------- -------- -------- ------- -------- -------
SOUTHERN CALIFORNIA:
Los Angeles(2)................... 2 $ 39,696 22.5% 722 116 4,875 -- 1,168 6,881
San Diego........................ 15 5,019 2.8 112 125 575 -- -- 812
TEXAS:
Dallas/Ft. Worth................. 7 13,329 7.6 679 84 2,073 135 -- 2,971
Houston.......................... 9 17,091 9.7 557 647 2,215 1,860 -- 5,279
San Antonio...................... 34 8,484 4.8 754 -- 1,374 1,332 -- 3,460
MIDWEST:
Chicago.......................... 3 17,891 10.1 417 17 2,858 -- 3,078 6,370
Cleveland(3)..................... 22 9,821 5.6 261 6 2,007 -- -- 2,274
Milwaukee........................ 28 4,949 2.8 137 30 821 -- -- 988
NORTHERN CALIFORNIA:
San Francisco/Oakland(4)......... 4 23,832 13.5 386 320 1,554 432 6,812 9,504
Sacramento....................... 29 4,101 2.3 91 44 426 -- 142 703
SOUTHEAST:
Miami............................ 11 3,759 2.2 -- -- -- -- 2,088 2,088
Atlanta.......................... 12 8,433 4.8 365 26 1,132 -- -- 1,523
Tampa(5)......................... 21 10,267 5.8 522 45 1,471 -- -- 2,038
SOUTHWEST:
Phoenix.......................... 20 5,683 3.2 365 -- -- -- -- 365
El Paso.......................... 70 4,091 2.3 284 11 545 544 -- 1,384
-------- ----- ----- ----- ------ ----- ------ ------
Total.......................... $176,446(6) 100.0% 5,652(7) 1,471 21,926 4,303 13,288 46,640(8)
======== ===== ===== ===== ====== ===== ====== ======
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(1) Market rank of the largest city in each market.
(2) Includes Los Angeles, Orange, Riverside, San Bernardino and Ventura
counties.
(3) Includes Akron and Canton.
(4) Includes San Francisco, Oakland, San Jose, Santa Cruz and Solano counties.
(5) Includes Sarasota and Bradenton.
(6) Excludes convenience store and other miscellaneous net revenues.
(7) Includes 21 wallscapes.
(8) Excludes 4,086 convenience store displays.
OPERATING STRATEGY
The Company's strategy is to expand its market presence and improve its
operating results by (i) managing the advertising rates and occupancy levels of
its displays to maximize market revenues; (ii) attracting new categories of
advertisers to the outdoor medium through significant investments in sales and
marketing resources; (iii) constructing new displays and upgrading its existing
displays; (iv) taking advantage of technological advances which increase both
sales force productivity and production department efficiency; and (v) acquiring
additional displays in its existing markets and expanding into additional
markets within the country's 35 largest media markets and their surrounding
regional areas. The Company believes this operating strategy enhances its
ability to effectively respond to advertisers' needs.
- Maximizing market revenues. The Company believes that the size,
diversity, and premium location of its display inventory provides it with
substantial pricing flexibility. The Company seeks to maximize revenues
through the optimization of advertising rates and occupancy levels.
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6
- Attracting new categories of advertisers. The Company dedicates
substantial resources to target large companies whose advertising
expenditures do not typically include outdoor advertising and introduce
them to the benefits of the outdoor medium. The Company offers
comprehensive sales, marketing, creative and research services to new and
existing customers.
- Constructing new displays and upgrading existing display faces. Since
January 1, 1996, the Company has invested approximately $10.2 million for
new display construction and for ongoing enhancement of its existing
display inventory. Where opportunities are available, the Company intends
to build new displays, continue to convert existing 30-sheet posters into
Premier Panels(TM) and Premier Plus(TM) panels and continue to upgrade
its existing display inventory.
- Capitalizing on technological improvements. The Company intends to take
advantage of advances in production (including the increased use of vinyl
and pre-printed advertising copy) and market research (including the
increased use of mapping and demographic software) in order to achieve
greater efficiencies and to increase the Company's net revenues and
Operating Cash Flow.
- Acquiring additional displays. In addition to internal growth, the
Company seeks to grow by continuing to acquire additional displays in its
existing markets and through the acquisition of other outdoor companies
whose assets have strategic appeal. The Company is focused on expanding
its operations in existing markets and expanding into additional markets
within the country's 35 largest media markets and their surrounding
regional areas. The Company believes that larger markets provide greater
revenue potential per display, improved access to national advertisers,
greater regional advertising benefits and the opportunity to gain a
larger market share from competitive and higher cost (per thousand)
media. The Company is also considering expansion into international
markets.
To support this operating strategy, the Company has decentralized its
operating structure in order to place authority, autonomy and accountability at
the market level and provide local management with the tools necessary to
oversee sales, display development, administration and production and to
identify suitable acquisition candidates. The Company is implementing
centralized accounting and financial controls designed to allow it to closely
monitor the operating and financial performance of its markets. The Company also
maintains a fully-staffed sales and marketing office in New York which services
national accounts and supports the Company's local sales force in each market.
The Company believes that one of its strongest competitive advantages is its
unique blend of highly experienced corporate and local market management.
BACKGROUND AND RECENT DEVELOPMENTS
The Company was formed in August 1995 to acquire PMG and EIC. EIC was
formed in August 1992 for the purpose of acquiring certain outdoor advertising
operations in Phoenix, Arizona. In September 1993, EIC purchased certain outdoor
advertising operations in El Paso, Texas, and in December 1994, EIC purchased
certain outdoor advertising operations in Atlanta, Georgia. In August 1995, the
Company acquired EIC and purchased from General Electric Capital Corporation
("GECC") the outdoor advertising operations of PMG. PMG was the successor to
Foster and Kleiser, the first significant national outdoor advertising company
in the United States, founded at the turn of the century.
Since January 1, 1996, the Company has purchased an aggregate of
approximately 1,550 display faces in 26 in-market purchases for an aggregate
purchase price of approximately $38.0 million. The Company believes that these
purchases strengthen its market position and allow it to capitalize on operating
efficiencies associated with the addition of display faces to its existing
markets. These purchases have included 167 bulletins in the Dallas/Ft. Worth
market and 227 bulletins and 735
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30-sheet posters in the San Antonio market. In addition, in December 1996, the
Company entered into an agreement to acquire 45 bulletins in the San
Francisco/Oakland market.
In addition to these acquisitions, the Company has initiated several
operational restructuring activities since August 1995, including the (i)
relocation of PMG's Chicago headquarters to Phoenix and (ii) relocation of PMG's
financial operations from Scranton, Pennsylvania to Phoenix. Collectively, these
measures have reduced operating and administrative costs and have helped the
Company to operate more efficiently and respond more quickly to its customers'
needs.
The Company was incorporated in Delaware in 1995 and its principal
executive office is located at 2850 E. Camelback Road, Suite 300, Phoenix,
Arizona 85016, and its telephone number is (602) 957-8116.
THE OFFERING
Common Stock offered by the Company..................... shares
Common Stock offered by the Selling Stockholders........ shares
Common Stock to be outstanding after the Offering....... shares(1)
Use of Proceeds to the Company.......................... To repay existing bank indebtedness
and for general corporate purposes.
See "Use of Proceeds." The Company
will not receive any proceeds from
the sale of shares by the Selling
Stockholders. See "Principal and
Selling Stockholders."
Nasdaq National Market Symbol........................... ELLR
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(1) Excludes (i) shares of Common Stock issuable upon exercise of
options outstanding on the date hereof, of which will be
immediately exercisable upon consummation of the Offering, (ii)
shares reserved for issuance pursuant to the Company's Equity Plan
(as defined herein), (iii) shares issuable pursuant to the Company's
Phantom Equity Plan (as defined herein) and (iv) shares issuable
pursuant to the terms of a convertible promissory note. See
"Management -- Executive Officers' Stock Options," "Management -- Equity
Plan," "Management -- Phantom Equity Plan" and "Description of Indebtedness
and Other Commitments -- Convertible Promissory Note."
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SUMMARY FINANCIAL AND OTHER DATA
The following table is derived from the Company's and the Predecessors'
respective financial statements and should be read in conjunction with such
financial statements, "Selected Consolidated Financial and Other Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
PREDECESSORS(1) EMC
--------------------- | -----------------------------------------
| NINE
YEAR ENDED | MONTHS ENDED
DECEMBER 31, | YEAR ENDED SEPTEMBER 30,
--------------------- | DECEMBER 31, ---------------------
1993 1994 | 1995 1995 1996
--------- --------- | ----------------- --------- ---------
| PRO
| PRO FORMA(2) FORMA(2)
(DOLLARS IN | ----------------- ---------
THOUSANDS |
EXCEPT PER SHARE |
AMOUNTS) |
|
STATEMENT OF OPERATIONS DATA: |
Gross revenues.................... $ 193,184 $ 216,008 | $ 249,400 $ 185,056 $ 203,995
Net revenues(3)................... 166,210 188,867 | 218,012 161,664 178,728
Cost of sales..................... 76,029 80,683 | 89,006 65,780 68,135
Selling, general and |
administrative expense.......... 43,919 47,226 | 52,760 39,686 39,830
Depreciation and amortization..... 43,630 43,446 | 33,259 22,807 29,372
-------- -------- | -------- -------- --------
Operating income.................. 2,632 17,512 | 42,987 33,391 41,391
Interest expense.................. 47,597 52,962 | 36,542 27,546 26,877
Other (expense) income, net....... (75) 6,859 | (8,354) (6,373) (5,323)
Provision for (benefit from) |
income taxes.................... (27,015) (9,870) | -- -- 2,400
-------- -------- | -------- -------- --------
Income (loss) before extraordinary |
item(4)......................... (18,025) (18,721) | (1,909) (528) 6,791
Net income (loss)................. (18,025) (20,894) | (1,909) (528) 6,791
Net income (loss) per share....... |
Weighted average common and |
equivalent shares outstanding... |
OTHER DATA: |
Operating Cash Flow(5)............ $ 46,262 $ 60,958 | $ 76,246 $ 56,198 $ 70,763
Operating Cash Flow Margin(6)..... 27.8% 32.3% | 35.0% 34.8% 39.6%
Capital expenditures(7)........... 21,319 44,185 | 14,289 9,876 48,151
SEPTEMBER 30, 1996
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ACTUAL AS ADJUSTED(8)
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(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital(9)............................................... $ 11,164
Total assets..................................................... 668,034
Total debt and capital lease obligations......................... 419,403
Stockholders' equity............................................. 196,016
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(1) See footnote 1 to "Selected Consolidated Financial and Other Data."
(2) See the Unaudited Pro Forma Consolidated Statements of Operations of the
Company included elsewhere in this Prospectus.
(3) Net revenues are gross revenues less agency commissions.
(4) Extraordinary item in 1994 represents loss on early extinguishment of debt.
(5) "Operating Cash Flow" is operating income before depreciation, amortization
and non-cash compensation expense. Operating Cash Flow is not intended to
represent net cash provided by operating activities as defined by generally
accepted accounting principles and should not be considered as an
alternative to net income (loss) as an indicator of the Company's operating
performance or to net cash provided by operating activities as a measure of
liquidity. The Company believes Operating Cash Flow is a measure commonly
reported and widely used by analysts, investors and other interested parties
in the media industry. Accordingly, this information has been disclosed
herein to permit a more complete comparative analysis of the Company's
operating performance relative to other companies in the media industry.
(6) "Operating Cash Flow Margin" is Operating Cash Flow stated as a percentage
of net revenues.
(7) Amount includes purchases and construction of display faces.
(8) Adjusted to reflect the sale of shares of Common Stock by the
Company in the Offering at an assumed initial public offering price of
$ per share and the application of the net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
(9) Working capital is current assets less current liabilities (excluding
current maturities of long-term debt and capital lease obligations).
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus.
Substantial Leverage; Ability to Service Indebtedness. The Company has
substantial consolidated indebtedness. On a pro forma basis after giving effect
to the application of the net proceeds of the Offering and the refinancing of
the Old Credit Facility (as defined herein), as of September 30, 1996, the
Company's total consolidated long-term debt was approximately $ million, and
on a pro forma basis for the nine months ended September 30, 1996, interest
expense was approximately $ million, or % of consolidated net revenues.
The Company's level of consolidated indebtedness could have important
consequences to the holders of Common Stock, including the following: (i) a
substantial portion of the Company's consolidated cash flow from operations must
be dedicated to the payment of the principal of and interest on indebtedness and
will not be available for other purposes; (ii) the ability of the Company to
obtain financing in the future for working capital needs, capital expenditures,
acquisitions, investments, general corporate purposes or other purposes may be
materially limited or impaired; and (iii) the Company's level of consolidated
indebtedness may reduce the Company's flexibility to respond to changing
business and economic conditions. Subject to certain limitations contained in
its Senior Credit Facility (as defined herein), the Company or its subsidiaries
may incur additional indebtedness to finance working capital or capital
expenditures, investments or acquisitions or for other purposes. See
"Description of Indebtedness and Other Commitments -- Senior Credit Facility."
Although historically the Company's Operating Cash Flow has been sufficient to
service its fixed charges, there can be no assurance that the Company's
Operating Cash Flow will continue to exceed its fixed charges. A decline in
Operating Cash Flow could impair the Company's ability to meet its obligations,
including debt service. In addition, the Company is a holding company and there
is no assurance that its operating subsidiaries will generate sufficient cash
flow to pay dividends or distribute funds to the Company so as to allow it to
pay its expenses or cash dividends on the Common Stock. See "Selected
Consolidated Financial and Other Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Restrictions Imposed by the Company's Indebtedness. The banks under the
Senior Credit Facility have a lien on substantially all of the assets of the
Company, including the capital stock of its subsidiaries, to secure the
indebtedness of the Company under such credit facility. In addition, the Company
and its subsidiaries have guaranteed repayment of the indebtedness under the
Senior Credit Facility. The Senior Credit Facility contains restrictions on the
Company's ability to incur additional indebtedness, create liens, pay dividends,
sell assets and make capital expenditures. Furthermore, the Senior Credit
Facility contains certain financial ratio maintenance tests. There can be no
assurance that the Company will be able to comply with the provisions of the
Senior Credit Facility, including compliance by the Company with the financial
ratios contained therein. Breach of any of these covenants or the failure to
fulfill the obligations thereunder and the lapse of any applicable grace periods
would result in an event of default under the Senior Credit Facility, and the
lenders could declare all amounts outstanding to be due and payable immediately.
There can be no assurance that the assets or cash flow of the Company would be
sufficient to repay in full borrowings under the Senior Credit Facility whether
upon maturity or earlier or if such indebtedness were to be accelerated upon an
event of default or that the Company would be able to refinance or restructure
its payments on such indebtedness. If such indebtedness were not so repaid,
refinanced or restructured, the lenders could proceed to realize on their
collateral. See "Description of Indebtedness and Other Commitments -- Senior
Credit Facility."
Acquisition Strategy. The Company was created through acquisitions and one
component of the Company's operating strategy is to continue to enhance its
market presence through acquisitions in new and existing markets. While the
Company believes that the outdoor advertising industry is rapidly consolidating,
there can be no assurance that suitable acquisition candidates can be found.
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10
The Company is likely to face competition from other media and outdoor
advertising companies for available acquisition opportunities. In addition, if
the prices sought by sellers of outdoor advertising display faces and companies
continue to rise, the Company may find fewer acceptable acquisition
opportunities. In addition, the purchase price of possible acquisitions could
require additional debt or equity financing on the part of the Company. The
Senior Credit Facility contains certain restrictions on the Company's ability to
incur additional indebtedness. There can be no assurance that the Company will
have sufficient capital resources to complete acquisitions, that acquisitions
can be completed on terms acceptable to the Company or that any acquisitions
that are completed can be integrated successfully into the Company. As part of
its regular on-going evaluation of acquisition opportunities, the Company may
from time to time engage in discussions concerning possible domestic and
international acquisitions, some of which may be material to the Company in
size. The Company cannot predict whether any such acquisitions will be
consummated. See "Business -- Operating Strategy," "Business -- Recent and
Pending Acquisitions" and "Description of Indebtedness and Other
Commitments -- Senior Credit Facility."
Regulation of Outdoor Advertising. Outdoor advertising displays are subject
to governmental regulation at the federal, state and local levels. These
regulations, in some cases, limit the height, size, location and operation of
billboards and, in limited circumstances, regulate the content of the
advertising copy displayed on the billboards. Some governmental regulations
prohibit the construction of new billboards or the replacement, relocation,
enlargement or upgrading of existing structures. Some cities, including one
within the Company's markets (Houston), have adopted amortization ordinances
under which, after the expiration of a specified period of time, billboards must
be removed at the owner's expense and without payment of compensation.
Ordinances requiring the removal of billboards without compensation, whether
through amortization or otherwise, are being challenged in various state and
federal courts with conflicting results. The Houston ordinance has been the
subject of litigation for over five years and is currently not being enforced.
The Company believes that its operations will not be materially affected by the
Houston amortization ordinance even if it is enforced, as a substantial number
of the Company's Houston inventory consists of bulletins and 30-sheet posters
located near federal highways where the Highway Beautification Act of 1965 would
require just compensation in the event of any required removal. In addition,
there can be no assurance that the Company will be successful in negotiating
acceptable arrangements in circumstances in which its displays are subject to
removal or amortization, and what effect, if any, such regulations may have on
the Company's operations. In addition, the Company is unable to predict what
additional regulations may be imposed on outdoor advertising in the future.
Legislation regulating the content of billboard advertisements has been
introduced in Congress from time to time in the past. Changes in laws and
regulations affecting outdoor advertising at any level of government could have
a material adverse effect on the Company. See "-- Tobacco Industry Regulation"
and "Business -- Government Regulation."
Tobacco Industry Regulation. Approximately 13.7% of the Company's 1995 pro
forma net revenues and approximately 16.3% of the Company's net revenues for the
nine months ended September 30, 1996 were derived from tobacco advertising. In
August 1996, the U.S. Food and Drug Administration issued final regulations
governing certain marketing practices in the tobacco industry, including a
prohibition of tobacco product billboard advertisements within 1,000 feet of
schools and playgrounds and a requirement that all tobacco product
advertisements on billboards be in black and white and contain only text. These
regulations will become effective in August 1997. There can be no assurance as
to the effect of these regulations or such legislation on the Company's business
and on its net revenues, Operating Cash Flow and financial position. A reduction
in billboard advertising by the tobacco industry would cause an immediate
reduction in the Company's direct revenue from such advertisers and would
simultaneously increase the available space on the existing inventory of
billboards in the outdoor advertising industry. This could in turn result in a
9
11
lowering of rates in each of the Company's markets or limit the ability of
industry participants to increase rates for some period of time. Any such
consequence could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Customers" and "Business -- Government Regulation."
Economic Conditions; Advertising Trends. The Company relies on sales of
advertising space for its revenues and its operating results therefore are
affected by general economic conditions, as well as trends in the advertising
industry. A reduction in advertising expenditures available for the Company's
displays could result from a general decline in economic conditions, a decline
in economic conditions in its markets, particularly California, or a
reallocation of advertising expenditures to other available media by significant
users of the Company's displays.
Competition. The Company faces competition for advertising revenues from
other media such as radio, television, print media and direct mail marketing, as
well as from other outdoor advertising companies. The Company also competes with
a wide variety of other out-of-home advertising media, the range and diversity
of which have increased substantially over the past several years, including
advertising displays in shopping centers and malls, airports, stadiums, movie
theaters and supermarkets, and on taxis, trains, buses and subways. Some of the
Company's competitors are substantially larger, better capitalized and have
access to greater resources than the Company. There can be no assurance that
outdoor advertising media will be able to compete with other types of media, or
that the Company will be able to compete either within the outdoor advertising
industry or with other media. See "Business -- Competition."
Reliance on Key Personnel. The Company's success depends to a significant
extent upon the continued services of its executive officers and other key
management and sales personnel, including, in particular, Karl Eller, the
Company's Chairman and Chief Executive Officer. Although the Company believes it
has incentive and compensation programs designed to retain key employees,
including options to purchase shares of the Company's Common Stock, the Company
has an employment agreement with only one employee, and few of its employees are
bound by non-competition agreements. The Company maintains key man insurance on
Karl Eller but not on any of its other executives. The unavailability of the
continuing services of Mr. Eller or one or more of the Company's other executive
officers and other key management and sales personnel could have a material
adverse effect on the Company. See "Management."
The Company's operating strategy is based in significant part on
decentralization and reliance on managers in local markets to operate
autonomously, subject to centralized strategic direction and administrative
controls. Accordingly, the Company's success is dependent upon its ability to
attract and retain qualified local managers and on the ability of those managers
to properly perform on a basis consistent with the Company's strategic goals and
objectives. Any failure of performance by local managers or any inability of the
Company to properly direct and control such managers could have a material
adverse effect on the Company.
Challenges of Business Integration. The Company was formed in August 1995
to acquire PMG and EIC. Since August 1995, the Company has initiated several
operational restructuring activities designed to reduce operating and
administrative costs and implement the Company's decentralized operating
philosophy, subject to centralized accounting and financial controls. The
Company is in the process of relocating PMG's financial operations from
Scranton, Pennsylvania to Phoenix, and is delegating the functions performed by
that staff both to the regional and local markets and also to the corporate
office in Phoenix. Included in this process is the installation of a new
accounting system which has been completed for 11 of the Company's markets.
There can be no assurance that the Company will complete these restructuring
projects and administrative changes in a timely fashion, that the expected cost
savings will be realized or that the new accounting system can be implemented
without disruption to the operations and controls of the Company.
History of Net Losses. The Predecessors historically recorded net losses
resulting in significant part from substantial depreciation and amortization
expenses relating to acquired assets and
10
12
goodwill, interest expense associated with acquisition related indebtedness and
other charges. Although the Company has recorded net income for the nine months
ended September 30, 1996, it will incur a write-off of deferred financing
charges as a result of the refinancing of the Old Credit Facility and will
experience significant non-cash charges for compensation expenses in the fourth
quarter of 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Fourth Quarter 1996 Charges." There can
be no assurance that the Company will generate net income in the future.
Environmental Matters. As the owner, lessee or operator of various real
properties and facilities, the Company is subject to various federal, state and
local environmental laws and regulations. Historically, compliance with such
laws and regulations has not had a material adverse effect on the Company's
business. There can be no assurance, however, that compliance with existing or
new environmental laws and regulations will not require the Company to make
significant expenditures in the future.
Seasonality. The Company's revenues and operating results have exhibited
some degree of seasonality in past periods. Typically, the Company experiences
its strongest financial performance in the second and third quarters and its
lowest revenues in the first and fourth quarters. The Company expects this trend
to continue in the future, and, as a result, the Company is likely to experience
a net loss for the quarter ended March 31, 1997. Because a significant portion
of the Company's expenses are fixed, a reduction in revenues in any quarter is
likely to result in a period-to-period decline in operating performance and net
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Seasonality and Quarterly Information."
Control by Executive Officers, Directors and Affiliates. Upon consummation
of the Offering, the Company's executive officers, directors and their
respective affiliates will beneficially own (including for this purpose options
exercisable within 60 days after the date of this Prospectus and shares over
which such persons have voting control) approximately % of the outstanding
shares of the Company's Common Stock. See "Principal and Selling Stockholders."
Such persons, if acting together, would have sufficient voting power to control
the outcome of corporate actions submitted to the stockholders for approval and
to control the management and affairs of the Company, including the election of
the Board of Directors of the Company. As a result of such control, certain
transactions may not be possible without the approval of such stockholders,
including proxy contests, mergers involving the Company and tender offers or
other purchases of Common Stock that could give stockholders of the Company the
opportunity to realize a premium over the then-prevailing market price for their
shares of Common Stock. See "Principal and Selling Stockholders" and
"Description of Capital Stock -- Special Provisions of the Certificate of
Incorporation, Bylaws and Delaware Law."
Anti-Takeover Provisions. The level of stock ownership of the Company's
executive officers, directors and their respective affiliates, as well as the
provisions of the Delaware General Corporation Law and the Company's Certificate
of Incorporation and Bylaws (each as defined in "Description of Capital Stock"),
may have the effect of deterring hostile takeovers, delaying or preventing
changes in control or changes in management, or limiting the ability of
stockholders to approve transactions that they may deem to be in their best
interests. In accordance with the terms of the Company's Certificate of
Incorporation, effective upon consummation of the Offering, the terms of office
of the Board of Directors will be divided into three classes serving staggered
three-year terms. In addition, under the Company's Certificate of Incorporation,
the Board of Directors has the authority to issue shares of preferred stock and
establish the rights and preferences thereof without obtaining stockholder
approval. The Company has no present plans to issue any shares of preferred
stock. See "Description of Capital Stock."
Absence of Public Market. Prior to this Offering, there has been no public
market for the Common Stock of the Company. There can be no assurance that,
following this Offering, an active
11
13
trading market for the Common Stock will develop or be sustained or that the
market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price will be determined by
negotiations among the Company, the Selling Stockholders and the Representatives
(as defined herein) of the Underwriters (as defined herein) and will not
necessarily be indicative of the market price of the Common Stock after this
Offering. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. From time to time, the stock
market experiences significant price and volume volatility, which may affect the
market price of the Common Stock for reasons unrelated to the Company.
Immediate and Substantial Dilution. Purchasers of the Common Stock offered
hereby will suffer an immediate and substantial dilution in the net tangible
book value of the Common Stock from the initial public offering price. See
"Dilution."
Shares Eligible for Future Sale. Sales of the Company's Common Stock in the
public market after the Offering could adversely affect the market price of the
Company's Common Stock. Upon completion of this Offering, the Company will have
outstanding shares of Common Stock (excluding (i) shares of
Common Stock issuable upon the exercise of the Underwriters' over-allotment
option, (ii) shares of Common Stock issuable upon the exercise of
options outstanding on the date hereof, of which will be immediately
exercisable upon consummation of the Offering, (iii) shares reserved
for issuance pursuant to the Equity Plan, (iv) shares issuable pursuant to
the Phantom Equity Plan and (v) shares issuable pursuant to the terms
of a convertible promissory note). Of these shares, the shares
( shares if the Underwriters' over-allotment option is exercised in
full) of Common Stock sold in this Offering will be freely tradable without
restriction under the Securities Act of 1933, as amended (the "Securities Act"),
except for any shares purchased by "affiliates," as that term is defined in the
Securities Act, of the Company. The remaining shares are "restricted
securities" within the meaning of Rule 144 adopted under the Securities Act.
Such shares generally may not be sold unless they are registered under the
Securities Act or are sold pursuant to an exemption from registration, such as
the exemption provided by Rule 144 under the Securities Act. Approximately
outstanding shares of Common Stock will become eligible for sale in
August 1997 pursuant to Rule 144, subject to volume and manner of sale
restrictions. Certain of the Company's stockholders and all of its executive
officers and directors, with the power to dispose of a total of
shares, have agreed not to offer, sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of Alex. Brown & Sons Incorporated on behalf of the
Underwriters. In addition, the Company intends to file a registration statement
on Form S-8 under the Securities Act to register shares to be issued upon
exercise of options outstanding on the date hereof and options granted pursuant
to the Equity Plan. See "Management -- Executive Officers' Stock Options,"
"Management -- Equity Plan," "Description of Indebtedness and Other
Commitments -- Convertible Promissory Note," and "Shares Eligible for Future
Sale."
Absence of Dividends. The Company has not paid dividends on its Common
Stock and does not anticipate paying dividends on its Common Stock in the
foreseeable future. In addition, the Senior Credit Facility prohibits the
Company from paying cash dividends or making any other distribution on its
Common Stock. The Senior Credit Facility also requires that a portion of the
Company's excess cash flow be applied to prepay the term loans under such credit
facility. See "Dividend Policy" and "Description of Indebtedness and Other
Commitments -- Senior Credit Facility."
12
14
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company believes that this Prospectus contains certain forward-looking
statements, including statements containing the words "believes," "anticipates,"
"expects" and words of similar import. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: adverse changes in national or local economic
conditions, competition from other outdoor advertising companies or other media,
changes in the availability, cost and terms of financing, changes in operating
expenses, adverse changes in governmental regulations and other factors
referenced in this Prospectus. Certain of these factors are discussed in more
detail elsewhere in this Prospectus, including without limitation under the
captions "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business." Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered by the Company hereby are estimated to be approximately
$ million (or approximately $ million if the Underwriters'
overallotment option is exercised in full), assuming an initial public
offering price of $ per share, after deducting estimated underwriting
discounts and commissions and offering expenses.
The Company intends to use approximately $ million of such proceeds to
repay the revolving credit amounts (the "Revolver") outstanding under its $550
million senior secured credit facility (the "Senior Credit Facility"). As of
December 10, 1996 approximately $412 million was outstanding under the Senior
Credit Facility, including $62 million outstanding under the Revolver, which
amount bore interest at a rate of approximately 7.35% per annum. Amounts under
the Revolver were incurred for acquisitions and working capital and are due and
payable on September 30, 2003. See "Description of Indebtedness and Other
Commitments -- Senior Credit Facility." The Company will use the remaining
proceeds from this Offering, estimated to be approximately $ million ($
million if the Underwriters' over-allotment option is exercised in full), for
general corporate purposes.
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Stockholders.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock and does not
anticipate paying dividends on its Common Stock in the foreseeable future. The
Company intends to retain any future earnings for reinvestment in the Company.
In addition, the Senior Credit Facility prohibits the Company from paying cash
dividends or making any other distribution on its Common Stock. The Senior
Credit Facility also requires that a portion of the Company's excess cash flow
be applied to prepay the term loans under such credit facility beginning in
1999. See "Description of Indebtedness and Other Commitments -- Senior Credit
Facility." Any future determination as to the payment of dividends will be
subject to such prohibitions and limitations and will be at the discretion of
the Company's Board of Directors and will depend on the Company's results of
operations, financial condition, capital requirements and other factors deemed
relevant by the Board of Directors.
13
15
DILUTION
The net tangible book value of the Company's Common Stock as of September
30, 1996 was approximately $48.3 million, or $ per share of Common
Stock. The net tangible book value per share of Common Stock represents the
amount of the Company's common stockholders' equity, less intangible assets,
divided by shares of Common Stock outstanding as of September 30,
1996.
Net tangible book value dilution per share of Common Stock represents the
difference between the amount per share paid by purchasers of Common Stock in
this Offering and the net tangible book value per share of Common Stock
immediately after completion of this Offering. After giving effect to the sale
by the Company of shares of Common Stock in this Offering at an
assumed initial public offering price of $ per share and the application
of the estimated net proceeds therefrom, the net tangible book value of the
Common Stock as of September 30, 1996 would have been $ , or $ per
share of Common Stock. This represents an immediate decrease in the net tangible
book value of $ per share of Common Stock to purchasers of Common Stock
in this Offering. The following table illustrates this dilution in the net
tangible book value per share to new investors:
Assumed initial public offering price per share...................... $
Net tangible book value per share of Common Stock at September 30,
1996............................................................ $
Increase per share of Common Stock attributable to new investors...
Pro forma net tangible book value per share of Common Stock after
this Offering......................................................
--------
Dilution per share to new investors.................................. $
========
The following table sets forth, as of September 30, 1996, the number of
shares of Common Stock issued by the Company, the total consideration paid and
the average price per share paid by existing stockholders and by new investors
purchasing shares of Common Stock in this Offering:
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------- ---------- ------------ ---------- -------------
Existing stockholders(1)(2)... % $191,600,000 % $
New investors(2).............. $
--
----- --- -----
Total....................... 100.0% $ 100.0%
== ===== === =====
- ------------------------
(1) Excludes (i) shares of Common Stock issuable upon exercise of options
outstanding on the date hereof, of which will be immediately
exercisable upon consummation of the Offering, (ii) shares reserved for
issuance pursuant to the Equity Plan, (iii) shares issuable pursuant to
the Phantom Equity Plan and (iv) shares issuable pursuant to the terms
of a convertible promissory note. See "Management -- Executive Officers'
Stock Options," "Management -- Equity Plan," "Management -- Phantom Equity
Plan" and "Description of Indebtedness and Other Commitments -- Convertible
Promissory Note."
(2) Sales by the Selling Stockholders in this Offering will reduce the number of
shares of Common Stock held by existing stockholders to , or %,
of the total number of shares of Common Stock to be outstanding after this
Offering, and will increase the number of shares of Common Stock to be
purchased by new investors to , or %, of the total number of
shares of Common Stock to be outstanding after this Offering.
The computations in the table set forth above assume no exercise of stock
options outstanding on the date hereof. On the date of this Prospectus, there
were outstanding options to purchase shares of Common Stock at a
weighted average exercise price of $ per share. Assuming the exercise
of all such options, the per share dilution to new investors would be
$ as compared to $ presented above.
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CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
at September 30, 1996, (ii) the pro forma capitalization of the Company at
September 30, 1996 after giving effect to the refinancing and replacement of the
Old Credit Facility with the Senior Credit Facility and (iii) the pro forma as
adjusted capitalization of the Company at September 30, 1996 after giving
additional effect to the sale by the Company of shares of Common Stock
in the Offering at an assumed initial public offering price of $ per
share and the application of the estimated net proceeds to the Company therefrom
as set forth under "Use of Proceeds." The table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the related
notes thereto included elsewhere in this Prospectus.
SEPTEMBER 30, 1996
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
Current maturities of long-term debt and
capital lease obligations............................ $ 21,081 $ 1,331 $
-------- -------- --------
Long-term debt:
Old Credit Facility:
Tranche A loans................................... $226,750 --
Tranche B loans................................... 124,000 --
Line of credit facility........................... 43,500 --
Other................................................ 2,003 2,003
-------- -------- --------
Total existing long-term debt................ 396,253 2,003
-------- -------- --------
Senior Credit Facility:
Tranche A loans................................... -- 200,000
Tranche B loans................................... -- 150,000
Line of credit facility........................... -- 66,730
-------- -------- --------
Total Senior Credit Facility................. -- 416,730
-------- -------- --------
Capital lease obligations.............................. 2,069 2,069
-------- -------- --------
Total long-term debt and capital
lease obligations.......................... 398,322 420,802
-------- -------- --------
Stockholders' equity:
Preferred Stock, $.01 par value...................... -- --
Common Stock, $.01 par value......................... 1 1
Additional paid in capital........................... 191,758 191,758
Retained earnings (deficit).......................... 4,257 (414)
-------- -------- --------
Total stockholders' equity(1)..................... 196,016 191,345
-------- -------- --------
Total capitalization......................... $615,419 $613,478 $
======== ======== ========
- ---------------
(1) Excludes (i) shares of Common Stock issuable upon exercise of
options outstanding on the date hereof, of which will be
immediately exercisable upon consummation of the Offering,
(ii) shares reserved for issuance pursuant to the Equity Plan,
(iii) shares issuable pursuant to the Phantom Equity Plan and
(iv) shares issuable pursuant to the terms of a convertible
promissory note. See "Management -- Executive Officers' Stock Options,"
"Management -- Equity Plan," "Management -- Phantom Equity Plan" and
"Description of Indebtedness and Other Commitments --Convertible Promissory
Note."
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17
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected financial data presented below for the nine-months ended
September 30, 1996 is derived from the consolidated financial statements of the
Company. The selected financial data for the period from January 1, 1995 to
August 17, 1995 is derived from the consolidated financial statements of PMG and
the combined financial statements of EIC. The selected financial data for the
period from August 18, 1995 to December 31, 1995 is derived from the
consolidated financial statements of the Company. The pro forma selected
financial data for the nine and twelve months ended September 30, 1995 and
December 31, 1995, respectively, is derived from the Unaudited Pro Forma
Consolidated Statements of Operations of the Company. The remaining selected
financial data for the years ended December 31, 1991, 1992, 1993 and 1994 are
derived from the consolidated financial statements of PMG and the combined
financial statements of EIC.
The selected financial data of the Company as of December 31, 1995 and for
the period from August 18, 1995 to December 31, 1995, the selected financial
data of the Predecessors from January 1, 1995 to August 17, 1995, and the
selected financial data of EIC as of and for the year ended December 31, 1994,
were derived from financial statements audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports included elsewhere
in this Prospectus. The selected financial data of PMG as of and for the two
years ended December 31, 1994 was derived from financial statements audited by
KPMG Peat Marwick LLP, independent public accountants, as indicated in their
report included elsewhere in this Prospectus.
The selected financial data as of September 30, 1995 and 1996 was derived
from the respective unaudited consolidated or combined financial statements
referred to above. These respective unaudited consolidated or combined financial
statements were prepared on a basis consistent with that of the audited
consolidated or combined financial statements and, in the opinion of management,
contain all adjustments necessary for a fair presentation. Results for periods
of less than one year are not necessarily indicative of results for a full year.
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical and unaudited pro forma consolidated financial statements,
including the notes thereto, appearing elsewhere in this Prospectus.
16
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PREDECESSORS(1)
-------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1991 1992 1993 1994
--------- ------------------ ------------------- ------------------
PMG PMG EIC PMG EIC PMG EIC
--------- -------- ------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Gross revenues.......................................... $ 198,808 $174,123 $ 2,287 $187,003 $ 6,181 $203,065 $12,943
Net revenues(3)......................................... 166,846 147,640 1,978 160,822 5,388 177,275 11,592
Cost of sales........................................... 77,415 65,698 976 73,163 2,866 75,427 5,256
Selling, general and administrative expense............. 45,890 39,600 242 43,262 657 45,859 1,367
Depreciation and amortization........................... 37,833 34,615 298 42,756 874 41,733 1,713
--------- -------- -------- -------- -------- ------- --------
Operating income........................................ 5,708 7,727 462 1,641 991 14,256 3,256
Interest expense........................................ 64,674 43,429 705 45,695 1,902 50,325 2,637
Other (expense) income, net............................. (50,355) (34,751) 7 38 (113) 7,064 (205)
Provision for (benefit from) income taxes............... -- 20,461 -- (27,015) -- (9,950) 80
--------- -------- -------- -------- -------- ------- --------
Income (loss) before extraordinary item(4).............. (109,321) (90,914) (236) (17,001) (1,024) (19,055) 334
Net income (loss)....................................... 79,551 (90,914) (236) (17,001) (1,024) (19,055) (1,839)
Net income (loss) per share.............................
Weighted average common and equivalent shares
outstanding............................................
OTHER DATA:
Operating Cash Flow(5).................................. $ 43,541 $ 42,342 $ 760 $ 44,397 $ 1,865 $ 55,989 $ 4,969
Operating Cash Flow Margin(6)........................... 26.1% 28.7% 38.4% 27.6% 34.6% 31.6% 42.9%
Capital expenditures(7)................................. 6,048 7,249 31 21,205 114 21,573 22,612
EMC
------------------------------------------
JANUARY 1, AUGUST 18, NINE MONTHS
TO TO YEAR ENDED ENDED
AUGUST 17, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------- ------------ ------------- ------------
1995 1995 1995 1995
------------------- ------------ ------------- ------------
PMG EIC PRO PRO
-------- -------- FORMA(2) FORMA(2)
------------- --------
STATEMENT OF OPERATIONS DATA:
Gross revenues.......................................... $141,778 $ 15,439 $ 92,183 $ 249,400 $185,056
Net revenues(3)......................................... 123,615 13,719 80,678 218,012 161,664
Cost of sales........................................... 50,456 5,796 32,754 89,006 65,780
Selling, general and administrative expense............. 31,480 1,903 19,377 52,760 39,686
Depreciation and amortization........................... 22,769 2,148 14,468 33,259 22,807
-------- -------- -------- -------- --------
Operating income........................................ 18,910 3,872 14,079 42,987 33,391
Interest expense........................................ 27,629 3,240 13,616 36,542 27,546
Other (expense) income, net............................. (4,860) (497) (2,997) (8,354) (6,373)
Provision for (benefit from) income taxes............... (3,858) -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before extraordinary item(4).............. (9,721) 135 (2,534) (1,909) (528)
Net income (loss)....................................... (9,721) 135 (2,534) (1,909) (528)
Net income (loss) per share.............................
Weighted average common and equivalent shares
outstanding............................................
OTHER DATA:
Operating Cash Flow(5).................................. $ 41,679 $ 6,020 $ 28,547 $ 76,246 $56,198
Operating Cash Flow Margin(6)........................... 33.7% 43.9% 35.4% 35.0% 34.8%
Capital expenditures(7)................................. 8,218 409 5,662 14,289 9,876
EMC
-----------
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
1996
--------
STATEMENT OF OPERATIONS DATA:
Gross revenues.......................................... $203,995
Net revenues(3)......................................... 178,728
Cost of sales........................................... 68,135
Selling, general and administrative expense............. 39,830
Depreciation and amortization........................... 29,372
--------
Operating income........................................ 41,391
Interest expense........................................ 26,877
Other (expense) income, net............................. (5,323)
Provision for (benefit from) income taxes............... 2,400
--------
Income (loss) before extraordinary item(4).............. 6,791
Net income (loss)....................................... 6,791
Net income (loss) per share.............................
Weighted average common and equivalent shares
outstanding............................................
OTHER DATA:
Operating Cash Flow(5).................................. $ 70,763
Operating Cash Flow Margin(6)........................... 39.6%
Capital expenditures(7)................................. 48,151
PREDECESSORS(1)
------------------------------------------------
DECEMBER 31,
------------------------------------------------
1991 1992 1993
--------- --------------------- --------
PMG PMG EIC PMG
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital(8).......................................................... $ (69,410) $ 6,007 $ (1,824) $ 16,596
Total assets................................................................ 370,020 584,081 17,547 555,226
Total debt and capital lease obligations.................................... 475,601 565,823 14,695 590,171
Stockholders' equity (deficit).............................................. (206,885) (31,702) (236) (48,713)
PREDECESSORS(1)
-----------------------------------------------------
DECEMBER 31,
-------------------------------- EMC
1993 1994 ------------
-------- --------------------- DECEMBER 31,
EIC PMG EIC 1995
-------- -------- -------- ------------
BALANCE SHEET DATA:
Working capital(8).......................................................... $ (312) $ 9,085 $ 178 $ 7,228
Total assets................................................................ 14,308 513,024 45,999 643,846
Total debt and capital lease obligations.................................... 13,195 562,040 40,221 407,510
Stockholders' equity (deficit).............................................. (1,559) (67,969) (1,666) 189,126
EMC
------------
SEPTEMBER 30,
1996
-------------
BALANCE SHEET DATA:
Working capital(8).......................................................... $ 11,164
Total assets................................................................ 668,034
Total debt and capital lease obligations.................................... 419,403
Stockholders' equity (deficit).............................................. 196,016
See Notes to Selected Consolidated Financial and Other Data.
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NOTES TO SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(1) The historical information set forth herein represents the separate
financial performance of PMG and EIC. Fiscal year 1991 includes only PMG
since EIC was formed on August 20, 1992. The following table sets forth
combined statements of operations and other data for the Predecessors for
the periods indicated, representing the sum of the corresponding amounts
appearing in the respective historical statements of operations of the
Predecessors appearing herein, without pro forma or other adjustments.
Because the Predecessors had different accounting policies, cost basis and
capital structures, the combined statements are not in all respects
comparable, with respect to matters such as depreciation, amortization,
interest expense and other items, to the financial statements of the
Company, nor are the Predecessors' financial statements in all respects
comparable to each other. Such combined statements do not represent the
results which would have been achieved or reported had the Predecessors been
acquired by the Company or otherwise combined at the beginning of the
periods presented.
PREDECESSORS
---------------
PREDECESSORS
------------------------------------------ JANUARY 1,
TO
YEAR ENDED DECEMBER 31, AUGUST 17,
------------------------------------------ ---------------
1991 1992 1993 1994 1995
--------- -------- -------- -------- ---------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Gross revenues..................................................... $ 198,808 $176,410 $193,184 $216,008 $ 157,217
Net revenues(3).................................................... 166,846 149,618 166,210 188,867 137,334
Cost of sales...................................................... 77,415 66,674 76,029 80,683 56,252
Selling, general and administrative expense........................ 45,890 39,842 43,919 47,226 33,383
Depreciation and amortization...................................... 37,833 34,913 43,630 43,446 24,917
--------- -------- -------- -------- --------
Operating income................................................... 5,708 8,189 2,632 17,512 22,782
Interest expense................................................... 64,674 44,134 47,597 52,962 30,869
Other (expense) income, net........................................ (50,355) (34,744) (75) 6,859 (5,357)
Provision for (benefit from) income taxes.......................... -- 20,461 (27,015) (9,870) (3,858)
--------- -------- -------- -------- --------
Income (Loss) before extraordinary item(4)......................... (109,321) (91,150) (18,025) (18,721) (9,586)
Net income (loss).................................................. 79,551 (91,150) (18,025) (20,894) (9,586)
OTHER DATA:
Operating Cash Flow(5)............................................. $ 43,541 $ 43,102 $ 46,262 $ 60,958 $ 47,699
Operating Cash Flow Margin(6)...................................... 26.1% 28.8% 27.8% 32.3% 34.7%
Capital expenditures(7)............................................ 6,048 7,280 21,319 44,185 8,627
(2) See the Unaudited Pro Forma Consolidated Statements of Operations of the
Company included elsewhere in this Prospectus.
(3) Net revenues are gross revenues less agency commissions.
(4) Extraordinary item in 1991 represents gain on early extinguishment of debt,
and extraordinary item in 1994 represents loss on early extinguishment of
debt.
(5) Operating Cash Flow is operating income before depreciation, amortization
and non-cash compensation expense. See footnote 5 to "Summary Financial and
Other Data."
(6) Operating Cash Flow Margin is Operating Cash Flow stated as a percentage of
net revenues.
(7) Amount includes purchases and construction of display faces.
(8) Working capital is current assets less current liabilities (excluding
current maturities of long-term debt and capital lease obligations).
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the consolidated results of operations of the
Company and the Predecessors for the three years ended December 31, 1995 and the
nine months ended September 30, 1995 and September 30, 1996 and financial
condition at December 31, 1995 and September 30, 1996 should be read in
conjunction with the respective financial statements of the Company and the
Predecessors and the related notes thereto included elsewhere in this
Prospectus.
BACKGROUND
The Company was formed in August 1995 to acquire PMG and EIC. EIC was
formed in August 1992 for the purpose of acquiring certain outdoor advertising
operations in Phoenix, Arizona. In September 1993, EIC purchased certain outdoor
advertising operations in El Paso, Texas, and in December 1994, EIC purchased
certain outdoor advertising operations in Atlanta, Georgia. In August 1995, the
Company acquired EIC and purchased from GECC the outdoor advertising operations
of PMG. PMG was the successor to Foster and Kleiser, the first significant
national outdoor advertising company in the United States, founded at the turn
of the century.
The Company financed the purchase of PMG with a combination of a $440
million credit facility, consisting of two term loans and a revolving credit
facility (the "Old Credit Facility"), and an equity investment of approximately
$163 million from Hellman & Friedman Capital Partners III, L.P., H&F Orchard
Partners III, L.P. and H&F International Partners III, L.P. and other
co-investors.
Since the Company's formation, management has actively pursued purchases of
outdoor advertising displays which have increased its presence in major
metropolitan markets. Since January 1, 1996, the Company has purchased an
aggregate of approximately 1,550 display faces in 26 in-market purchases for an
aggregate purchase price of approximately $38.0 million. The Company has
financed such acquisitions with borrowings under the Old Credit Facility and
cash from operations. The Company's financial results for the nine months ended
September 30, 1996 do not reflect the full impact of these purchases.
GENERAL
Revenues are a function of the number of displays operated by the Company,
as well as the occupancy levels of the Company's display faces and the rates
that the Company charges for their use. The Company focuses its sales efforts on
maximizing the yield of its display inventory by optimizing its rates and
occupancy levels to best meet demand in each market. The Company utilizes
sophisticated demographic research, substantial creative resources and strategic
developmental sales and marketing techniques to generate demand for out-of-home
media products, often targeting customers currently using other forms of media.
The Company has emphasized the development of new display locations in
growth areas of its existing markets in order to generate additional revenues.
Additionally, the Company has expanded its product offering to include transit
displays and other out-of-home media products in order to better serve
customers' needs and generate additional demand. The Company has also developed
creative new display types to meet advertiser needs and attract new customers to
outdoor advertising, including Premier Panels(TM) and Premier Plus(TM) panels.
These new display types permit the Company to enhance its rate structure on its
existing display inventory by increasing the square footage of advertising
displays and expanding the format of its outdoor advertising displays to
accommodate more diverse advertising copy.
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21
Net revenues represent gross revenues less commissions paid to advertising
agencies and brokers that contract for the use of advertising displays on behalf
of advertisers. Agency commissions on revenues which are contracted through
advertising agencies are typically 15% of gross revenues. Not all revenues are
contracted through advertising agencies. An increasing portion of revenues are
derived directly from advertisers or are contracted through an advertising
agency that is being compensated on a fixed fee basis rather than on a
commission based program. As a result, agency commissions as a percentage of
gross revenues have decreased over the past several years to approximately 12.4%
of gross revenues in the nine months ended September 30, 1996.
The Company considers agency commissions as a reduction in gross revenues
and measures its operating performance based upon percentages of net revenues
rather than gross revenues. The Company's sales incentive programs are focused
on net revenues as well.
The Company's cost of sales consists of direct expenses, maintenance and
operations expenses and site leases. Direct expenses include costs directly
associated with the Company's displays, including copy, production and
installation costs and illumination expense. Maintenance and operations expenses
include minor repairs, vehicle upkeep and other miscellaneous operating
expenses. Site leases consist mainly of rental payments to owners of real estate
underlying the signs. For the nine months ended September 30, 1996, these
expenses amounted to the following approximate percentages of net revenues:
direct 8.8%, maintenance and operations 8.4% and site leases 20.8%.
Selling, general and administrative expenses occur at both the market and
corporate level. At the market level, these expenses consist of various items of
office overhead pertaining to both personnel and facilities, including
accounting and administrative expenses and direct sales and marketing costs. At
the corporate level, these costs represent staff and facility expenses for the
executive office, the Company's incentive bonus pool, the New York sales and
marketing office and the corporate accounting and MIS functions.
The Company's decentralized operating structure places authority, autonomy
and accountability at the market level and provides local management with the
tools necessary to effectively manage their operations on a day-to-day basis.
The corporate, executive and administrative functions focus on providing
strategic direction and oversight to the markets while maintaining specific
financial controls to monitor market progress. The Company's bonus expense is
accounted for at the corporate level since executive management exercises
substantial discretion in determining market compensation levels, and since
executive management is responsible for administering the program.
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22
RESULTS OF OPERATIONS -- THE COMPANY
NINE MONTHS ENDED SEPTEMBER 30, 1996 ("INTERIM 1996") COMPARED TO PRO FORMA
NINE MONTHS ENDED SEPTEMBER 30, 1995 ("INTERIM 1995")
The following table presents certain operating statement items of the
Company as a percentage of net revenues.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
PRO FORMA
1995(1) 1996
--------- -----
Net revenues............................................................ 100.0% 100.0%
Cost of sales........................................................... 40.7 38.1
Selling, general and administrative expenses............................ 24.5 22.3
--------- -----
Operating Cash Flow..................................................... 34.8 39.6
Depreciation and amortization........................................... 14.1 16.4
--------- -----
Operating income........................................................ 20.7 23.2
Interest expense........................................................ 17.0 15.0
Net income.............................................................. (0.3) 3.8
--------- -----
- ---------------
(1) See the Unaudited Pro Forma Consolidated Statements of Operations of the
Company included elsewhere in this Prospectus.
Net revenues increased 10.6% from $161.7 million in Interim 1995 to $178.7
million in Interim 1996. The increase reflects higher advertising rates and
occupancy levels, particularly in the Texas, Southern California and Northern
California regions. To a substantially lesser extent, the increase reflects the
purchase of advertising display faces in the San Antonio, Dallas and Houston
markets.
Cost of sales increased 3.6% from $65.8 million in Interim 1995 to $68.1
million in Interim 1996 primarily as a result of increased net revenues. As a
percentage of net revenues, cost of sales decreased from 40.7% in Interim 1995
to 38.1% in Interim 1996 as a result of economies of scale associated with
increased revenues.
Selling, general and administrative expenses increased 0.4% from $39.7
million in Interim 1995 to $39.8 million in Interim 1996. As a percentage of net
revenues, these expenses decreased from 24.5% in Interim 1995 to 22.3% in
Interim 1996, reflecting reduced headcount at the corporate level due to cost
reduction programs, as well as economies of scale associated with the increased
revenues.
Operating Cash Flow increased 25.9% from $56.2 million in Interim 1995 to
$70.8 million in Interim 1996 as a result of the above factors. As a percentage
of net revenues, Operating Cash Flow increased from 34.8% in Interim 1995 to
39.6% in Interim 1996.
Depreciation and amortization expenses increased 28.8% from $22.8 million
in Interim 1995 to $29.4 million in Interim 1996 reflecting additional
depreciation associated with advertising displays purchased and capital
expenditures made after August 1995.
Interest expense remained relatively constant at $26.9 million in Interim
1996 as compared to $27.5 million in Interim 1995.
As a result of the above factors, the Company recorded net income of $6.8
million in Interim 1996 as compared to a net loss of $0.5 million in Interim
1995.
PRO FORMA YEAR ENDED DECEMBER 31, 1995
Pro forma net revenues for 1995 were $218.0 million. This represents an
increase of 15.4% from the combined net revenues for EIC and PMG of $188.9
million for the year ended December 31,
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23
1994. The increase was primarily attributable to increases in rate and occupancy
in the California and Midwest regions, and to a lesser extent, due to additional
revenues from the Atlanta market which was acquired by EIC in December 1994.
Pro forma cost of sales was $89.0 million in 1995, an increase of 10.3%
over the combined cost of sales of $80.7 million for EIC and PMG in 1994. As a
percentage of net revenues, pro forma cost of sales was 40.8% in 1995 as
compared to 42.7% for combined EIC and PMG in 1994, reflecting economies of
scale associated with the increased revenues.
Pro forma selling, general and administrative expenses were $52.8 million
in 1995, an increase of 11.7% over the combined selling, general and
administrative expenses of $47.2 million for EIC and PMG in 1994. As a
percentage of net revenues, these pro forma expenses were 24.2% in 1995 as
compared to 25.0% for combined EIC and PMG in 1994, primarily due to decreased
headcount in PMG's corporate headquarters and the increase in revenues.
Due to the above factors, pro forma Operating Cash Flow was $76.2 million
in 1995, an increase of 25.1% over the combined Operating Cash Flow of $61.0
million for EIC and PMG in 1994. As a percentage of net revenues, pro forma
Operating Cash Flow was 35.0% in 1995 as compared to 32.3% for combined EIC and
PMG in 1994, reflecting the economies of scale associated with revenue
increases.
Pro forma depreciation and amortization expense was $33.3 million in 1995
and pro forma interest expense was $36.5 million in 1995, reflecting the site
and structure depreciation, goodwill amortization and interest expense on
acquisition-related debt arising from the Company's acquisitions of EIC and PMG.
The above factors resulted in a pro forma loss of $1.9 million in 1995.
RESULTS OF OPERATIONS -- PREDECESSORS
The following table presents certain operating statement items of the
Predecessors as a percentage of net revenues:
JANUARY 1, TO
YEAR ENDED DECEMBER 31, AUGUST 17,
-------------------------------------- ---------------
1993 1994 1995
----------------- ---------------- ---------------
PMG EIC PMG EIC PMG EIC
------ ------ ------ ----- ----- -----
Net revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................... 45.5 53.2 42.5 45.3 40.8 42.2
Selling, general and administrative
expenses.......................... 26.9 12.2 25.9 11.8 25.5 13.9
------ ------ ------ ----- ----- -----
Operating Cash Flow................. 27.6 34.6 31.6 42.9 33.7 43.9
Depreciation and amortization....... 26.6 16.2 23.5 14.8 18.4 15.7
------ ------ ------ ----- ----- -----
Operating income.................... 1.0 18.4 8.0 28.1 15.3 28.2
Interest expense.................... 28.4 35.3 28.4 22.7 22.4 23.6
Net income (loss) before
extraordinary item................ (10.6) (19.0) (10.7) 2.9 (7.9) 1.0
------ ------ ------ ----- ----- -----
JANUARY 1, 1995 TO AUGUST 17, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The following is a discussion of the results of operations of EIC and PMG
for the period from January 1, 1995 to August 17, 1995 as compared to the year
ended December 31, 1994. Because the 1995 period is only for eight and one-half
months, and EIC completed the Atlanta transaction in December 1994 and results
from the Atlanta market are reflected only in the 1995 period, the two periods
generally are not comparable. Accordingly, the discussion primarily addresses
relative changes in certain items as a percentage of net revenues and not
absolute changes. Items which are not comparable are not discussed.
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EIC
Net revenues increased 18.3% from $11.6 million in 1994 to $13.7 million
during the abbreviated 1995 period despite the fact that the 1995 time period
was considerably shorter than the 1994 period for purposes of comparison. The
increase was primarily attributable to the Atlanta transaction which was
completed by EIC in December 1994. To a lesser extent, the increase was
attributable to rate and occupancy increases in the El Paso and Phoenix markets.
As a percentage of net revenues, cost of sales decreased from 45.3% in 1994
to 42.2% during the abbreviated 1995 period. The decrease was attributable to
the economies of scale associated with increased revenues in the El Paso and
Phoenix markets coupled with the high level of profitability of the acquired
Atlanta operations. As a percentage of net revenues, selling, general and
administrative expenses increased from 11.8% in 1994 to 13.9% during the
abbreviated 1995 period, primarily as a result of increased levels of corporate
and market overhead which were required to support the addition of the Atlanta
operations.
Depreciation and amortization expense was $2.1 million during the
abbreviated 1995 period and interest expense was $3.2 million during the
abbreviated 1995 period.
The above factors resulted in net income of $135,000 during the abbreviated
1995 period.
PMG
Net revenues decreased 30.3% from $177.3 million in 1994 to $123.6 million
in the abbreviated 1995 period entirely as a result of the abbreviation of the
1995 period for comparative purposes.
As a percentage of net revenues, cost of sales decreased from 42.5% in 1994
to 40.8% in the abbreviated 1995 period primarily as a result of economies of
scale and productivity improvements associated with increased usage of vinyl and
computer painting processes in the bulletin segment of the business. As a
percentage of net revenues, selling, general and administrative expenses
remained relatively flat at approximately 26% due to the fixed nature of the
majority of these costs.
Depreciation and amortization expense was $22.8 million during the
abbreviated 1995 period and interest expense was $27.6 million during the
abbreviated 1995 period.
The above factors resulted in a net loss of $9.7 million during the
abbreviated 1995 period.
EIC YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net revenues increased 115.1% from $5.4 million in 1993 to $11.6 million in
1994 primarily as a result of the inclusion of the El Paso market in the 1994
financial results. To a far lesser extent, the net revenues increase was
attributable to increased advertising rates and occupancy levels in the Phoenix
market.
Cost of sales increased 83.4% from $2.9 million in 1993 to $5.3 million in
1994 primarily as a result of the inclusion of the El Paso market in the 1994
results. As a percentage of net revenues, cost of sales decreased from 53.2% in
1993 to 45.3% in 1994 as a result of the high level of profitability of the El
Paso market, and to a lesser extent, as a result of the economies of scale
associated with increased revenues in the Phoenix market.
Selling, general and administrative expenses increased 108.1% from $0.7
million in 1993 to $1.4 million in 1994 primarily as a result of the inclusion
of the El Paso market in the 1994 results. As a percentage of net revenues,
selling, general and administrative expenses decreased from 12.2% in 1993 to
11.8% in 1994 due to the high level of profitability of the El Paso market and
economies of scale associated with the increased revenues.
Operating Cash Flow increased 166.4% from $1.9 million in 1993 to $5.0
million in 1994 primarily as a result of the inclusion of the El Paso market in
the 1994 results.
23
25
Depreciation and amortization expense increased from $0.9 million in 1993
to $1.7 million in 1994 primarily as a result of the inclusion of depreciation
from the El Paso market assets in the 1994 results.
Interest expense increased from $1.9 million in 1993 to $2.6 million in
1994 primarily as a result of the increased indebtedness associated with the
purchase of the El Paso market.
Net losses increased from $1.0 million in 1993 to $1.8 million in 1994
primarily due to an extraordinary loss on extinguishment of debt of $2.2 million
in 1994, partially offset by the factors discussed above.
PMG YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net revenues increased 10.3% from $160.8 million in 1993 to $177.3 million
in 1994. The growth was primarily attributable to increases in advertising rate
and occupancy levels in the California, Midwest and Texas regions, partially
offset by the divestiture of the Rochester, New York market in 1994.
Cost of sales increased 3.1% from $73.2 million in 1993 to $75.4 million in
1994, primarily as a result of increased net revenues. As a percentage of net
revenues, cost of sales decreased from 45.5% in 1993 to 42.5% in 1994 reflecting
economies of scale associated with increased revenues. The Company's increased
use of computer painted bulletins helped reduce direct bulletin expenses.
Selling, general and administrative expenses increased 6.0% from $43.3
million in 1993 to $45.9 million in 1994. As a percentage of net revenues, these
expenses decreased from 26.9% in 1993 to 25.9% in 1994, reflecting economies of
scale associated with the increased revenues.
Operating Cash Flow increased 26.1% from $44.4 million in 1993 to $56.0
million in 1994 as a result of the above factors.
Depreciation and amortization expenses decreased 2.4% from $42.8 million in
1993 to $41.7 million in 1994 due to a reduced asset base which resulted from
the divestiture of the Rochester, New York market in 1994.
Interest expense increased 10.1% from $45.7 million in 1993 to $50.3
million in 1994 as a result of an increased interest allocation from GECC.
As a result of the above factors and the tax benefit recognized, net losses
increased from $17.0 million in 1993 to $19.1 million in 1994.
SEASONALITY AND QUARTERLY INFORMATION
The following table sets forth certain quarterly financial information of
the Company for each quarter of 1995 and for the first three quarters of 1996.
The information has been derived from the quarterly financial statements of the
Company and the Predecessors which are unaudited but which, in the opinion of
management, have been prepared on the same basis as the financial statements
included herein and include all adjustments (consisting only of normal recurring
items) necessary for a fair presentation of the financial results for such
periods. The information for the three quarters in the period ended September
30, 1995 have been prepared on a basis consistent with the Unaudited Pro Forma
Consolidated Statements of Operations of the Company appearing elsewhere in this
Prospectus. All of this information should be read in conjunction with the
Company's and the Predecessors' respective financial statements and the notes
thereto and the other financial information appearing elsewhere in this
Prospectus. The operating results for any quarter are not necessarily indicative
of results for any future period.
The Company's revenues and operating results have exhibited some degree of
seasonality in past periods. Typically the Company experiences its strongest
financial performance in the second and third quarters and its lowest revenues
in the first and fourth quarters. The Company expects this trend to continue in
the future, and, as a result, the Company is likely to experience a net loss for
the quarter ended March 31, 1997. Because a significant portion of the Company's
expenses are fixed, a
24
26
reduction in revenues in any quarter is likely to result in a period to period
decline in operating performance and net earnings.
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995(1) 1995(1) 1995(1) 1995 1996 1996 1996
--------- -------- ------------- ------------ --------- -------- -------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues................. $ 45,660 $ 57,850 $58,154 $ 56,348 $51,210 $ 62,267 $65,251
Operating income............ 3,559 14,273 15,559 9,597 10,233 14,830 16,328
Net income (loss)........... (5,488 ) 2,581 2,379 (1,380) (4,110) 4,844 6,056
PERCENTAGE OF NET REVENUES:
Operating income............ 7.8% 24.7% 26.8% 17.0% 20.0% 23.8% 25.0%
Net income (loss)........... (12.0 )% 4.5% 4.1% (2.4)% (8.0)% 7.8% 9.3%
OTHER DATA:
Operating Cash Flow......... $ 11,115 $ 21,836 $23,247 $ 20,048 $16,852 $ 26,236 $27,676
Operating Cash Flow
Margin.................... 24.3 % 37.7% 40.0% 35.6% 32.9% 42.1% 42.4%
- ---------------
(1) See the Unaudited Pro Forma Consolidated Statements of Operations of the
Company included elsewhere in this Prospectus.
FOURTH QUARTER 1996 CHARGES
In the fourth quarter of 1996, the Company will record a one-time, non-cash
pre-tax charge of $7.7 million, reflecting the write-off of the remaining
unamortized debt incurrence expenses arising as a result of the refinancing of
the Old Credit Facility. In addition, the Company will record a one-time,
non-cash pre-tax charge of $ million in connection with the vesting of
certain employee stock options. See "Management -- Executive Officers' Stock
Options." The Company will also record non-cash compensation expense of
approximately $ in the fourth quarter of 1996 in connection with
modifications to its Phantom Equity Plan, and expects to record continuing
annual non-cash compensation expense under the Phantom Equity Plan of
approximately $ in fiscal years 1997 through 2000 and $ in
fiscal year 2001. See "Management -- Phantom Equity Plan."
LIQUIDITY AND CAPITAL RESOURCES
Since its formation, the Company has satisfied its working capital
requirements with cash generated from operations and to a lesser extent from
borrowings under the Old Credit Facility. Purchases of outdoor advertising
displays have been financed primarily with borrowings under the Old Credit
Facility and, to a lesser extent, with cash generated from operations.
In November 1996, the Company completed the refinancing of the Old Credit
Facility used to fund both the acquisition of PMG and subsequent display
purchases. The Old Credit Facility was increased to $550 million, comprised of
(i) a $200 million revolving credit facility (of which approximately $65 million
was drawn upon the consummation of the refinancing, and, subsequently,
approximately $ million of which will be repaid with the proceeds from this
Offering), (ii) a $200 million seven year term loan and (iii) a $150 million
eight year term loan. See "Description of Indebtedness and Other
Commitments -- Senior Credit Facility."
Net cash provided by operating activities was $36.0 million for the nine
months ended September 30, 1996. Net cash used in investing activities was $47.5
million for the nine months ended September 30, 1996, resulting primarily from
the purchases of displays and other capital expenditures. Net cash provided by
financing activities was $12.0 million for the nine months ended September 30,
1996 resulting primarily from net increases in amounts outstanding under the
Company's borrowing facilities. The Company anticipates its capital expenditures
for construction of new displays and normal maintenance of its displays and
other physical assets to range from approximately $13 million to $15 million in
1997.
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27
The Company believes that its cash from operations together with proceeds
from the Offering and the increased availability under the Senior Credit
Facility will be sufficient to satisfy cash requirements for the foreseeable
future, including capital expenditures for existing operations. However, in the
event cash and borrowings are not sufficient, the Company may incur additional
indebtedness to finance operations and may choose to seek additional debt or
equity capital to finance acquisitions. There can be no assurance that such
additional debt or equity capital will be available.
INFLATION
Inflation has not had a significant impact on the Company over the past
three years. The floating rate on the Senior Credit Facility could increase in
an inflationary environment, but management believes that because a significant
portion of the Company's costs are fixed, inflation will not have a material
adverse effect on its operations. However, there can be no assurance that a high
rate of inflation in the future will not have an adverse effect on the Company's
operations.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of, which established
a new accounting principle for accounting for the impairment of certain loans,
certain investments in debt and equity securities, long-lived assets that will
be held and used including certain identifiable intangibles and goodwill related
to those assets, and long-lived assets and certain identifiable intangibles to
be disposed of. The implementation of SFAS 121 did not materially affect the
Company's financial position.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards, No. 123 ("SFAS 123"), Accounting For Stock-Based
Compensation, which allows a company to record stock-based compensation on the
basis of fair value. Under the provisions of SFAS 123, the Company is
encouraged, but not required, to measure compensation costs related to its
employee stock compensation under the fair value method. If the Company elects
not to recognize compensation expense under this method, it is required to
disclose the pro forma effects based on the SFAS 123 methodology. The Company
will disclose the pro forma effects of SFAS 123 beginning in its December 31,
1996 financial statements.
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BUSINESS
GENERAL
Eller Media Corporation is the largest outdoor advertising company in the
United States based on its total U.S. advertising display inventory of
approximately 50,000 display faces. The Company provides outdoor advertising
services in 15 major metropolitan markets located in six operating regions:
Southern California, Texas, the Midwest, Northern California, the Southeast and
the Southwest. The Company believes it is the largest provider of outdoor
advertising services in 12 of its 15 markets based on total display faces. The
markets in which the Company operates represent approximately 22% of the total
U.S. population and approximately 50% of the rapidly growing U.S. Hispanic
population. The Company has a significant presence in eight of the ten largest
U.S. Hispanic markets, including Los Angeles, Miami, Chicago and San Antonio.
INDUSTRY OVERVIEW
The outdoor advertising industry has experienced increased advertiser
interest and revenue growth in recent years. Outdoor advertising generated total
revenues of approximately $1.8 billion in 1995, or approximately 1.1% of the
total advertising expenditures in the United States, and the out-of-home
advertising industry generated revenues in excess of $3.0 billion in 1995,
according to estimates by the OAAA. Outdoor advertising's 1995 revenues
represent growth of approximately 8.2% over estimated total 1994 revenues, which
compares favorably to the growth of total U.S. advertising expenditures of
approximately 7.7% during the same period. In addition, for the first half of
1996, outdoor advertising generated total revenues of approximately $915
million, up 7.0% from the same 1995 period, according to recent estimates by the
OAAA.
Advertisers purchase outdoor advertising for a number of reasons. Outdoor
advertising offers repetitive impact and a lower cost-per-thousand impressions,
a commonly used media measurement, as compared to competitive media, including
television, radio, newspapers, magazines and direct mail marketing. Accordingly,
because of its cost-effective nature, outdoor advertising is a good vehicle to
build mass market support. In addition, outdoor advertising can be used to
target a defined audience in a specific location and, therefore, can be relied
upon by local businesses concentrating on a particular geographic area where
customers have specific demographic characteristics. For instance, restaurants,
motels, service stations and similar roadside businesses may use outdoor
advertising to reach potential customers close to the point of sale and provide
directional information. Other local businesses such as television and radio
stations and consumer products companies may wish to appeal more broadly to
customers and consumers in the local market. National brand name advertisers may
use the medium to attract customers generally and build brand awareness. In all
cases, outdoor advertising can be combined with other media such as radio and
television to reinforce messages being provided to consumers.
The outdoor advertising industry has experienced significant change in
recent periods due to a number of factors. First, the out-of-home advertising
category has expanded to include, in addition to traditional billboards and
roadside displays, displays in shopping centers and malls, airports, stadiums,
movie theaters and supermarkets, as well as on taxis, trains, buses, blimps and
subways. Second, while the outdoor advertising industry has experienced a
decline in the use of outdoor advertising by tobacco companies, it has increased
its visibility with and attractiveness to local advertisers as well as national
retail and consumer product-oriented companies. Third, the industry has
benefitted significantly from improvements in production technology, including
the use of computer-generated images for printing, vinyl advertising copy and
improved lighting techniques, which have facilitated a more dynamic, colorful
and creative use of the medium. These technological advances have permitted the
outdoor advertising industry to respond more promptly and cost effectively to
the changing needs of its advertising customers and make greater use of
advertising copy used in other media. Lastly, the outdoor advertising industry
has benefitted from the growth in automobile travel time for business and
leisure due to increased highway congestion and continued demographic shifts of
residences and businesses from the cities to outlying suburbs. The Company
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believes that these trends demonstrate that consumer exposure to existing
billboard structures also increased during this period.
A relatively new opportunity within the out-of-home advertising industry is
transit advertising. Increasing numbers of local governments are providing
transit shelters and benches to enhance the service and image of local transit
systems. These locations, as well as buses, are increasingly being used for
out-of-home advertising.
The outdoor advertising industry is comprised of several large outdoor
advertising and media companies with operations in multiple markets, as well as
many smaller and local companies operating a limited number of structures in a
single or few local markets. While the industry has experienced some
consolidation within the past few years, the OAAA estimates that there are still
approximately 1,000 companies in the outdoor advertising industry operating
approximately 396,000 billboard displays. The Company expects the trend of
consolidation in the outdoor advertising industry to continue.
OPERATING STRATEGY
The Company's strategy is to expand its market presence and improve its
operating results by (i) managing the advertising rates and occupancy levels of
its displays to maximize market revenues; (ii) attracting new categories of
advertisers to the outdoor medium through significant investments in sales and
marketing resources; (iii) constructing new displays and upgrading its existing
displays; (iv) taking advantage of technological advances which increase both
sales force productivity and production department efficiency; and (v) acquiring
additional displays in its existing markets and expanding into additional
markets within the country's 35 largest media markets and their surrounding
regional areas. The Company believes this operating strategy enhances its
ability to effectively respond to advertisers' needs.
- Maximizing market revenues. The Company believes that the size,
diversity, and premium location of its display inventory provides it with
substantial pricing flexibility. The Company seeks to maximize revenues
through the optimization of advertising rates and occupancy levels.
- Attracting new categories of advertisers. The Company dedicates
substantial resources to target large companies whose advertising
expenditures do not typically include outdoor advertising and introduce
them to the benefits of the outdoor medium. The Company offers
comprehensive sales, marketing, creative and research services to new and
existing customers.
- Constructing new displays and upgrading existing display faces. Since
January 1, 1996, the Company has invested approximately $10.2 million for
new display construction and for ongoing enhancement of its existing
display inventory. Where opportunities are available, the Company intends
to build new displays, continue to convert existing 30-sheet posters into
Premier Panels(TM) and Premier Plus(TM) panels and continue to upgrade
its existing display inventory.
- Capitalizing on technological improvements. The Company intends to take
advantage of advances in production (including the increased use of vinyl
and pre-printed advertising copy) and market research (including the
increased use of mapping and demographic software) in order to achieve
greater efficiencies and to increase the Company's net revenues and
Operating Cash Flow.
- Acquiring additional displays. In addition to internal growth, the
Company seeks to grow by continuing to acquire additional displays in its
existing markets and through the acquisition of other outdoor companies
whose assets have strategic appeal. The Company is focused on expanding
its operations in existing markets and expanding into additional markets
within the country's 35 largest media markets and their surrounding
regional areas. The Company
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believes that larger markets provide greater revenue potential per
display, improved access to national advertisers, greater regional
advertising benefits and the opportunity to gain a larger market share
from competitive and higher cost (per thousand) media. The Company is
also considering expansion into international markets.
To support this operating strategy, the Company has decentralized its
operating structure in order to place authority, autonomy and accountability at
the market level and provide local management with the tools necessary to
oversee sales, display development, administration and production and to
identify suitable acquisition candidates. The Company is implementing
centralized accounting and financial controls designed to allow it to closely
monitor the operating and financial performance of its markets. The Company also
maintains a fully-staffed sales and marketing office in New York which services
national accounts and supports the Company's local sales force in each market.
The Company believes that one of its strongest competitive advantages is its
unique blend of highly experienced corporate and local market management.
RECENT AND PENDING ACQUISITIONS
Since January 1, 1996, the Company has purchased an aggregate of
approximately 1,550 display faces in 26 in-market purchases for an aggregate
purchase price of approximately $38.0 million. The Company believes that these
purchases strengthen its market position and allow it to capitalize on operating
efficiencies associated with the addition of display faces to its existing
markets. These purchases have included 167 bulletins in the Dallas/Ft. Worth
market purchased in September 1996 for a purchase price of $11.6 million and 227
bulletins and 735 30-sheet posters in the San Antonio market purchased in July
1996 for an aggregate purchase price of $11.0 million. The Company believes
these acquisitions have further strengthened its position in the Dallas/Ft.
Worth and San Antonio markets, respectively.
In December 1996, the Company entered into an agreement with ADCO Outdoor
Advertising ("ADCO") to purchase 45 bulletins in the San Francisco/Oakland
market for an aggregate purchase price of $9.5 million, payable pursuant to the
terms of a secured convertible promissory note. See "Description of Indebtedness
and Other Commitments -- Convertible Promissory Note." The Company believes this
acquisition will enhance its position in this market.
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MARKETS
Each of the Company's markets possess demographic characteristics that are
attractive to national advertisers, allowing the Company to package its displays
in several of its markets in a single contract for advertisers in national and
regional campaigns. Each market also has unique local industries, businesses,
sports franchises and special events that are frequent users of outdoor
advertising. The following table sets forth for the nine month period ended
September 30, 1996 certain information with respect to each of the Company's 15
major metropolitan markets (dollars in thousands):
PREMIER
PERCENTAGE PANELS(TM) TOTAL
MARKET NET OF NET AND PREMIER 30-SHEET 8-SHEET TRANSIT DISPLAY
MARKET RANK(1) REVENUES REVENUES BULLETINS PLUS(TM) PANELS POSTERS POSTERS DISPLAYS FACES
- ----------------------------- ------- -------- ---------- --------- ---------------- -------- ------- -------- -------
SOUTHERN CALIFORNIA:
Los Angeles(2)............. 2 $ 39,696 22.5% 722 116 4,875 -- 1,168 6,881
San Diego.................. 15 5,019 2.8 112 125 575 -- -- 812
TEXAS:
Dallas/Ft. Worth........... 7 13,329 7.6 679 84 2,073 135 -- 2,971
Houston.................... 9 17,091 9.7 557 647 2,215 1,860 -- 5,279
San Antonio................ 34 8,484 4.8 754 -- 1,374 1,332 -- 3,460
MIDWEST:
Chicago.................... 3 17,891 10.1 417 17 2,858 -- 3,078 6,370
Cleveland(3)............... 22 9,821 5.6 261 6 2,007 -- -- 2,274
Milwaukee.................. 28 4,949 2.8 137 30 821 -- -- 988
NORTHERN CALIFORNIA:
San Francisco/Oakland(4)... 4 23,832 13.5 386 320 1,554 432 6,812 9,504
Sacramento................. 29 4,101 2.3 91 44 426 -- 142 703
SOUTHEAST:
Miami...................... 11 3,759 2.2 -- -- -- -- 2,088 2,088
Atlanta.................... 12 8,433 4.8 365 26 1,132 -- -- 1,523
Tampa(5)................... 21 10,267 5.8 522 45 1,471 -- -- 2,038
SOUTHWEST:
Phoenix.................... 20 5,683 3.2 365 -- -- -- -- 365
El Paso.................... 70 4,091 2.3 284 11 545 544 -- 1,384
-------- ----- ----- ----- ------ ----- ------ ------
Total.................... $176,446(6) 100.0% 5,652(7) 1,471 21,926 4,303 13,288 46,640(8)
======== ===== ===== ===== ====== ===== ====== =====
- ---------------
(1) Market rank of the largest city in each market.
(2) Includes Los Angeles, Orange, Riverside, San Bernardino and Ventura
counties.
(3) Includes Akron and Canton.
(4) Includes San Francisco, Oakland, San Jose, Santa Cruz and Solano counties.
(5) Includes Sarasota and Bradenton.
(6) Excludes convenience store and other miscellaneous net revenues.
(7) Includes 21 wallscapes.
(8) Excludes 4,086 convenience store displays.
INVENTORY
The Company operates the following types of outdoor advertising billboards
and displays:
- Bulletins generally are 14 feet high by 48 feet wide (672 square feet) 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 onto the panels at
the facilities of the outdoor advertising company in accordance with
design specifications supplied by the advertiser and attached to the
outdoor advertising structure. Bulletins also include "wallscapes" that
are painted on vinyl surfaces or directly on the sides of buildings,
typically four stories or less. The Company also offers bulletin
advertisements that can be moved to a different location every 60 days,
providing the opportunity to reach an entire region during the course of
a 12-month contract. Because of their greater impact and higher
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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.
- 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. The Company 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. Where opportunities are available, the Company
plans to continue to convert existing 30-sheet posters into Premier
Panels(TM) and Premier Plus(TM) panels.
On occasion, to attract more attention, some bulletins, Premier
Panels(TM) and Premier Plus(TM) panels may extend beyond the linear edges
of the display face and may include three-dimensional embellishments.
- 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.
- Junior (8-sheet) posters usually are 6 feet high by 12 feet wide (72
square feet). Displays are prepared and mounted in the same manner as
30-sheet posters. Most junior posters, because of their smaller size, are
concentrated on city streets targeting pedestrian traffic.
- 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 subway platforms. The Company's transit
customers include the San Francisco Bay Area Rapid Transit (BART) and the
Metropolitan Rail (METRA) in Chicago. In the last few years, transit
displays have experienced substantial growth as additional municipalities
have begun to permit this type of advertising. Bus shelters and other
transit displays are an attractive product to advertisers using
"vertical" advertising copy, such as magazines and movie posters, because
the advertising copy is easily adapted for use in such displays. In
addition, bus shelters can target a specific audience, provide coverage
in market areas which cannot be reached by traditional billboards or
achieve other micro-marketing objectives.
- Convenience store displays generally are 68 inches high by 47 inches wide
and are printed on polystyrene. These displays are installed in aluminum
frames that may be affixed to the wall or window of a convenience store,
or may be free-standing on an 18 inch pedestal.
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 a municipality or transit authority. Billboard
structures are durable, have long useful lives and generally do not require
substantial maintenance. When disassembled, they typically can be relocated to
new sites. The Company's outdoor advertising structures are made of steel and
other durable materials built to withstand variable climates. Since January 1,
1996, the Company has invested approximately $10.2 million for new display
construction and for ongoing enhancement of its existing display inventory. Over
90% of the Company's bulletin inventory has been retrofitted for vinyl.
SALES AND MARKETING
The Company is able to capitalize on its strong presence in major
metropolitan markets through its sales and marketing office in New York staffed
with 11 sales and marketing people who have strong relationships with customers
and advertising agencies. The Company's significant presence in
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geographically diverse markets enables major national advertisers to build brand
support and create national brand awareness through the purchase of "national
buys" and other unique advertising packages. The Company believes these efforts
allow it to offer superior service to its large base of national advertisers and
gain a larger market share from competitive media. In addition to its New York
sales and marketing force, the Company maintains a team of local sales
representatives headed by a sales manager in each of its markets. Karl Eller,
the Company's Chairman and Chief Executive Officer, Scott Eller, the Company's
Executive Vice President, and all of the Company's regional and market
presidents are significantly involved with the Company's sales and marketing
activities. The Company devotes considerable time and resources to recruiting,
training and coordinating the activities of its sales force, which is
compensated primarily on a commission basis to maximize incentive to perform.
In addition to the sales staff, the Company has established creative,
marketing and research departments in each of its principal markets. The
creative staff uses technologically advanced computer hardware and software to
develop original design copy for both local and national accounts. The various
creative departments exchange work via modem or over the Internet directly with
clients or their agencies. As a result, many customers turn to the Company for
the creation of their outdoor campaigns. In addition, the Company's research and
development departments utilize state-of-the-art software to provide inventory
management, mapping and other demographic information. The Company believes that
the implementation of continuing technological improvements by its creative,
marketing and research departments provides a significant competitive advantage
in the sales and service area.
OPERATIONS
In each of its principal markets, the Company maintains a complete outdoor
advertising operation including a sales office, a production, construction and
maintenance facility, a creative department equipped with advanced technology, a
real estate unit, a public affairs and marketing department and support staff.
The Company conducts its outdoor advertising operations through these local
offices, consistent with senior management's belief that an organization with
decentralized sales and operations is more responsive to local market conditions
and provides greater incentives to employees. The Company is implementing
centralized accounting and financial controls to allow it to closely monitor the
operating and financial performance of each market. The Company has a regional
or divisional president in each major market. They report directly to the Chief
Executive Officer and are responsible for the day-to-day market operations,
including sales, display development, administration, production and the
identification of suitable acquisition candidates. The regional and divisional
presidents are compensated according to the financial performance of their
respective markets.
Although site leases for land underlying advertising structures are
administered from the Company's headquarters in Phoenix, each local office is
responsible for locating and ultimately procuring leases for appropriate sites
in its market. Each office maintains a leasing department, with an extensive
database containing information on local property ownership, lease contract
terms, zoning ordinances and permit requirements. The Company's experienced
lease teams have been successful in developing new advertising display face
inventory in each of its markets by utilizing these databases. Each team's
primary responsibility is the procurement of sites for new locations.
CUSTOMERS
Advertisers usually contract for outdoor displays through advertising
agencies, which are responsible for the artistic design and written content of
the advertising as well as the choice of media and the planning and
implementation of the overall campaign. The Company pays commissions to the
agencies for advertising contracts that are procured by or through those
agencies. Advertising rates are based on a particular display's exposure (or
number of "impressions" delivered) in relation to the demographics of the
particular market and its location within that market. The number of
"impressions" delivered by a display is measured by the number of vehicles
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passing the site during a defined period and is weighted to give effect to such
factors as its proximity to other displays, the speed and viewing angle of
approaching traffic, the national average of adults riding in vehicles and
whether the display is illuminated. The number of impressions delivered by a
display is verified by independent auditing companies.
The Company has a diversified customer base of over 3,000 advertisers and
advertising agency clients. The size and geographic diversity of the Company'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. The Company competes for national advertisers
primarily on the basis of price, location of displays, availability and service.
In addition, the Company believes that its outdoor advertising inventory reaches
approximately 50% of the rapidly growing U.S. Hispanic population. The Company
has a significant presence in eight of the ten largest U.S. Hispanic markets,
including Los Angeles, Miami, Chicago and San Antonio.
The Company also focuses its efforts on local sales. Local advertisers tend
to have smaller advertising budgets and require greater assistance from the
Company's production and creative personnel to design and produce advertising
copy. In local sales, the Company often expends more sales efforts on educating
customers regarding the benefits of outdoor media and helping potential
customers develop an advertising strategy using outdoor advertising. While price
and availability are important competitive factors, service and customer
relationships are also critical components of local sales.
Tobacco revenues have historically accounted for a significant portion of
outdoor advertising revenues. In 1991 and 1992, the leading tobacco companies
substantially reduced their expenditures for outdoor advertising due to a
declining population of smokers, societal pressures, consolidation in the
tobacco industry and price competition from generic brands. Since tobacco
advertisers often utilized some of the industry's prime inventory, the decline
in tobacco-related advertising expenditures has made space available for other
advertisers, including those that had not traditionally utilized outdoor
advertising. As a result of this decline in tobacco-related advertising revenues
and the increased use of outdoor advertising by other advertisers, such as
entertainment companies, retailers, financial institutions and other businesses,
the range of the Company's advertisers has become quite diverse. The following
table illustrates the diversity of the Company's advertising base:
1995 PRO FORMA NET REVENUES BY CATEGORY
PERCENTAGE OF
PRO FORMA
NET REVENUES
-------------
Entertainment/Travel........................................... 16.0%
Tobacco........................................................ 13.7
Business & Consumer Services................................... 11.5
Autos, Accessories & Equipment................................. 10.0
Publishing & Media............................................. 6.5
Beer & Wine.................................................... 7.5
Retail......................................................... 5.0
Insurance & Real Estate........................................ 2.6
Food, Snacks & Soft Drinks..................................... 4.3
Health Products................................................ 2.4
Apparel, Footwear & Accessories................................ 2.7
Other.......................................................... 17.8
-----
Total................................................ 100.0%
=====
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PRODUCTION
The Company has internal production facilities and staff to perform the
full range of activities required to develop, create and install outdoor
advertising in all of its markets. Production work includes creating the
advertising copy design and layout, painting the design or coordinating its
printing and installing the designs on its displays. The Company usually
provides its full range of production services to local advertisers and to
advertisers that are not represented by advertising agencies, since national
advertisers and advertisers represented by advertising agencies often use
preprinted designs that require only installation. However, the Company's
creative and production personnel frequently are involved in production
activities even when advertisers are represented by agencies due to the
development of new designs or the adaptation of copy from other media for use on
billboards. The Company's artists also assist in the development of marketing
presentations, demonstrations and strategies to attract new advertisers.
With the increased use of vinyl and pre-printed advertising copy furnished
to the outdoor advertising company by the advertiser or its agency, outdoor
advertising companies are becoming less responsible for labor-intensive
production work since vinyl and pre-printed copy is typically produced by the
advertiser or its agency and can be installed quickly. The vinyl sheets are
reusable, thereby reducing the Company's production costs, and are easily
transportable. Due to the geographic proximity of the Company's principal
markets and the transportability of vinyl sheets, the Company can shift
materials among markets to promote efficiency. The Company believes that this
trend over time will reduce operating expenses associated with production
activities. Because of its quick installation and high reproduction quality, the
Company believes that the use of vinyl has increased occupancy rates and
attracted new advertisers to the medium.
COMPETITION
The Company competes in each of its markets with other media, including
broadcast and cable television, radio, print media and direct mail marketers, as
well as other outdoor advertisers. In addition, the Company also competes with a
wide variety of other out-of-home media, including advertising in shopping
centers and malls, airports, stadiums, movie theaters and supermarkets, as well
as on taxis, trains, buses and subways. Advertisers compare relative costs of
available media and cost-per-thousand impressions, particularly when delivering
a message to customers with distinct demographic characteristics. In competing
with other media, outdoor advertising relies on its lower cost-per-thousand
impressions and its ability to reach a broad segment of the population in a
specific market or to target a particular geographic area or population with a
particular set of demographic characteristics within that market.
The outdoor advertising industry is highly fragmented, consisting of
several large outdoor advertising and media companies with operations in
multiple markets as well as smaller and local companies operating a limited
number of structures in single or a few local markets. Although some
consolidation has occurred over the past few years, according to the OAAA there
are approximately 1,000 companies in the outdoor advertising industry operating
approximately 396,000 billboard displays. In several of its markets, the Company
encounters direct competition from other major outdoor media companies,
including Outdoor Systems, Inc., Universal Outdoor, Inc. and 3M National
Advertising Co. (a division of Minnesota Mining and Manufacturing Company). The
Company believes that its broad national coverage, strong emphasis on sales and
customer service, the location of its displays in major markets and its position
as a major provider of advertising services enable it to compete effectively
with other media, as well as other outdoor advertising companies. The Company
also competes with other outdoor advertising companies for sites on which to
build new structures. See "Risk Factors -- Competition."
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GOVERNMENT REGULATION
The outdoor advertising industry is subject to governmental regulation at
the federal, state and local level. Federal law, principally the Highway
Beautification Act of 1965, encourages states, by the threat of withholding
federal appropriations for the construction and improvement of highways within
such states, to implement legislation to restrict billboards located within 660
feet of, or visible from, interstate and primary highways except in commercial
or industrial areas. All of the states have implemented regulations at least as
restrictive as the Highway Beautification Act, including the prohibition on the
construction of new billboards adjacent to federally-aided highways and the
removal at the owner's expense and without any compensation of any illegal signs
on such highways. The Highway Beautification Act, and the various state statutes
implementing it, require the payment of just compensation whenever governmental
authorities require legally erected and maintained billboards to be removed from
federally-aided highways.
The states and local jurisdictions have, in some cases, passed additional
and more restrictive regulations on the construction, repair, upgrading, height,
size and location of, and, in some instances, content of advertising copy being
displayed on outdoor advertising structures adjacent to federally-aided highways
and other thoroughfares. Such regulations, often in the form of municipal
building, sign or zoning ordinances, specify minimum standards for the height,
size and location of billboards. In some cases, the construction of new
billboards or relocation of existing billboards is prohibited. Some
jurisdictions also have restricted the ability to enlarge or upgrade existing
billboards, such as converting from wood to steel or from non-illuminated to
illuminated structures, and Houston restricts the reconstruction of billboards
which are substantially destroyed as a result of storms or other causes. From
time to time governmental authorities order the removal of billboards by the
exercise of eminent domain. Thus far, the Company has been able to obtain
satisfactory compensation for any of its structures removed at the direction of
governmental authorities, although there is no assurance that it will be able to
continue to do so in the future.
In recent years, there have been movements to restrict billboard
advertising of certain products, including tobacco and alcohol. No bills have
become law at the federal level except those requiring health hazard warnings
similar to those on cigarette packages and print advertisements. It is uncertain
whether additional legislation of this type will be enacted on the national
level or in any of the Company's markets.
In August 1996, the U.S. Food and Drug Administration issued final
regulations governing certain marketing practices in the tobacco industry,
including a prohibition of tobacco product billboard advertisements within 1,000
feet of schools and playgrounds and a requirement that all tobacco product
advertisements on billboards be in black and white and contain only text. These
regulations will become effective in August 1997. A reduction in billboard
advertising by the tobacco industry would cause an immediate reduction in the
Company's direct revenue from such advertisers and would simultaneously increase
the available space on the existing inventory of billboards in the outdoor
advertising industry. See "Business -- Customers" and "Risk Factors -- Tobacco
Industry Regulation."
Amortization of billboards has also been adopted in varying forms in
certain jurisdictions. Amortization permits the billboard owner to operate its
billboard as a non-conforming use for a specified period of time until it has
recouped its investment, after which it must remove or otherwise conform its
billboard to the applicable regulations at its own cost without any
compensation. Amortization and other regulations requiring the removal of
billboards without compensation have been subject to vigorous litigation in
state and federal courts and cases have reached differing conclusions as to the
constitutionality of these regulations. To date, regulations in the Company's
markets have not materially adversely affected its operations. However, the
outdoor advertising industry is heavily regulated and at various times and in
various markets can be expected to be subject to varying degrees of regulatory
pressure affecting the operation of advertising displays. Accordingly, although
the Company's experience to date is that the regulatory environment can be
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managed, no assurance can be given that existing or future laws or regulations
will not materially adversely affect the Company. None of the Company's markets
other than Houston currently has an amortization ordinance or regulation. The
Houston ordinance has been the subject of litigation for over five years and
currently is not being enforced. The Company believes that its operations will
not be materially affected by the Houston amortization ordinance even if it is
enforced, as a substantial number of the Company's Houston inventory consists of
bulletins and 30-sheet posters located near federal highways where the Highway
Beautification Act of 1965 would require just compensation in the event of any
required removal. See "Risk Factors -- Regulation of Outdoor Advertising."
OUTDOOR ADVERTISING PROPERTIES; OFFICE AND PRODUCTION FACILITIES
Outdoor Advertising Sites. The Company owns or has permanent easements on
relatively few parcels of real property that serve as the sites for its outdoor
displays. The Company's remaining approximately 18,343 billboard sites are
leased. The Company's leases are for varying terms ranging from month-to-month
or year-to-year to terms of ten years or longer, and many provide for renewal
options. There is no significant concentration of displays under any one lease
or subject to negotiation with any one landlord. The Company believes that an
important part of its management activity is to negotiate suitable lease
renewals and extensions.
Office Facilities. The Company's principal executive offices are located in
Phoenix, Arizona. In addition, the Company has 15 divisional offices in Arizona,
California, Florida, Georgia, Illinois, Ohio, Texas and Wisconsin, substantially
all of which are leased. The divisional offices include front office
administration and sales office space, as well as back-shop poster and bulletin
production space. The Company considers its facilities to be well maintained and
adequate for its current and reasonably anticipated future needs.
EMPLOYEES
As of September 30, 1996, the Company employed approximately 980 people, of
whom, approximately 193 were primarily engaged in sales and marketing, 552 were
engaged in painting, bill posting and construction and maintenance of displays
and the balance were employed in financial, administrative and other capacities.
The Company is a party to 21 collective bargaining agreements covering 267
employees. The Company is currently negotiating new collective bargaining
agreements with several of the unions. The Company believes that its relations
with its employees, including its unionized employees, are good.
LITIGATION
The Company from time to time is involved in litigation in the ordinary
course of business, including disputes involving advertising contracts, site
leases, employment claims and construction matters. The Company is also involved
in routine administrative and judicial proceedings regarding billboard permits,
fees and compensation for condemnations. The Company is not a party to any
lawsuit or proceeding which, in the opinion of management, is likely to have a
material adverse effect on the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth certain information with respect to the
directors and executive officers of the Company.
NAME AGE POSITION(1)
- ------------------------------ --- ----------------------------------------------
Karl Eller 68 Chairman and Chief Executive Officer (Class
III Director)
Scott S. Eller 40 Executive Vice President/Secretary
Timothy J. Donmoyer 31 Executive Vice President/Chief Financial
Officer
Paul J. Meyer 54 Executive Vice President/General Counsel
John L. Bunce, Jr.(2) 38 Class III Director
H. Irving Grousbeck(3) 62 Class II Director
Bruce T. Halle 67 Class I Director
F. Warren Hellman 62 Class III Director
Arthur H. Kern(2) 50 Class II Director
Joseph M. Niehaus(3) 33 Class II Director
Patricia Salas Pineda(3) 44 Class I Director
Richard Reiss, Jr.(2) 52 Class I Director
- ---------------
(1) Each director holds office until his resignation or removal and until his
successor shall have been duly elected and qualified. Elections with respect
to the Class I Directors, Class II Directors and Class III Directors will be
held at the annual meeting of stockholders in 1997, 1998, and 1999,
respectively. Executive officers of the Company are elected by the Board of
Directors on an annual basis and serve at the discretion of the Board of
Directors (subject to the terms of any employment agreement).
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
The principal occupations and positions for the past five years, and in
certain cases prior years, of the directors and executive officers named above
are set forth below. References to service with the Company include service with
Eller and with the Predecessors.
Mr. Karl Eller, the founder of the Company, has served as Chairman and
Chief Executive Officer of the Company since its organization. An entrepreneur
and veteran of the outdoor advertising industry for over 40 years, Mr. Eller
began his career in 1952 as a leasing representative for the Tucson, Arizona
branch of Foster and Kleiser. Mr. Eller has held a variety of executive
positions, including President and Chief Executive Officer of Combined
Communications Corporation, member of the Office of Chief Executive and Board of
Directors of Gannett Company, Inc., Chairman of the Board of Mediacom
Industries, Inc. (Canada), President and member of the Board of Directors of
Columbia Pictures Industries and Chairman and Chief Executive Officer of the
Circle K Corporation. Mr. Eller serves on the Boards of Directors of El Dorado
Investment Company and the Phoenix Suns. Mr. Eller received his B.A. in Business
from the University of Arizona, which named its Eller Graduate School of
Management in his honor.
Mr. Scott S. Eller has served as Executive Vice President and Secretary of
the Company since its organization. Mr. Eller is responsible for all corporate
development, developmental marketing, human resources, public affairs, real
estate and operational functions of the Company. Mr. Eller served as President
of EIC and SunVen Entertainment Company, Inc. from 1992 to 1995. Prior to 1992,
for ten years, Mr. Eller served as President and co-founder of SunVen Capital
Corporation, a venture capital company which invested in the media,
communications and entertainment industries. Prior to 1983, Mr. Eller served in
various capacities with Hambrecht and Quist Venture Group
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and First Interstate Bank. Mr. Eller is Vice Chairman of the OAAA and serves on
several Boards of Directors of private companies. Scott Eller is the son of Karl
Eller.
Mr. Donmoyer has served as the Executive Vice President and Chief Financial
Officer of the Company since September 1995. Mr. Donmoyer came to the Company
from Bear Stearns & Co. Inc., where he was employed for seven years and held the
position of Associate Director in the investment banking department,
specializing in mergers, acquisitions and financing for the outdoor advertising
industry. Mr. Donmoyer also owned and operated Aztec Outdoor, a small painted
bulletin company in Chicago, which was acquired by PMG in 1994. Mr. Donmoyer is
a director of BLR, a Tucson-based company which provides mapping, traffic and
demographic data to the outdoor industry and the Traffic Audit Bureau.
Mr. Meyer has served as the Executive Vice President and General Counsel of
the Company since April 1996. Before joining the Company, Mr. Meyer maintained a
corporate transactional practice with the law firm of Meyer, Hendricks, Bivens
and Moyes, and its predecessor firms, where he also served as managing partner
for more than 20 years. Mr. Meyer also served as the senior law clerk to Chief
Justice Earl Warren of the United States Supreme Court during Chief Justice
Warren's final term.
Mr. Bunce has served as a director of the Company since August 1995. Mr.
Bunce is a General Partner of Hellman & Friedman, a private investment firm. Mr.
Bunce is a director of Western Wireless Corporation, MobileMedia Corporation and
numerous private companies.
Mr. Grousbeck has served as a director of the Company since September 1995.
Mr. Grousbeck is a Consulting Professor of Management at Stanford Business
School, where he began teaching in 1985. From 1981 to 1985, Mr. Grousbeck was a
Lecturer at Harvard University, Graduate School of Business Administration. Mr.
Grousbeck was a co-founder of Continental Cablevision, Inc. where he served as
President from 1964 to 1980 and Chairman of the Board of Directors from 1980 to
1985. Mr. Grousbeck is currently a director of numerous private companies.
Mr. Halle has served as a director of the Company since September 1995. Mr.
Halle has been the Chairman and CEO of Discount Tire Company since 1969.
Mr. Hellman has served as a director of the Company since September 1995.
Mr. Hellman is a General Partner of Hellman & Friedman. Mr. Hellman is a
director of Williams-Sonoma, Inc., Levi Strauss Associates, Inc., Franklin
Resources, Inc., APL Limited, MobileMedia Corporation and numerous private
companies.
Mr. Kern has served as a director of the Company since September 1995. Mr.
Kern is Chairman and CEO of American Media, a company he started in 1981 which
owns and operates commercial radio stations. Mr. Kern is a director of Yahoo!
Inc. and Total Entertainment Network, a new on-line game company.
Mr. Niehaus has served as a director of the Company since August 1995. Mr.
Niehaus is a General Partner of Hellman & Friedman. Mr. Niehaus is a director of
Hoyts Cinemas Limited, Hoyts Cinemas America Limited and numerous private
companies.
Ms. Pineda has served as a director of the Company since July 1996. Ms.
Pineda has been a practicing attorney for nineteen years. Ms. Pineda is
presently the Vice President and Corporate Secretary of New United Motor
Manufacturing, Inc. (NUMMI) with primary responsibility for the Legal,
Environmental and Government Relations Departments. Ms. Pineda has been with
NUMMI since its inception in 1984. Ms. Pineda also serves as director of Levi
Strauss Associates, Inc., Trustee of RAND and director of The James Irvine
Foundation.
Mr. Reiss has served as a director of the Company since September 1995. Mr.
Reiss has been a Managing Partner of Cumberland Associates, a private investment
firm, since 1982. Mr. Reiss is currently a director of O'Charley's, the Lazard
Funds, Inc. and Page One Communications, Ltd.
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For their services as directors, the members of the Board of Directors who
are not employees of the Company are paid $7,500 annually, plus $2,500 per
meeting and $1,000 per committee meeting. Prior to the Offering, Messrs.
Hellman, Bunce and Niehaus did not receive director fees. In addition, Messrs.
Halle, Reiss, Grousbeck and Kern and Ms. Pineda have been granted certain
non-qualified options to purchase Common Stock. All directors are reimbursed for
reasonable expenses associated with their attendance at meetings of the
Company's Board of Directors and committees thereof.
EXECUTIVE COMPENSATION
The Company was formed to acquire the Predecessors in August 1995. Prior to
its acquisition by the Company, EIC paid no salaries to executive officers, but
did pay a management fee to Red River Resources, Inc., a company controlled by
Karl Eller and in which Scott Eller has a 49% indirect interest, of $100,000 in
1993, $200,000 in 1994, and $497,000 in 1995. The following table sets forth
certain information regarding compensation paid or accrued from August 1995 to
December 31, 1995 to or on behalf of the Company's Chief Executive Officer, the
only executive officer whose total compensation exceeded $100,000 for such
period:
SUMMARY COMPENSATION TABLE
1995 COMPENSATION
---------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------------------------------- -------- --------- ------------
Karl Eller......................................... $107,685 $ 0 (1)
Chairman and Chief Executive Officer
(1) Other annual compensation did not exceed the lesser of $50,000 or 10% of the
total salary and bonuses of Mr. Eller. See "-- Employment Agreement."
EXECUTIVE OFFICERS' STOCK OPTIONS
The following table sets forth information concerning individual grants of
stock options made by the Company during the fiscal year ended December 31, 1995
to each executive officer.
OPTION GRANTS IN LAST FISCAL YEAR(1)
POTENTIAL REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES
------------------------------------------------------------------- OF
PERCENT OF STOCK PRICE
NUMBER OF TOTAL APPRECIATION
SECURITIES OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(2)
UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION --------------------
NAME OPTIONS GRANTED(#) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ----------------------- ------------------ --------------- ----------- -------------- ------ ------
Karl Eller(3).......... 95.4% August 2002
Chairman and Chief
Executive Officer
Timothy J.
Donmoyer(4).......... 4.6% November 2002
Executive Vice
President/Chief
Financial Officer
- ---------------
(1) All options are non-qualified options with an exercise price equal to the
fair market value of the Common Stock on the date of grant, as determined by
the Board of Directors.
(2) The potential realizable value is calculated in accordance with instructions
of the Securities and Exchange Commission (the "Commission") based on the
term of the option at the date of its grant or assignment and assuming that
the stock price appreciates from the date of grant or assignment at the
indicated annual rate, compounded annually for the entire term of the
option. The actual realizable value of the options, assuming an initial
public offering price of $ per share, will substantially exceed the
potential realizable value shown in the table.
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(3) Mr. Eller was granted options for shares of Common Stock which
become exercisable in annual installments ("Base Options"), and options for
shares of Common Stock which become exercisable upon the
satisfaction of performance conditions ("Performance Options"). Upon
consummation of the Offering, the Base Options will be 80% exercisable and
the Performance Options will be fully exercisable. Mr. Eller has assigned
his right to Base Options and Performance Options to certain
executive officers and a director, subject to possible revesting of certain
of such options in Mr. Eller upon the occurrence of certain contingencies.
The assigned options are included in the table.
(4) Mr. Donmoyer was granted options for shares of Common Stock which
become exercisable in annual installments. In addition, Mr. Eller assigned
to Mr. Donmoyer his rights with respect to shares under the Base
Options, and shares under the Performance Options. Upon
consummation of the Offering, the assigned Performance Options will be fully
exercisable and all other options will be 70% exercisable.
The following table sets forth the number and value as of December 31, 1995
of shares underlying unexercised options held by each of the executive officers.
Prior to the Offering, no stock options will be exercised by any executive
officers.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE-MONEY"
OPTIONS AS OF OPTIONS AS OF
DECEMBER 31, 1995 DECEMBER 31, 1995(1)
NAME AND ----------------------------- -----------------------------
PRINCIPAL POSITION EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ------------- ----------- -------------
Karl Eller.......................................
Chairman and Chief Executive Officer
Timothy J. Donmoyer..............................
Executive Vice President/Chief Financial
Officer
- ---------------
(1) Based on the estimated fair market value of the Common Stock at December 31,
1995 of $ per share, less the exercise price payable upon exercise
of such options. Such estimated fair market value as of December 31, 1995 is
substantially lower than the assumed initial public offering price of $
per share.
EQUITY PLAN
In October 1996, the Company adopted the Eller Media Corporation 1996
Equity Participation Plan (the "Equity Plan"). The Equity Plan was approved by
the stockholders of the Company as of October 29, 1996. The principal purposes
of the Equity Plan are to provide incentives for officers, employees and
consultants of the Company and its subsidiaries through granting of options,
restricted stock and other awards ("Awards"), thereby stimulating their personal
and active interest in the Company's development and financial success, and
inducing them to remain in the Company's employ. In addition to Awards made to
officers, employees or consultants, the Equity Plan permits the granting of
options ("Director Options") to the Company's independent non-employee
directors.
On the date hereof, the Company intends to grant at the public offering
price to certain executive officers options to purchase an aggregate of
shares of Common Stock.
Under the Equity Plan, not more than shares of Common Stock (or
the equivalent in other equity securities) are authorized for issuance upon
exercise of options, stock appreciation rights ("SARs"), and other Awards, or
upon vesting of restricted or deferred stock awards. Furthermore, the maximum
number of shares which may be subject to options or stock appreciation rights
granted under the Equity Plan to any individual in any calendar year cannot
exceed .
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The principal features of the Equity Plan are summarized below, but the
summary is qualified in its entirety by reference to the Equity Plan, which is
filed as an exhibit to the registration statement of which this Prospectus is a
part.
Administration
Prior to the closing of the Offering, the Board will administer the Equity
Plan. After the closing of the Offering, the Compensation Committee of the Board
or another committee thereof (the "Committee") will administer the Equity Plan
with respect to grants to employees or consultants of the Company and the full
Board will administer the Equity Plan with respect to Director Options. The
Committee will consist of at least two members of the Board, each of whom is a
"non-employee director" for purposes of Rule 16b-3 under the Securities Exchange
Act of 1934, as amended ("Rule 16b-3") and, with respect to options and SAR's
which are intended to constitute performance-based compensation under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), an
"outside director" for the purposes of Section 162(m) of the Code. Subject to
the terms and conditions of the Equity Plan, the Board or Committee has the
authority to select the persons to whom Awards are to be made, to determine the
number of shares to be subject thereto and the terms and conditions thereof, and
to make all other determinations and to take all other actions necessary or
advisable for the administration of the Equity Plan. Similarly, the Board has
discretion to determine the terms and conditions of Director Options and to
interpret and administer the Equity Plan with respect to Director Options. The
Committee (and the Board) are also authorized to adopt, amend and rescind rules
relating to the administration of the Equity Plan.
Eligibility
Options, SARs, restricted stock and other Awards under the Equity Plan may
be granted to individuals who are then officers or other employees of the
Company or any of its present or future subsidiaries. Such Awards also may be
granted to consultants of the Company selected by the Board or Committee for
participation in the Equity Plan. Non-employee directors of the Company may be
granted NQSOs (as defined herein) by the Board.
Awards under the Equity Plan
The Equity Plan provides that the Committee may grant or issue stock
options, SARs, restricted stock, deferred stock, dividend equivalents,
performance awards, stock payments and other stock related benefits, or any
combination thereof. Each Award will be set forth in a separate agreement with
the person receiving the Award and will indicate the type, terms and conditions
of the Award.
Nonqualified Stock Options ("NQSOs") will provide for the right to purchase
Common Stock at a specified price which, except with respect to NQSOs intended
to qualify as performance-based compensation under Section 162(m) of the Code,
may be less than fair market value on the date of grant (but not less than par
value), and usually will become exercisable (in the discretion of the Board or
Committee) in one or more installments after the grant date, subject to the
participant's continued employment with the Company and/or subject to the
satisfaction of individual or Company performance targets established by the
Board or Committee. NQSOs may be granted for any term specified by the Board or
Committee.
Incentive Stock Options ("ISOs") will be designed to comply with the
provisions of the Code and will be subject to certain restrictions contained in
the Code. Among such restrictions, ISOs must have an exercise price not less
than the fair market value of a share of Common Stock on the date of grant, may
only be granted to employees, must expire within a specified period of time
following the optionee's termination of employment, and must be exercised within
the ten years after the date of grant; but may be subsequently modified to
disqualify them from treatment as ISOs. In the case of an ISO granted to an
individual who owns (or is deemed to own) at least 10% of the total combined
voting power of all classes of stock of the Company, the Equity Plan provides
that the exercise price
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must be at least 110% of the fair market value of a share of Common Stock on the
date of grant and the ISO must expire upon the fifth anniversary of the date of
its grant.
Restricted Stock may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Board or Committee. Restricted stock, typically, may be repurchased by the
Company at the original purchase price if the conditions or restrictions are not
met. In general, restricted stock may not be sold, or otherwise transferred or
hypothecated, until restrictions are removed or expire. Purchasers of restricted
stock, unlike recipients of options, will have voting rights and will receive
dividends prior to the time when the restrictions lapse.
Deferred Stock may be awarded to participants, typically without payment of
consideration, but subject to vesting conditions based on continued employment
or on performance criteria established by the Board or Committee. Like
restricted stock, deferred stock may not be sold, or otherwise transferred or
hypothecated, until vesting conditions are removed or expire. Unlike restricted
stock, deferred stock will not be issued until the deferred stock award has
vested, and recipients of deferred stock generally will have no voting or
dividend rights prior to the time when vesting conditions are satisfied.
Stock Appreciation Rights may be granted in connection with stock options
or other Awards, or separately. SARs granted by the Board or Committee in
connection with stock options or other Awards typically will provide for
payments to the holder based upon increases in the price of the Company's Common
Stock over the exercise price of the related option or other Awards, but
alternatively may be based upon criteria such as book value. Except as required
by Section 162(m) of the Code with respect to a SAR intended to qualify as
performance-based compensation as described in Section 162(m) of the Code, there
are no restrictions specified in the Equity Plan on the exercise of SARs or the
amount of gain realizable therefrom, although restrictions may be imposed by the
Board or Committee in the SAR agreements. The Board or Committee may elect to
pay SARs in cash or in Common Stock or in a combination of both.
Dividend Equivalents represent the value of the dividends per share paid by
the Company, calculated with reference to the number of shares covered by the
stock options, SARs or other Awards held by the participant.
Performance Awards may be granted by the Board or Committee on an
individual or group basis. Generally, these Awards will be based upon specific
performance targets and may be paid in cash or in Common Stock or in a
combination of both. Performance Awards may include "phantom" stock Awards that
provide for payments based upon increases in the price of the Company's Common
Stock over a predetermined period. Performance Awards may also include bonuses
which may be granted by the Board or Committee on an individual or group basis
and which may be payable in cash or in Common Stock or in a combination of both.
Stock Payments may be authorized by the Board or Committee in the form of
shares of Common Stock or an option or other right to purchase Common Stock as
part of a deferred compensation arrangement in lieu of all or any part of
compensation, including bonuses, that would otherwise be payable in cash to the
key employee or consultant.
Securities Laws and Federal Income Taxes
Securities Laws. The Equity Plan is intended to conform to the extent
necessary with all provisions of the Securities Act and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and any and all regulations and
rules promulgated by the Securities and Exchange Commission thereunder,
including without limitation Rule 16b-3. The Equity Plan will be administered,
and options will be granted and may be exercised, only in such a manner as to
conform to such laws, rules and regulations. To the extent permitted by
applicable law, the Equity Plan and
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options granted thereunder shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.
General Federal Tax Consequences. Under current federal laws, in general,
recipients of awards and grants of nonqualified stock options, stock
appreciation rights, restricted stock, deferred stock, dividend equivalents,
performance awards, and stock payments under the Equity Plan are taxable under
Section 83 of the Code upon their receipt of Common Stock or cash with respect
to such awards or grants and, subject to Section 162(m) of the Code, the Company
will be entitled to an income tax deduction with respect to the amounts taxable
to such recipients. Under Sections 421 and 422 of the Code, recipients of ISOs
are generally not taxable on their receipt of Common Stock upon their exercises
of ISOs if the ISOs and option stock are held for certain minimum holding
periods and, in such event, the Company is not entitled to income tax deductions
with respect to such exercises. Participants in the Equity Plan will be provided
with detailed information regarding the tax consequences relating to the various
types of awards and grants under the plan.
Section 162(m) Limitation. In general, under Section 162(m) of the Code
("Section 162(m)"), income tax deductions of publicly-held corporations may be
limited to the extent total compensation (including base salary, annual bonus,
stock option exercises and non-qualified benefits paid) for certain executive
officers exceeds $1 million (less the amount of any "excess parachute payments"
as defined in Section 280G of the Code) in any one year. However, under Section
162(m), the deduction limit does not apply to certain "performance-based
compensation" established by an independent compensation committee which is
adequately disclosed to, and approved by, stockholders. In particular, stock
options and SARs will satisfy the "performance-based compensation" exception if
the awards are made by a qualifying compensation committee, the plan sets the
maximum number of shares that can be granted to any person within a specified
period and the compensation is based solely on an increase in the stock price
after the grant date (i.e. the option exercise price is equal to or greater than
the fair market value of the stock subject to the award on the grant date).
Under a Section 162(m) transition rule for compensation plans of corporations
which are privately held and which become publicly held in an initial public
offering, the Equity Plan will not be subject to Section 162(m) until the
earlier of (i) the material modification of the Equity Plan, (ii) the issuance
of all employer stock and other compensation that has been allocated under the
Equity Plan, or (iii) the first meeting of stockholders at which directors are
to be elected that occurs after December 31, 1999 (the "Transition Date"). After
the Transition Date, rights or awards granted under the Equity Plan, other than
options and SARs, will not qualify as "performance-based compensation" for
purposes of Section 162(m) unless such rights or awards are granted or vest upon
preestablished objective performance goals, the material terms of which are
disclosed to and approved by the stockholders of the Company. Thus, the Company
expects that such other rights or awards under the Equity Plan will not
constitute "performance-based compensation" for purposes of Section 162(m).
The Company has attempted to structure the Equity Plan in such a manner
that, after the Transition Date, the remuneration attributable to stock options
and SARs granted thereunder may qualify as performance-based compensation which
will not be subject to the $1,000,000 limitation. The Company has not, however,
requested a ruling from the IRS or an opinion of counsel regarding this issue.
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement, dated August 18, 1995,
with Karl Eller for a term of four years pursuant to which the Company agreed to
employ Mr. Eller as the Chairman of the Board of Directors and Chief Executive
Officer of the Company and its respective subsidiaries. Pursuant to the terms of
the agreement, the Company pays Mr. Eller an initial base salary of $400,000 per
year and granted him certain stock options (described above in "-- Executive
Officers' Stock Options"). Mr. Eller's initial base salary is increased annually
by the percentage increase in the Consumer Price Index, if any. In addition, Mr.
Eller may be granted bonus compensation at the
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discretion of the Board of Directors. Pursuant to the terms of the agreement,
Mr. Eller's employment is terminable by the Company at any time for "Cause." For
purposes of the agreement, "Cause" includes (i) willful misconduct or gross
negligence, (ii) commission of a crime involving moral turpitude, (iii) disloyal
or dishonest conduct that materially harms the Company or materially undermines
the confidence of the Board of Directors in Mr. Eller, or (iv) willful breach of
the agreement. Pursuant to the terms of the agreement, Mr. Eller may terminate
his employment for "Good Reason" by giving thirty (30) days' written notice. For
purposes of the agreement, "Good Reason" exists only if (i) Mr. Eller is removed
or not reappointed as the Company's Chief Executive Officer, unless such
termination is due to death or disability, (ii) Mr. Eller is assigned duties or
authority is withdrawn from Mr. Eller inconsistent with his authority or without
his consent, or (iii) the Company breaches any of its material obligations under
the agreement. If Mr. Eller terminates his employment for Good Reason or if the
Company terminates Mr. Eller's employment without Cause, Mr. Eller is entitled
to receive all compensation and benefits owed for the remainder of the term of
the agreement. The employment agreement obligates Mr. Eller for one year
following termination of his employment with the Company, to refrain from
engaging in competition with the Company and from influencing any person to give
up an employment or business relationship with the Company.
401(K) PLANS
The Company sponsors two 401(k) plans that allow contributions of 1% to 15%
of base compensation for eligible employees. Participation in these plans is
available to salaried employees and to certain groups of hourly employees.
Employees covered by collective bargaining units are not eligible. The Company
matches the employee's contribution, at its discretion, in amounts up to
approximately 15% of the employee's contribution. The Company also contributes,
at its discretion, an annual contribution based on the Company's results of
operations, subject to certain limitations under the Code. See Note 9 to the
consolidated financial statements of the Company.
PHANTOM EQUITY PLAN
The Company maintained a phantom equity plan (the "Phantom Equity Plan")
for certain key employees pursuant to which it granted to such employees an
aggregate of 90 units of phantom Common Stock (with each unit equivalent to
approximately shares of Common Stock). The units vest at the end of a
five-year period after their grant, subject to continued employment and
achievement of certain financial performance criteria, and are payable in cash
in an amount equal to the value at vesting of a number of shares of Common Stock
equivalent to the number of units. In October 1996 the Company determined that,
upon consummation of the Offering, it would not grant further units under the
Phantom Equity Plan, it would eliminate the performance criteria and, at
vesting, outstanding units would be paid with Common Stock.
AUDIT COMMITTEE; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors formed an Audit Committee in October 1996 which is
responsible for reviewing the Company's accounting controls and recommending to
the Board of Directors the engagement of the Company's outside auditors. The
members of the Company's Audit Committee are Messrs. Grousbeck and Niehaus and
Ms. Pineda.
During 1995, the Company's Board of Directors did not have a compensation
committee or other committee performing similar functions. All compensation
decisions concerning the Company's executive officers during 1995 were made by
the entire Board of Directors. The Board of Directors formed a Compensation
Committee in October 1996 which is responsible for reviewing and approving the
amount and type of consideration to be paid to senior management and for
administering the Company's stock option plans. See "-- Executive Officers'
Stock Options" and "-- Equity Plan." The members of the Company's Compensation
Committee are Messrs. Bunce, Kern and Reiss.
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LIMITATIONS ON LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has entered into, or intends to enter into, agreements to
provide indemnification for the Company's directors and executive officers.
These agreements, among other things, will indemnify the Company's directors and
executive officers for certain expenses (including attorney's fees), and all
losses, claims, liabilities, judgments, fines and settlement amounts incurred by
such person arising out of or in connection with such person's service as a
director or officer of the Company to the fullest extent permitted by applicable
law. The Company has also obtained director and officer liability insurance that
insures the Company's directors and officers against certain liabilities. In
addition, the Certificate of Incorporation limits the personal liability of
directors to the Company and its stockholders, and the Bylaws provide that the
Company shall indemnify the Company's directors and officers, in each case, to
the fullest extent permissible under Delaware General Corporation Law. See
"Description of Capital Stock -- Special Provisions of the Certificate of
Incorporation, Bylaws and Delaware Law."
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock outstanding immediately prior to the
Offering and as adjusted to reflect the sale of Common Stock offered hereby by:
(i) each person known by the Company to own beneficially 5% or more of the
Common Stock; (ii) each director and executive officer of the Company identified
under "Management -- Executive Compensation"; (iii) each Selling Stockholder and
(iv) all directors and executive officers of the Company as a group. Except as
otherwise indicated, each stockholder listed below has informed the Company that
such stockholder has (i) sole voting and investment power with respect to such
stockholder's shares of stock, except to the extent that authority is shared by
spouses under applicable law, and (ii) record and beneficial ownership with
respect to such stockholder's shares of stock.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)(2)
---------------------- NUMBER OF ----------------------
NAME AND ADDRESS OF BENEFICIAL NUMBER OF PERCENT SHARES NUMBER OF PERCENT
OWNER SHARES OF CLASS OFFERED SHARES OF CLASS
- ----------------------------------- --------- -------- --------- --------- --------
Hellman & Friedman Capital
Partners III, L.P.
("Capital Partners")(3).......... 74.55%
H&F Orchard Partners III, L.P.
("Orchard")(3)................... 5.49
H&F International Partners III,
L.P.
("International")(3)............. 1.65
Loel Ranches, Inc. ("LRI")(4)(5)... 8.29
El Dorado Investment Company(6).... *
Steven G. Mihaylo(7)............... 1.13
Karl Eller(4)(5)(8)................ 15.67
Scott S. Eller(4).................. 4.51
Timothy J. Donmoyer(4)(8).......... 1.26
Paul J. Meyer(4)(8)................ *
John L. Bunce, Jr.(3)(9)........... *
H. Irving Grousbeck(10)............ *
Bruce T. Halle(11)................. *
F. Warren Hellman(3)............... 81.69
Arthur H. Kern(12)................. *
Joseph M. Niehaus(3)(9)............ *
Patricia Salas Pineda(13).......... *
Richard Reiss, Jr.(5)(8)(14)....... 1.36
All directors and executive
officers
as a group (12 persons).......... 99. %
- ---------------
* Less than 1%.
(1) A person is deemed as of any date to have "beneficial ownership" of any
security that such person has a right to acquire within 60 days after such
date. Shares which each identified stockholder has the right to acquire
within 60 days of the date of the table set forth above are deemed to be
outstanding in calculating the percentage ownership of such stockholder,
but are not deemed to be outstanding as to any other person.
(2) For purposes of this table, information as to shares of Common Stock
assumes that (i) the persons in the table do not purchase shares in the
Offering and (ii) no exercise of the Underwriters' over-allotment option.
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(3) The address of such persons is One Maritime Plaza, Suite 1200, San
Francisco, CA 94111. Capital Partners, Orchard and International, and their
collective general partner, F. Warren Hellman, individually and as a
trustee of The Hellman Family Revocable Trust dated December 17, 1984 (the
"Hellman Trust"), and Tully M. Friedman, individually and as the trustee of
The Tully M. Friedman Revocable Trust UAD January 3, 1980 (the "Friedman
Trust"), may be deemed to constitute a "group" within the meaning of
Section 13(d)(3) of the Exchange Act. As a group, these individuals and
entities own directly , or %, of the outstanding shares of Common
Stock. Capital Partners, Orchard and International are entities indirectly
controlled by the Hellman Trust and the Friedman Trust. A trustee of the
Hellman Trust is F. Warren Hellman, and the trustee of the Friedman Trust
is Tully M. Friedman. Messrs. Hellman and Friedman, individually and as
trustees of the respective trusts, share voting and investment power with
respect to the shares of Common Stock held by Capital Partners, Orchard and
International, and, as a result, may be deemed to be the beneficial owner
of 100% of the shares of Common Stock held by those entities.
(4) The address of such persons is c/o Eller Media Company, 2850 East Camelback
Road, Suite 300, Phoenix, AZ 85016.
(5) Karl Eller indirectly exercises voting and investment power over
shares of Common Stock owned by LRI. Richard Reiss, Jr. has an exercisable
option to acquire of the shares of Common Stock held by LRI.
(6) The address of such entity is 400 East Van Buren, Suite 700, Phoenix, AZ
85004.
(7) The address of such person is P.O. Box 5350, Incline Village, NV 89450.
(8) Includes for Karl Eller, Timothy J. Donmoyer and Richard Reiss, Jr.
, , and shares, respectively, issuable under
options exercisable within 60 days. Of such number for Mr. Eller,
of such options have been assigned to other executive officers
and a director, subject to revesting in Mr. Eller upon the occurrence of
certain contingencies. Mr. Reiss' total includes shares which may be
acquired upon exercise of the LRI option described in Note 5.
(9) Messrs. Bunce and Niehaus, directors of the Company, serve as officers of
the ultimate corporate general partner of Capital Partners, Orchard and
International and may be deemed beneficial owners of certain shares owned
by those partnerships. Messrs. Bunce and Niehaus each disclaim beneficial
ownership of the shares of Common Stock held by such entities.
(10) The address of such person is c/o Stanford University, Graduate School of
Business Administration, Room L336, Stanford, CA 94305.
(11) The address of such person is c/o Discount Tire Company, 14631 North
Scottsdale Road, Scottsdale, AZ 85254.
(12) The address of such person is c/o American Media, 1940 Webster Street, San
Francisco, CA 94115.
(13) The address of such person is c/o 606 Stagecoach Court, Lafayette, CA
94549.
(14) The address of such person is c/o Cumberland Associates, 1114 Avenue of the
Americas, New York, NY 10036.
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DESCRIPTION OF CAPITAL STOCK
Upon consummation of the Offering, the Company's authorized capital stock
will consist of shares of Common Stock, $.01 par value per share, and
shares of preferred stock, $.01 par value per share ("Preferred
Stock"). The following summary of the Company's capital stock is qualified in
its entirety by reference to the Company's Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Restated Bylaws (the "Bylaws"), each of
which is filed as an exhibit to the registration statement of which this
Prospectus is a part.
COMMON STOCK
Upon consummation of the Offering, the Company will be authorized to issue
shares of Common Stock. Following the Offering, shares of
Common Stock will be issued and outstanding (assuming no exercise of the
over-allotment option and excluding (i) shares of Common Stock
issuable upon the exercise of options outstanding on the date hereof, of which
will be immediately exercisable upon consummation of the Offering,
(ii) shares reserved for issuance pursuant to the Company's Equity
Plan, (iii) shares issuable pursuant to the Phantom Equity Plan and
(iv) shares of Common Stock issuable pursuant to the terms of a
convertible promissory note). See "Capitalization."
Holders of Common Stock are entitled to one vote per share on all matters
on which the holders of Common Stock are entitled to vote. Because holders of
Common Stock do not have cumulative voting rights and the Company has a
classified Board of Directors, the holders of a majority of the shares of Common
Stock voting for the election of directors can elect all of the members of the
Board of Directors standing for election at any particular meeting. The Common
Stock is not redeemable and has no conversion or preemptive rights. All of the
outstanding shares of Common Stock are, and all of the shares of Common Stock
sold in this Offering will be, when issued and paid for, fully paid and
nonassessable. In the event of the liquidation or dissolution of the Company,
the holders of Common Stock are entitled to share pro rata in any of the
corporate assets available for distribution to them. The Company may pay
dividends if, when and as declared by the Board of Directors from funds legally
available therefor, subject to the restrictions set forth in the Senior Credit
Facility. See "Dividend Policy."
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more series. Subject to the provisions of the
Certificate of Incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series, and to provide for or change the voting powers, designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, including dividend rights
(including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any series of the
Preferred Stock, in each case without any further action or vote by the
stockholders. The Company has no current plans to issue any additional shares of
Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of Preferred Stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, Preferred Stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of Preferred Stock may
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discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
Certificate of Incorporation and Bylaws. Certain provisions of the
Certificate of Incorporation and Bylaws as well as certain provisions of
Delaware law may be deemed to have an anti-takeover effect or may delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
in such stockholder's best interest, including those attempts that might result
in a premium over the market price for the shares held by a stockholder. In
addition, the Certificate of Incorporation eliminates the ability of the
stockholders to act by written consent and consequently stockholders may only
act at meetings thereof. The Certificate of Incorporation also provides that a
special meeting of the Company's stockholders may only be called by certain
officers of the Company or by the Board of Directors; no such meeting may be
called by stockholders. Any amendment of the Bylaws and certain provisions of
the Certificate of Incorporation by stockholders will require the affirmative
vote of at least 66 2/3% of the shares of Common Stock then outstanding.
The Certificate of Incorporation provides that no director of the Company
shall be personally liable to the Company or its stockholders for monetary
damages for breach of duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the
Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of these provisions is
to eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of fiduciary duty as a director (including
breaches resulting from grossly negligent behavior), except in the situations
described above.
The Bylaws provide that the Company will indemnify its directors and
officers to the fullest extent permissible under Delaware General Corporation
Law. These indemnification provisions require the Company to indemnify such
persons against certain liabilities and expenses to which they may become
subject by reason of their service as a director or officer of the Company. The
provisions also set forth certain procedures, including the advancement of
expenses, that apply in the event of a claim for indemnification.
Delaware Anti-Takeover Law. Section 203 of the Delaware General
Corporation Law ("Section 203") generally provides that a person who, together
with affiliates and associates owns, or within three years did own, 15% or more
of the outstanding voting stock of a corporation (an "Interested Stockholder")
but less than 85% of such stock may not engage in certain business combinations
with the corporation for a period of three years after the date on which the
person became an Interested Stockholder unless (i) prior to such date, the
corporation's board of directors approved either the business combination or the
transaction in which the stockholder became an Interested Stockholder (as was
the case with respect to Capital Partners, Orchard and International) or (ii)
subsequent to such date, the business combination is approved by the
corporation's board of directors and authorized at a stockholders' meeting by a
vote of at least two-thirds of the corporation's outstanding voting stock not
owned by the Interested Stockholder. Section 203 defines the term "business
combination" to encompass a wide variety of transactions with or caused by an
Interested Stockholder, including mergers, asset sales, and other transactions
in which the Interested Stockholder receives or could receive a benefit on other
than a pro rata basis with other stockholders.
The provisions of Section 203, coupled with the Board's authority to issue
Preferred Stock without further stockholder action, could delay or frustrate the
removal of incumbent directors or a change in control of the Company. The
provisions also could discourage, impede or prevent a merger, tender offer or
proxy contest, even if such event would be favorable to the interests of
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stockholders. The Company's stockholders, by adopting an amendment to the
Certificate of Incorporation, may elect not to be governed by Section 203 which
election would be effective 12 months after such adoption. Neither the
Certificate of Incorporation nor the Bylaws exclude the Company from the
restrictions imposed by Section 203.
CLASSIFIED BOARD OF DIRECTORS
The Certificate of Incorporation classifies the Board of Directors into
three classes. The first class consists of three directors whose initial term
expires in 1997. The second class consists of three directors whose initial term
expires in 1998. The third class consists of three directors whose initial term
expires in 1999. At each annual meeting, the number of directors equal to the
number of directors in the class whose terms expire at the time of such meeting
shall be elected to hold office until the third succeeding annual meeting. As a
result of this classification of directors, no stockholder or group of
stockholders would be able to elect a majority of the Board of Directors at any
single meeting for the election of directors. In addition, the Delaware General
Corporation Law prohibits the removal of a director of a classified board
without cause. This could discourage a proxy contest for control of the Board of
Directors.
NOTICE PROVISIONS
The Bylaws provide that only business or proposals, including director
nominations, properly brought before an annual meeting of stockholders may be
conducted at such meeting. In order to bring business or a proposal before an
annual meeting, a stockholder is required to provide written notice to the
Company at least 60 days prior to the annual meeting which describes the
business or proposal to be brought before the annual meeting, the name and
address of the stockholder proposing the business, the class and number of
shares of stock held by such stockholder, and any material interest of the
stockholder in the business to be brought before the meeting. These procedures
may operate to limit the ability of stockholders to bring business before the
annual meeting, including with respect to the nomination of directors or
considering any transaction that could result in a change of control of the
Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is LaSalle National
Trust, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock
of the Company. No prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares of Common Stock
for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock of the Company in the
public market after the restrictions described below lapse could adversely
affect the prevailing market price of the Common Stock and the ability of the
Company to raise equity capital in the future.
Upon completion of the Offering, the Company will have outstanding
shares of Common Stock (excluding (i) shares of Common Stock issuable upon
the exercise of the Underwriters' over-allotment option, (ii) shares of
Common Stock issuable upon the exercise of options outstanding on the date
hereof, of which will be immediately exercisable upon consummation of the
Offering, (iii) shares reserved for issuance pursuant to the Company's
Equity Plan, (iv) shares issuable pursuant to the Phantom Equity Plan and
(v) shares of Common Stock issuable pursuant to the terms of a
convertible promissory note). See "Capitalization," "Description of Capital
Stock" and "Description of Indebtedness and Other Commitments -- Convertible
Promissory Note." Of these shares, the shares ( shares if the
Underwriters' over-allotment option is exercised in full) of Common Stock sold
in this Offering will be freely tradable without restriction under the
Securities Act except for any shares purchased by "affiliates,"
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as that term is defined in the Securities Act, of the Company. The remaining
shares are "restricted securities" within the meaning of Rule 144 adopted
under the Securities Act (the "Restricted Shares"). The Restricted Shares
generally may not be sold unless they are registered under the Securities Act or
are sold pursuant to an exemption from registration, such as the exemption
provided by Rule 144 under the Securities Act.
Certain of the Company's stockholders and all of its executive officers and
directors, with the power to dispose of a total of shares, have agreed
not to offer, sell or otherwise dispose of any shares of Common Stock for a
period of 180 days after the date of this Prospectus (the "Lock-up Period")
without the prior written consent of Alex. Brown & Sons Incorporated on behalf
of the Underwriters. See "Underwriting." Following the Lock-up Period, these
shares will not be eligible for sale in the public market without registration
unless such sales meet the conditions and restrictions of Rule 144 as described
below.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for a period of at least two years (as computed under Rule 144) is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of (i) 1% of the then-outstanding shares of Common Stock
(approximately shares after giving effect to this Offering) and (ii)
the average weekly trading volume in the Company's Common Stock during the four
calendar weeks immediately preceding the date on which the notice of such sale
on Form 144 is filed with the Commission. Sales under Rule 144 are also subject
to certain provisions relating to notice and manner of sale and the availability
of current public information about the Company. In addition, a person (or
persons whose shares are aggregated) who has not been an affiliate of the
Company at any time during the 90 days immediately preceding a sale, and who has
beneficially owned the shares at least three years (as computed under Rule 144),
would be entitled to sell such shares under Rule 144(k) without regard to the
volume limitation and other conditions described above. The foregoing summary of
Rule 144 is not intended to be a complete description thereof. Approximately
outstanding shares of Common Stock will become eligible for sale in
August 1997, pursuant to Rule 144, subject to volume and manner of sale
restrictions described above.
The Company has reserved an aggregate of shares of Common Stock
for issuance pursuant to the Equity Plan. As of the date hereof, the Company has
issued options to purchase an aggregate of shares of Common Stock,
of which remain unexercised. The Company intends to file a
registration statement on Form S-8 under the Securities Act to register shares
to be issued upon exercise of such options and options granted pursuant to the
Equity Plan. To the extent not held by affiliates or subject to a lock-up
agreement, shares of Common Stock issued under the stock option plan after the
effective date of the registration statement covering the Equity Plan will be
available for sale in the public market without restriction. See "Management --
Executive Officers' Stock Options" and "Management -- Equity Plan."
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DESCRIPTION OF INDEBTEDNESS AND OTHER COMMITMENTS
SENIOR CREDIT FACILITY
The Senior Credit Facility was made available to the Company pursuant to
the Amended and Restated Credit Agreement dated as of November 19, 1996, as
amended (the "Credit Agreement"), among the Company and each of its
subsidiaries, the several banks and other financial institutions (collectively,
the "Lenders") from time to time parties thereto and The Chase Manhattan Bank
("Chase"), as administrative agent for the Lenders. The Senior Credit Facility
provides for revolving credit loans, letters of credit, and term loans.
Capitalized terms used below without definition shall have the meanings ascribed
to them in the Credit Agreement.
Revolving Credit Loans. The Senior Credit Facility provides for revolving
credit loans of up to $200 million, including a $15 million sublimit available
for issuance of letters of credit. The revolving credit loan commitment
automatically reduces to zero in quarterly installments commencing on September
30, 2000, and continuing until September 30, 2003. The Company may prepay
revolving credit loans in whole or in part, without premium or penalty, and it
may reborrow subject to the scheduled reductions and subject to compliance with
the terms of the Credit Agreement. LIBOR loans may only be paid at the end of
interest periods. See "Capitalization" and "Use of Proceeds."
Term Loans. The Senior Credit Facility provides for term loans designated
as "Tranche A" and "Tranche B" term loans. The Tranche A commitment is $200
million and the Tranche B commitment is $150 million. See "Capitalization." The
term loans are payable in quarterly installments commencing on September 30,
1997.
Letters of Credit. Chase has agreed to issue letters of credit under the
Senior Credit Facility for the account of the Company or its subsidiaries during
the revolving credit commitment period (which expires September 30, 2003) up to
the letter of credit commitment amount of $15 million (but only to the extent
there is available revolving credit commitment which is not being utilized for
revolving credit loans). The Company is required to pay fees in connection with
the letter of credit commitment and to reimburse Chase for amounts drawn under
any letter of credit.
General Terms. The revolving credit loans and term loans are subject to
the following terms:
Interest. With respect to revolving credit loans and term loans, the
interest rate charged on outstanding loans is payable quarterly in arrears in
the case of Base Rate Borrowings, or at the end of interest periods in the case
of LIBOR Borrowings. Interest will be calculated on the basis of the Base Rate
or LIBOR, as the case may be, plus a premium based on the Company's leverage
ratio, adjusted quarterly.
Security. Obligations under the Senior Credit Facility are secured by a
pledge of 100% of the stock of Eller and its subsidiaries, secured by all
personal property of the Company and its subsidiaries and guaranteed by the
Company and its subsidiaries.
Covenants. The Senior Credit Facility contains customary covenants,
including the following: (i) limitations on additional indebtedness of the
Company and its subsidiaries; (ii) limitations on mergers; (iii) limitations on
sale, lease or other disposition of stock of any subsidiary or of other assets,
provided that the foregoing restrictions do not apply to, among other things,
sales, leases or other dispositions of property in the ordinary course of
business; (iv) limitations on investments and capital expenditures; (v)
limitations on transactions with affiliates; (vi) prohibition on dividends and
other distributions by the Company (other than stock dividends); and (vii)
limitation on liens. The Senior Credit Facility also requires the Company to
meet certain financial tests, including a total leverage ratio, an interest
expense coverage ratio and a fixed charges coverage ratio, and to enter into
certain interest rate hedging agreements.
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Events of Default and Restrictions. The Senior Credit Facility contains
customary events of default, including the following: (i) failure to pay
principal or interest when due; (ii) breach of any covenant, representation or
warranty; (iii) cross-default provisions; (iv) certain events of bankruptcy,
insolvency or reorganization and (v) the levy of certain judgments against the
Company or any of its subsidiaries. The occurrence of an event of default
permits the Lenders to terminate the commitments and accelerate the indebtedness
under the Senior Credit Facility.
Mandatory Prepayments. The Senior Credit Facility requires prepayment of
the term loans equal to 50% of Excess Cash Flow, less voluntary prepayments of
the term loans, for each fiscal year starting with the fiscal year ended
December 31, 1998, to be paid in fiscal year 1999 and following years.
CONVERTIBLE PROMISSORY NOTE
In connection with the acquisition of display faces from ADCO (see
"Business -- Recent and Pending Acquisitions"), the Company will issue a 6.25%
secured convertible promissory note (the "ADCO Note") in the principal amount of
$9.5 million for the assets to be acquired (the "ADCO Assets"). Repayment of the
ADCO Note will be secured by a first lien on the ADCO Assets. The principal
under the ADCO Note will be due and payable on January 3, 2002.
The holder of the ADCO Note will be able to convert, at a price per share
of Common Stock equal to the Price to Public on the cover page of this
Prospectus, all or a portion of the ADCO Note into shares of Common Stock of the
Company at any time after January 3, 1998 and prior to maturity or earlier
redemption after January 2000 of the ADCO Note.
The holder of the ADCO Note will also be entitled to certain "piggy-back"
registration rights with respect to any shares of Common Stock acquired upon
conversion of the ADCO Note in the event the Company registers additional shares
of Common Stock.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Alex. Brown & Sons Incorporated, Bear, Stearns & Co. Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Furman Selz LLC (the "Representatives"),
have severally agreed to purchase from the Company and the Selling Stockholders,
the following respective number of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
NUMBER
OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- -------
Alex. Brown & Sons Incorporated...........................................
Bear, Stearns & Co. Inc...................................................
Donaldson, Lufkin & Jenrette Securities Corporation.......................
Furman Selz LLC...........................................................
Total...........................................................
======
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the initial
public offering, the offering price and other selling terms may be changed by
the Representatives.
The Company and the Selling Stockholders have granted to the Underwriters
an option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to additional shares of Common Stock at the initial
public offering price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the above table bears to ,
and the Company and the Selling Stockholders will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the shares are
being offered.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Certain of the Company's stockholders and all of its executive officers and
directors, with the power to dispose of a total of shares, have agreed
not to offer, sell or otherwise dispose of any shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Alex. Brown & Sons Incorporated on behalf of the Underwriters. See
"Principal and Selling Stockholders" and "Shares Eligible for Future Sale."
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined through
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negotiation among the Company, the Selling Stockholders and the Representatives.
Among the factors to be considered in such negotiations will be prevailing
market conditions, the results of operations of the Company in recent periods,
the market capitalizations and stages of development of other companies which
the Company and the Representatives believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
CERTAIN LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Latham & Watkins, Los Angeles,
California. Piper & Marbury L.L.P., Baltimore, Maryland, will pass on certain
legal matters related to this Offering for the Underwriters.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and for the period from August 18, 1995 through December 31, 1995, together
with the consolidated financial statements of PMG and the combined financial
statements of EIC for the period from January 1, 1995 through August 17, 1995,
in this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
The consolidated financial statements of PMG as of December 31, 1994 and
for each of the two years then ended in this Prospectus have been so included in
reliance on the report of KPMG Peat Marwick LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The combined financial statements of EIC as of and for the period ended
December 31, 1994 in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include all amendments thereto) on Form S-1 under the Securities Act,
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to herein are not necessarily complete.
With respect to each report or other information filed with the Commission
pursuant to the Exchange Act, and such contract, agreement or document filed as
an exhibit to the Registration Statement, reference is made to such exhibit for
a more complete description, and each such statement is deemed to be qualified
in all respects by such reference. The Registration Statement and reports and
other information filed by the Company may be inspected, without charge, at the
offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and
at its regional offices at Seven World Trade Center, New York, New York 10048,
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained form the public reference section of the Commission at
its Washington address upon payment of the prescribed fee. The
55
57
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission and the address of such site is
http://www.sec.gov.
The Company intends to distribute to the holders of its shares of Common
Stock annual reports containing consolidated financial statements audited by an
independent accountant and quarterly reports containing unaudited condensed
consolidated financial information for the first three quarters of each year.
56
58
INDEX TO FINANCIAL STATEMENTS
PAGE
----
ELLER MEDIA CORPORATION PRO FORMA
Unaudited Pro Forma Consolidated Statements of Operations........................... F-2
Notes to Unaudited Pro Forma Consolidated Statements of Operations.................. F-5
ELLER MEDIA CORPORATION
Report of Independent Public Accountants (Arthur Andersen LLP)...................... F-6
Consolidated Balance Sheets......................................................... F-7
Consolidated Statements of Operations............................................... F-8
Consolidated Statements of Stockholders' Equity..................................... F-9
Consolidated Statements of Cash Flows............................................... F-10
Notes to Consolidated Financial Statements.......................................... F-11
PMG HOLDINGS, INC.
Report of Independent Public Accountants (KPMG Peat Marwick LLP).................... F-20
Consolidated Balance Sheet.......................................................... F-21
Consolidated Statements of Operations............................................... F-22
Consolidated Statements of Changes in Stockholders' Deficit......................... F-23
Consolidated Statements of Cash Flows............................................... F-24
Notes to Consolidated Financial Statements.......................................... F-25
ELLER INVESTMENT COMPANY, INC.
Report of Independent Public Accountants (Arthur Andersen LLP)...................... F-33
Combined Balance Sheet.............................................................. F-34
Combined Statement of Operations.................................................... F-35
Combined Statement of Stockholders' Deficit......................................... F-36
Combined Statement of Cash Flows.................................................... F-37
Notes to Combined Financial Statements.............................................. F-38
F-1
59
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following sets forth unaudited pro forma consolidated statements of
operations for the Company. The unaudited pro forma consolidated statements of
operations for the twelve and nine months ended December 31, 1995 and September
30, 1995 respectively give effect to the acquisition of PMG Holding, Inc. and
Subsidiaries ("PMG") and Eller Investment Company ("EIC") (the "Acquisitions")
as if they had occurred on January 1, 1995.
The unaudited pro forma consolidated statements of operations do not
purport to present the actual results of operations of the Company had the
Acquisitions taken place at the beginning of the year, nor are they necessarily
indicative of the results of operations that may be achieved in the future. The
unaudited pro forma consolidated statements of operations are based on certain
assumptions and adjustments described in the notes thereto and should be read in
conjunction therewith. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the consolidated financial statements of
the Company and the notes thereto, the consolidated financial statements of PMG
and the notes thereto, and the combined financial statements of EIC and the
notes thereto, included elsewhere in this Prospectus.
F-2
60
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREDECESSORS
PERIOD FROM
JANUARY 1, 1995 TO ELLER MEDIA CORPORATION
AUGUST 17, 1995 PERIOD FROM
------------------ AUGUST 18, 1995 TO PRO FORMA
PMG EIC DECEMBER 31, 1995 ADJUSTMENTS PRO FORMA
-------- ------- ----------------------- ----------- ---------
Gross revenues............ $141,778 $15,439 $92,183 $249,400
Net revenues.............. 123,615 13,719 80,678 218,012
Cost of sales............. 50,456 5,796 32,754 89,006
Selling, general and
administrative
expense................. 31,480 1,903 19,377 52,760
Depreciation and
amortization............ 22,769 2,148 14,468 21,404(1)
(29,776)(2)
2,246(3) 33,259
-------- ------- ------- --------
Operating income.......... 18,910 3,872 14,079 42,987
Interest expense.......... 27,629 3,240 13,616 22,926(4)
(30,869)(5) 36,542
Other expense, net........ 4,860 497 2,997 8,354
-------- ------- ------- --------
Income (loss) before
provision for income
taxes................... (13,579) 135 (2,534) (1,909)
Provision for (benefit
from) income taxes...... (3,858) -- -- 3,858(6) --
-------- ------- ------- --------
Net income (loss)......... $ (9,721) $ 135 $(2,534) $ (1,909)
======== ======= ======= ========
Per share............................................................................. $
========
Weighted average shares outstanding...................................................
========
See Notes to Unaudited Pro Forma Consolidated Statements of Operations.
F-3
61
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREDECESSORS
PERIOD FROM
JANUARY 1, 1995 TO ELLER MEDIA CORPORATION
AUGUST 17, 1995 PERIOD FROM
------------------ AUGUST 18, 1995 TO PRO FORMA
PMG EIC SEPTEMBER 30, 1995 ADJUSTMENTS PRO FORMA
-------- ------- ----------------------- ----------- ---------
Gross revenues............ $141,778 $15,439 $27,839 $185,056
Net revenues.............. 123,615 13,719 24,330 161,664
Cost of sales............. 50,456 5,796 9,528 65,780
Selling, general and
administrative
expense................. 31,480 1,903 6,303 39,686
Depreciation and
amortization............ 22,769 2,148 4,016 21,404(1)
(29,776)(2)
2,246(3) 22,807
-------- ------- ------- --------
Operating income.......... 18,910 3,872 4,483 33,391
Interest expense.......... 27,629 3,240 4,620 22,926(4)
(30,869)(5) 27,546
Other expense, net........ 4,860 497 1,016 6,373
-------- ------- ------- --------
Income (loss) before
provision for income
taxes................... (13,579) 135 (1,153) (528)
Provision for (benefit
from) income taxes...... (3,858) -- -- 3,858(6)
--
-------- ------- ------- --------
Net income (loss)......... $ (9,721) $ 135 $(1,153) $ (528)
======== ======= ======= ========
Per share............................................................................. $
========
Weighted average shares outstanding...................................................
========
See Notes to Unaudited Pro Forma Consolidated Statements of Operations.
F-4
62
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
The following describe the adjustments to present the pro forma statements
of operations of the Company, for the twelve and nine months ended December 31,
1995 and September 30, 1995, respectively, as if the Acquisitions had occurred
on January 1, 1995:
1. Record additional depreciation expense for the period from January
1, 1995 to August 17, 1995........................................ $ 21,404
2. Remove depreciation expense incurred by EIC and PMG from January 1,
1995 to August 17, 1995........................................... $(29,776)
3. Record additional amortization of goodwill for the period from
January 1, 1995 to August 17, 1995................................ $ 2,246
4. Record additional interest expense for the period from January 1,
1995 to August 17, 1995........................................... $ 22,926
5. Remove interest expense incurred by EIC and PMG from January 1, 1995
to August 17, 1995................................................ $(30,869)
6. Remove income tax benefit recorded by PMG........................... $ 3,858
F-5
63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Eller Media Corporation:
We have audited the accompanying consolidated balance sheet of ELLER MEDIA
CORPORATION ("EMC") (a Delaware corporation), formerly EMC Group, Inc., and
subsidiaries as of December 31, 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for the period from inception
(August 18, 1995) to December 31, 1995. In addition, we have audited the
accompanying combined statement of operations of Eller Investment Company, Inc.
("EIC") and the accompanying consolidated statement of operations of PMG
Holdings, Inc. and subsidiaries ("PMG"), the predecessors of EMC, for the period
from January 1, 1995 to August 17, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eller Media Corporation and
subsidiaries as of December 31, 1995, and the results of their operations and
their cash flows for the period from inception (August 18, 1995) to December 31,
1995, and the combined statement of operations of EIC and the consolidated
statement of operations of PMG for the period from January 1, 1995 to August 17,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona
March 15, 1996.
F-6
64
ELLER MEDIA CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AND SHARE DATA)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
CURRENT ASSETS:
Cash......................................................... $ 2,453 $ 2,948
Accounts receivable, net of allowance for doubtful accounts
of $2,274 and $2,399 at December 31, 1995 and September
30, 1996, respectively.................................... 30,510 36,556
Prepaid land leases and other assets......................... 10,077 11,898
-------- --------
Total current assets...................................... 43,040 51,402
PREPAID LAND LEASES AND OTHER, net of current portion.......... 4,593 3,651
PROPERTY AND EQUIPMENT, net (Note 4)........................... 448,345 465,309
DEFERRED LOAN FEES, net of accumulated amortization of $422 and
$1,363 at December 31, 1995 and September 30, 1996,
respectively (Note 5)........................................ 8,725 7,784
GOODWILL, net of accumulated amortization of $1,334 and $4,236
at December 31, 1995 and September 30, 1996, respectively.... 139,143 139,888
-------- --------
$643,846 $ 668,034
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................. $ 5,930 $ 3,873
Accrued liabilities.......................................... 25,652 33,701
Current portion of long-term debt (Note 5)................... 10,176 19,955
Current portion of capitalized lease obligations (Note 6).... 1,039 1,126
Accrued interest............................................. 4,229 2,664
-------- --------
Total current liabilities................................. 47,026 61,319
LONG-TERM DEBT, net of current portion (Note 5)................ 394,336 396,253
CAPITALIZED LEASE OBLIGATIONS, net of current portion (Note
6)........................................................... 1,960 2,069
OTHER LIABILITIES.............................................. 11,399 12,377
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
STOCKHOLDERS' EQUITY (Notes 2 and 7):
Preferred stock; $.01 par value; 2,000 shares authorized..... -- --
Class A common stock; $.01 par value; 10,000 shares
authorized, 1,916 and 1,917 shares issued and outstanding
at December 31, 1995 and September 30, 1996,
respectively.............................................. 1 1
Additional paid-in capital................................... 191,659 191,758
Retained earnings (deficit).................................. (2,534) 4,257
-------- --------
Total stockholders' equity................................ 189,126 196,016
-------- --------
$643,846 $ 668,034
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-7
65
ELLER MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREDECESSORS
---------------------------
EIC PMG
JANUARY 1, JANUARY 1, AUGUST 18, NINE
1995 1995 1995 MONTHS ENDED
TO TO TO SEPTEMBER
AUGUST 17, AUGUST 17, DECEMBER 31, 30,
1995 1995 1995 1996
---------- ------------ ------------ ------------
(UNAUDITED)
GROSS REVENUES....................................... $ 15,439 $141,778 $ 92,183 $203,995
AGENCY COMMISSIONS................................... (1,720) (18,163) (11,505) (25,267)
------- -------- -------- --------
Net revenues................................ 13,719 123,615 80,678 178,728
OPERATING EXPENSES, excluding depreciation and
amortization:
Cost of sales...................................... 5,796 50,456 32,754 68,135
Selling, general and administrative expense........ 1,903 31,480 19,377 39,830
------- -------- -------- --------
OPERATING INCOME BEFORE DEPRECIATION AND
AMORTIZATION....................................... 6,020 41,679 28,547 70,763
DEPRECIATION AND
AMORTIZATION....................................... 2,148 22,769 14,468 29,372
------- -------- -------- --------
Operating income............................ 3,872 18,910 14,079 41,391
INTEREST EXPENSE..................................... 3,240 27,629 13,616 26,877
OTHER EXPENSE, net................................... 497 4,860 2,997 5,323
------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES...... 135 (13,579) (2,534) 9,191
(BENEFIT) PROVISION FOR INCOME TAXES................. -- (3,858) -- 2,400
------- -------- -------- --------
Net income (loss)........................... $ 135 $ (9,721) $ (2,534) $ 6,791
======= ======== ======== ========
NET INCOME (LOSS) PER SHARE....................................................... $ (1,154) $ 3,093
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING............................................... 2,195.42 2,195.42
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
66
ELLER MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARES)
CLASS A
PREFERRED STOCK COMMON STOCK
------------------ --------------- ADDITIONAL RETAINED TOTAL
PREFERRED COMMON PAID-IN EARNINGS STOCKHOLDERS'
SHARES STOCK SHARES STOCK CAPITAL (DEFICIT) EQUITY
------ --------- ------ ------ -------- -------- -------------
BALANCE,
August 18, 1995 (inception)........ -- $-- -- $ -- $ -- $ -- $ --
Issuance of common stock......... -- -- 1,916 1 191,659 -- 191,660
Net loss......................... -- -- -- -- -- (2,534) (2,534)
----- ----- ----- ----- -------- -------- --------
BALANCE,
December 31, 1995................ -- -- 1,916 $ 1 $191,659 $ (2,534) $ 189,126
Issuance of common stock -- -- 1 -- 98 -- 99
(unaudited)....................
Net income (unaudited)........... -- -- -- -- -- 6,791 6,791
----- ----- ----- ----- -------- -------- --------
BALANCE,
September 30, 1996 (unaudited)... -- $-- 1,917 $ 1 $191,758 $ 4,257 $ 196,016
===== ===== ===== ===== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
67
ELLER MEDIA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
EIC PMG NINE
JANUARY 1, JANUARY 1, AUGUST 18, MONTHS ENDED
1995 1995 1995 SEPTEMBER 30,
TO TO TO 1996
AUGUST 17, AUGUST 17, DECEMBER 31, -------------
1995 1995 1995
---------- ---------- ------------ (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 135 $ (9,720) $ (2,534) $ 6,791
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation and amortization.......................... 2,728 22,768 14,467 29,372
Loss on disposal of fixed assets....................... 4,860 2,928 4,564
Changes in assets and liabilities, net of effect of
acquisitions --
Accounts receivable, net................................. (54) (7,089) 1,453 (6,047)
Prepaid land leases and other assets..................... (210) 31,004 2,561 (4,049)
Accounts payable, accrued and other liabilities.......... (129) (5,172) (1,681) 5,406
------- -------- --------- --------
Net cash provided by operating activities........... 2,470 36,651 17,194 36,037
------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (409) (8,218) (5,662) (48,151)
Proceeds from sale of fixed assets......................... -- 9,711 531 615
Purchase of PMG and EIC, net of cash acquired (Note 2)..... -- -- (520,441) --
------- -------- --------- --------
Net cash used in investing activities............... (409) 1,493 (525,572) (47,536)
------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................. (1,175) (37,315) (12,300) (4,500)
Principal payments on capitalized lease obligations........ (176) (442) (431) (1,395)
Proceeds from issuance of common stock..................... 163,160 100
Proceeds from issuance of debt............................. 360,402 17,789
------- -------- --------- --------
Net cash provided by financing activities........... (1,351) (37,757) 510,831 11,994
------- -------- --------- --------
NET INCREASE IN CASH......................................... 709 387 2,453 495
CASH, beginning of period.................................... 491 -- -- 2,453
------- -------- --------- --------
CASH, end of period.......................................... $ 1,200 $ 387 $ 2,453 $ 2,948
======= ======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
68
ELLER MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
Eller Media Corporation (the "Company") and its subsidiaries Eller Investment
Co. ("EIC") and PMG Holdings, Inc. and subsidiaries ("PMG"). The Company is
engaged in the business of providing rental space on outdoor advertising
structures and production services for outdoor advertisements in major
metropolitan areas in the United States.
EIC and PMG were acquired by the Company on August 18, 1995 (the "Purchase
Date"). The Company's consolidated statement of operations and cash flows for
the year ended December 31, 1995 include the operations of the Company since its
inception (August 18, 1995) and the operations of EIC and PMG since the Purchase
Date. Accordingly, the accompanying financial statements for the period January
1, 1995 to August 17, 1995 of EIC and PMG (the "Predecessors"), and the Company
are not comparable in all material respects since those financial statements
report results of operations and cash flows for separate entities.
Interim Financial Information
The accompanying condensed interim financial statements have been prepared
by the Company without audit. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles. See Note 11 for a discussion of the Company's
Phantom Stock Plan adopted effective June 1, 1996. The accompanying interim
financial statements should be read in conjunction with the Company's historical
financial statements and notes.
The accompanying unaudited interim financial statements reflect, in the
opinion of management, all adjustments, which are of a normal and recurring
nature, necessary for a fair presentation of the financial position and results
of operations for the periods presented. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
year.
(2) FORMATION OF THE COMPANY:
Acquisition of EIC, PMG and Initial Capitalization
On August 18, 1995, the Company was formed to acquire EIC and PMG. The
Company exchanged 284 shares of common stock for all the outstanding stock of
EIC in a transaction that was valued at approximately $28.5 million. Prior to
its acquisition by the Company, EIC was an outdoor advertising firm with
operations in Phoenix, Arizona, Atlanta, Georgia, and El Paso, Texas with annual
net revenues of approximately $22.0 million. The shares issued to the former
owners of EIC represent approximately 15% of the issued and outstanding stock of
the Company. Simultaneously, with the acquisition of EIC, the Company issued
1,632 shares of common stock (approximately 85% of the issued and outstanding
stock of the Company) in exchange for cash totaling approximately $163.1
million.
The acquisition of EIC was accounted for using the purchase method of
accounting. The purchase price of approximately $28.5 million was allocated to
assets and liabilities based on their estimated fair values as of the date of
acquisition. The cost in excess of fair values was approximately $32.4 million
and is recorded as goodwill in the accompanying consolidated balance sheets.
The Company, concurrent with its formation on August 18, 1995, executed a
stock purchase agreement with General Electric Capital Corporation to purchase
all of the stock of PMG for $519.2 million in cash. Prior to its acquisition by
EMC, PMG was an outdoor advertising firm with operations in several major cities
in the United States with annual net revenues of approximately $177.0 million.
This transaction was accounted for using the purchase method of accounting. The
purchase price was allocated to assets and liabilities based on their estimated
fair values as of the date of
F-11
69
ELLER MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition. The cost in excess of fair values was approximately $107.9 million
and is recorded as goodwill in the accompanying consolidated balance sheets.
The Chase Manhattan Bank, N.A., as an agent for a group of banks, provided
the Company with $440.0 million in senior secured facilities comprised of a
seven year $65.0 million revolving line of credit facility, a seven year $250.0
million term loan facility, and an eight-and-a-half year $125.0 million term
loan facility to finance a portion of the acquisition of PMG, to refinance
certain existing indebtedness, and to provide for general corporate purposes
(see Note 5).
Pro Forma Results of Operations
The following sets forth an unaudited pro forma consolidated statement of
operations for the Company. The unaudited pro forma consolidated statement of
operations for the twelve months ended December 31, 1995 gives effect to the
acquisitions of PMG and EIC as if they had occurred at January 1, 1995 (dollars
in thousands).
(UNAUDITED)
JANUARY AUGUST PRO FORMA
1, 18, JANUARY 1,
1995 1995 1995
TO TO TO
AUGUST DECEMBER DECEMBER
17, 31, PRO FORMA 31,
1995 1995 ADJUSTMENTS 1995
-------- -------- ----------- -----------
Gross Revenues............................... $157,217 $ 92,183 $ 249,400
Agency commissions and discounts............. (19,883) (11,505) (31,388)
-------- -------- ---------
Net revenues................................. 137,334 80,678 218,012
Operating Expenses:
Cost of sales.............................. 56,252 32,754 89,006
Selling, general and administrative
expense................................. 33,383 19,377 52,760
Depreciation and amortization................ 24,917 14,468 (6,126)(1) 33,259
-------- -------- ---------
Operating income............................. 22,782 14,079 42,987
Interest expense............................. 30,869 13,616 (7,943)(2) 36,542
Other expense, net........................... 5,357 2,997 8,354
-------- -------- ---------
Loss before provision of income taxes........ (13,444) (2,534) (1,909)
Benefit for income taxes..................... (3,858) -- 3,858(3) --
-------- -------- ---------
Net Loss..................................... $ (9,586) $ (2,534) $ (1,909)
======== ======== =========
- ---------------
(1) Records the Company's amortization and depreciation for the period from
January 1, 1995 to August 17, 1995, net of depreciation expense incurred by
EIC and PMG from January 1, 1995 to August 17, 1995.
(2) Records the Company's interest expense for period from January 1, 1995 to
August 17, 1995, net of interest expense incurred by EIC and PMG from
January 1, 1995 to August 17, 1995.
(3) Removes income tax benefit recorded by PMG.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents.
F-12
70
ELLER MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair values due to the short-term
maturities of these instruments.
Revenue Recognition
The Company provides outdoor advertising services under the terms of
contracts covering periods up to 36 months, which are generally billed monthly.
Revenues for outdoor advertising space rental are recognized ratably over the
contract terms. Revenues from design, production and certain other services are
recognized as the services are provided. All costs are recognized in the period
in which the related services are provided.
Prepaid Land Leases
Prepaid land leases represent amounts paid in advance for leases of land
occupied by outdoor advertising structures. Prepaid land leases are amortized on
a straight line basis over the term of the related lease period.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed on
a straight-line basis over the following useful lives:
Buildings.......................................................... 40 years
Advertising displays and structures................................ 5-16 years
Machinery and equipment............................................ 3-5 years
Vehicles........................................................... 3-4 years
Furniture, fixtures, computers and equipment....................... 3 years
Goodwill
Goodwill represents the excess of consideration paid over the fair market
values of identifiable net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. Goodwill and other long-lived assets are
periodically evaluated for impairment in accordance with the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
Supplemental Cash Flow Information
Cash paid for interest for the period January 1, 1995 through August 17,
1995 was approximately $2,155,072 and $161,960 for EIC and PMG, respectively. In
addition, capital lease obligations incurred by PMG during that period was
approximately $678,304. Cash paid for interest for the period August 18, 1995
through December 31, 1995, was approximately $9.7 million. In addition, capital
lease obligations incurred by the Company during that period totaled
approximately $504,000 for various equipment. In connection with the acquisition
of EIC, the Company issued 284 shares of stock in exchange for all of the
outstanding stock of EIC, which was valued at approximately $28.5 million. The
Company also obtained financing in connection with the acquisition of PMG, and
refinanced approximately $44.6 million of existing debt, warrants and preferred
stock with a portion of the proceeds. In addition, approximately $9.1 million of
the proceeds were used to pay loan costs related to the financing.
F-13
71
ELLER MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual amounts may differ from these estimates.
Recently Issued Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of, which established
a new accounting principle for accounting for the impairment of certain loans,
certain investments in debt and equity securities, long-lived assets that will
be held and used including certain identifiable intangibles and goodwill related
to those assets, and long-lived assets and certain identifiable intangibles to
be disposed of. The implementation of SFAS 121 did not materially affect the
Company's financial position.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting For Stock-Based
Compensation, which allows a company to record stock-based compensation on the
basis of fair value. Under the provisions of SFAS 123, the Company is
encouraged, but not required, to measure compensation costs related to its
employee stock compensation under the fair value method. If the Company elects
not to recognize compensation expense under the method, it is required to
disclose the pro forma effects based on the SFAS 123 methodology. The Company
will disclose the pro forma effects of SFAS 123 beginning in its December 31,
1996 financial statements.
(4) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1995
(dollars in thousands):
Advertising structures................................................... $412,110
Land................................................................ 7,676
Buildings........................................................... 16,917
Vehicles............................................................ 6,891
Machinery and equipment............................................. 4,429
Furniture and fixtures.............................................. 6,187
Construction-in-process............................................. 6,847
------------
461,057
Less: accumulated depreciation...................................... 12,712
------------
$448,345
============
Included in other expense are losses from the disposition (takedowns) of
certain advertising structures. Total losses on takedowns for the Company for
the period August 18, 1995 through December 31, 1995, were $2.9 million. In
addition, total losses on takedowns for PMG for the period January 1, 1995
through August 17, 1995, were approximately $4.9 million.
(5) LONG-TERM DEBT:
In connection with the financing discussed in Note 2, on August 18, 1995,
the Company entered into A and B Tranche Notes with a group of banks for whom
the Chase Manhattan Bank, N.A. acted as agent ("Agent"). The Tranche A Note
matures in June 2002, with interest payable quarterly, at the
F-14
72
ELLER MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agent's prime rate plus 1.25% (9.75% at December 31, 1995), or at LIBOR plus
2.50% (blended rate of 8.28% at December 31, 1995). The Tranche B Note, matures
in December 2003, with interest payable quarterly, at the Lender's prime rate
plus 2.00% (10.50% at December 31, 1995), or at LIBOR plus 3.25% (blended rate
of 9.13% at December 31, 1995). Use of the prime or LIBOR based rates is at the
Company's option, selected periodically, in advance. Borrowings may be used for
general corporate purposes, including working capital requirements, acquisitions
and refinancing existing indebtedness.
The Company also entered into a separate credit facility, due June 2002,
with the same Agent and group of banks, which consists of a revolving line of
credit, providing for up to $65.0 million in borrowings that may be used for
general corporate purposes, including working capital requirements, acquisitions
and refinancing existing indebtedness. Interest is payable quarterly at the
Agent's prime rate plus 1.25% (9.75% at December 31, 1995), or at LIBOR plus
2.50% (blended rate of 8.29% at December 31, 1995).
As part of the credit facility the Company may issue letters of credit to
be used for various vendor contracts. As of December 31, 1995, total letters of
credit outstanding were approximately $11.7 million.
As a result of the financings, the Company has entered into interest rate
swap, interest rate collar and interest rate cap agreements to reduce the impact
of changes in interest rates on its floating rate long-term debt. At December
31, 1995, the Company had outstanding agreements with various institutions,
having a total notional principal amount of $303.4 million. Those agreements
effectively change the Company's interest rate exposure on a portion of its
$402.0 million floating rate notes to a fixed rate ceiling of up to
approximately 12.50%, and mature through the year 1999. As a result of the
interest rate agreements and interest rates on debt not protected by such
agreements, the Company incurred interest cost at an average rate of
approximately 8.80% for the period August 18, 1995 through December 31, 1995.
The Company is exposed to credit loss in the event of nonperformance by the
other parties to the interest rate agreements (various banks). However,
management believes that, based on the high credit worthiness of these
counterparties, nonperformance is unlikely.
The fair value of interest rate swaps, caps and collars (used for hedging
purposes) are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments. The fair value of these instruments was approximately
$630,000 at December 31, 1995.
The financings restrict the Company and its subsidiaries from, among other
things (i) incurring additional indebtedness, (ii) creating liens, (iii) paying
dividends (other than dividends paid to the Company by its subsidiaries), and
(iv) permitting any part of the Company's business to be sold, leased or
conveyed to an unrelated party. The financings also restrict the Company's
ability to make capital expenditures and investments, and require that certain
financial ratios be met.
The Company has granted a security interest in substantially all of its
assets to the Agent in connection with the financings.
As part of the financings the Company paid approximately $9.1 million in
loan costs, which are being amortized on a straight-line basis over the maturity
period of the financings.
F-15
73
ELLER MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consists of the following at December 31, 1995 (dollars in
thousands):
Tranche A term loan notes................................................ $250,000
Tranche B term loan notes................................................ 125,000
Revolving line of credit................................................. 27,000
Various notes payable, bearing interest from 6% to 8.5%, maturing through
July 2000; partially secured by certain assets of the
Company................................................................ 2,512
------------
404,512
Less: current maturities................................................. 10,176
------------
$394,336
============
The carrying amount of the long-term debt is estimated to approximate fair
value as the actual interest rates are consistent with rates estimated to be
currently available for debt of similar terms and remaining maturities.
Aggregate principal payments on long-term debt for the years ending
December 31 are as follows (dollars in thousands):
1996..................................................................... $ 10,176
1997..................................................................... 20,000
1998..................................................................... 50,565
1999..................................................................... 51,500
2000..................................................................... 60,272
Thereafter............................................................... 212,000
------------
$404,511
============
(6) CAPITALIZED LEASE OBLIGATIONS:
The Company leases certain equipment under capital leases. As such, the
equipment has been capitalized and is being depreciated over the lease term or
the estimated useful life of the equipment, in accordance with Statement of
Financial Accounting Standards No. 13, Accounting for Leases.
Future minimum lease payments under capitalized lease obligations for the
years ending December 31 are as follows (dollars in thousands):
1996...................................................................... $ 1,242
1997...................................................................... 1,026
1998...................................................................... 712
1999...................................................................... 269
2000...................................................................... 112
-----------
Total minimum lease payments.............................................. 3,361
Less: amount representing interest (at rates ranging from 6.9% to
12.5%).................................................................. (363)
-----------
Present value of minimum lease payments................................... 2,998
Less: current portion..................................................... (1,039)
-----------
$ 1,960
===========
F-16
74
ELLER MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) STOCK OPTIONS:
As of December 31, 1995 the Company has granted to certain key employees
non-qualified options to purchase 121.098 shares of Common Stock at an exercise
price of $100,000 per share, which approximated fair value at the date of grant.
These options are subject to various vesting provisions through 1999 and expire
in 2002. The Company has also granted Performance Options to a key employee to
purchase 89.614 shares of Common Stock which also have an exercise price of
$100,000 per share and expire in 2002. The Performance Options, however, become
exercisable only when certain performance conditions relating to investor rate
of return are met. As of December 31, 1995, none of the performance conditions
have been met.
(8) INCOME TAXES:
The Company computes its taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes.
Deferred income taxes are provided for differences between results of operations
for financial reporting purposes and income tax purposes.
The components of net deferred taxes as of December 31, 1995 were as
follows (dollars in thousands):
Deferred Tax Asset
Depreciation........................................................ $ 931
Allowance for Doubtful Accounts..................................... 38
Restricted Covenant................................................. 36
Prepaid License..................................................... 39
Goodwill Amortization............................................... 162
NOL Carryover....................................................... 977
Noncompetes......................................................... 8
Other, Net.......................................................... 249
------
Subtotal....................................................... $ 2,440
------
Deferred Tax Liability
Deferred Loan Costs................................................. 955
Other............................................................... 8
------
Subtotal....................................................... (963)
------
Valuation Allowance................................................... (1,477)
------
Net Deferred Tax Asset................................................ $ --
======
F-17
75
ELLER MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before income taxes. The sources
and tax effects of the differences for the period from August 18, 1995 to
December 31, 1995 were as follows (dollars in thousands):
Federal Income Tax
Provision at statutory rate........................................... (855)
State taxes, net of federal benefit..................................... (122)
Net Operating Loss Carryover............................................ (83)
Amortization of nondeductible goodwill.................................. 244
Other, net.............................................................. (661)
Valuation Allowance..................................................... 1,477
-----
Provision for income taxes.............................................. $ --
=====
(9) RETIREMENT PLANS:
The Company has two defined benefit plans covering substantially all union
employees in four of its branches. Benefits provided by these plans are based
primarily on years of service. Assets are invested in insurance deposit annuity
contracts. As of December 31, 1994 (the most recent data available), the total
projected benefit obligation was approximately $853,000, and the fair value of
the plans' assets was approximately $795,000.
The Company also sponsors two 401(k) plans that allow contributions of 1%
to 15% of base compensation for eligible employees. Participation in these plans
is available to salaried employees and to certain groups of hourly employees.
Employees covered by collective bargaining units are not eligible. The Company
matches the employee contribution, at its discretion, in amounts up to
approximately 15% of the employee's contribution. The Company also contributes,
at its discretion, an annual contribution based on the Company's year end
results up to certain IRS limits.
The Company made payments to the 401(k) and defined benefit plans in the
sum of $548,000 for the period August 18, 1995 through December 31, 1995.
(10) COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is subject to certain
administrative proceedings and litigation. In management's opinion, the outcome
of such matters will not materially affect the financial position or results of
operations of the Company.
In various areas in which the Company operates, outdoor advertising is the
object of restrictive and, in some cases, prohibitive zoning and other
regulatory provisions, either enacted or proposed. The impact to the Company of
loss of displays due to governmental action has been somewhat mitigated by
federal and state laws mandating compensation for such loss and constitutional
restraints. Although the Company cannot predict the outcome of existing
litigation or the enactment of zoning and other regulatory provisions concerning
outdoor advertising, the Company, to date, has incurred no significant losses
from the removal of outdoor advertising structures resulting from litigation or
governmental enactments without just compensation. The Company leases its
offices, paint shop facilities and the majority of the land occupied by its
advertising structures under operating lease agreements. Rent expense under
operating leases of approximately $17.9 million was recorded for the period from
August 18, 1995 through December 31, 1995. In addition, rent expense under
operating leases for the period January 1, 1995 through August 17, 1995, of
approximately $3.1 and $26.7 million were recorded for EIC and PMG,
respectively. Future
F-18
76
ELLER MEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum lease payments under these building and billboard operating leases for
the years ended December 31 are expected to be as follows (dollars in
thousands):
1996..................................................................... $ 35,824
1997..................................................................... 35,642
1998..................................................................... 35,165
1999..................................................................... 34,517
2000..................................................................... 33,251
------------
$174,399
============
(11) SUBSEQUENT EVENTS (UNAUDITED):
The Company expects to complete an initial public offering (the "IPO") of
its Common Stock in the first quarter of 1997.
The Company established a phantom stock plan, effective June 1, 1996, for
certain key employees pursuant to which it granted to such employees an
aggregate of 90 units of phantom Common Stock equivalent to 8.62 shares of
Common Stock. The units vest at the end of a five year period after their grant
date, subject to continued employment and achievement of certain financial
performance criteria, and are payable in cash in an amount equal to the value at
vesting of the number of shares of Common Stock equivalent to the number of
units. In October 1996 the Company determined that, upon consummation of the
IPO, it would not grant further units under the plan, it would eliminate the
performance criteria and, at vesting, the outstanding units would be paid with
Common Stock.
In November 1996, the Company refinanced its $440.0 million credit facility
used to fund the August 1995 acquisition of PMG and subsequent acquisitions of
display faces. The original facility was increased to $550.0 million, comprised
of (i) a $200.0 million revolving credit facility, (ii) a $200.0 million seven
year term loan and (iii) a $150.0 million eight year term loan. In connection
with the consummation of this refinancing, the Company wrote-off the remaining
deferred loan fees included in the accompanying balance sheet in November 1996.
In the fourth quarter of 1996, the Company expects to record a
non-recurring significant non-cash compensation expense in connection with the
expected acceleration of vesting of certain Performance Options and annual
non-cash compensation expenses related to expected modifications to its Phantom
Stock Plan.
F-19
77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
PMG Holdings, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of PMG
HOLDINGS, INC. AND SUBSIDIARIES as of December 31, 1994, and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for each of the years in the two year period then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PMG
Holdings, Inc. and subsidiaries as of December 31, 1994, and the results of
their operations and their cash flows for each of the years in the two year
period then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
April 27, 1995.
F-20
78
PMG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Accounts receivable:
Trade, net of allowance for doubtful accounts of $1,980..................... $ 27,210
Other.......................................................................... 880
Prepaid expenses............................................................... 7,709
Other current assets........................................................... 807
--------
Total current assets................................................... 36,606
--------
PROPERTY, PLANT AND EQUIPMENT:
Advertising structures......................................................... 396,544
Site and building leases....................................................... 114,658
Furniture, fixtures and equipment.............................................. 15,893
Yard stores and work-in-process................................................ 5,366
Land........................................................................... 6,689
Buildings and improvements..................................................... 3,218
--------
542,368
LESS:
Accumulated depreciation....................................................... 74,932
Reserve for structure takedown (Note 3)........................................ 24,453
--------
Net property, plant and equipment...................................... 442,983
DEFERRED TAX ASSET (Note 7)...................................................... 29,622
OTHER ASSETS..................................................................... 3,813
--------
$513,024
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................................... $ 5,664
Accrued expenses............................................................... 21,363
Other current liabilities...................................................... 494
Current portion of long-term debt (Note 4)..................................... 1,387
--------
Total current liabilities.............................................. 28,908
LONG-TERM DEBT (Note 4).......................................................... 3,231
NOTE PAYABLE (Note 4)............................................................ 557,422
GECC INTERCOMPANY ACCOUNT........................................................ (9,188)
ACCRUED LIABILITIES.............................................................. 620
--------
Total liabilities...................................................... 580,993
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' DEFICIT (Note 1):
Common stock................................................................... --
Preferred stock................................................................ 2
Additional paid-in capital..................................................... 248
Accumulated deficit............................................................ (68,219)
--------
Total stockholders' deficit............................................ (67,969)
--------
$513,024
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
79
PMG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993 AND 1994
(DOLLARS IN THOUSANDS)
1993 1994
-------- --------
REVENUE:
Gross revenue...................................................... $187,003 $203,065
Less commissions and continuity discounts.......................... 26,181 25,790
-------- --------
Net revenue................................................ 160,822 177,275
-------- --------
OTHER INCOME, NET.................................................... 38 7,064
COSTS AND EXPENSES:
Operating.......................................................... 73,163 75,427
Selling, general and administrative................................ 43,262 45,859
Depreciation and amortization...................................... 42,756 41,733
Interest expense................................................... 45,695 50,325
-------- --------
Total costs and expenses................................... 204,876 213,344
-------- --------
LOSS BEFORE TAXES.................................................. (44,016) (29,005)
TAX BENEFIT (Note 7)............................................... 27,015 9,950
-------- --------
Net loss................................................... $(17,001) $(19,055)
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
80
PMG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1993 AND 1994
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON PREFERRED PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
------ --------- ---------- ----------- --------
Balance at January 1, 1993..... $ 8 $ 2 $340 $ (32,052) $(31,702)
Preferred dividend paid........ -- -- -- (10) (10)
Net loss....................... -- -- -- (17,001) (17,001)
-
--- ---- -------- --------
Balance at December 31, 1993... 8 2 340 (49,063) (48,713)
Merger with New PMG Group,
Inc.......................... (8) -- (92) (101) (201)
Net loss....................... -- -- -- (19,055) (19,055)
-
--- ---- -------- --------
Balance at December 31, 1994... $ -- $ 2 $248 $ (68,219) $(67,969)
=== = ==== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
81
PMG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993 AND 1994
(DOLLARS IN THOUSANDS)
1993 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................... $(17,001) $(19,055)
Adjustments to reconcile net loss to net cash provided by operating
activities --
Depreciation and amortization................................... 42,756 41,733
Provision for doubtful accounts................................. 431 1,035
Gain on disposition of assets................................... (38) (2,264)
Interest capitalized............................................ 176 214
Changes in assets and liabilities --
Increase in net accounts receivable, trade...................... (6,467) (1,924)
Decrease (increase) in other receivables........................ (7,276) 6,908
(Increase) decrease in prepaid expenses......................... 553 (1,885)
Decrease (increase) in other assets............................. (1,863) 3,146
Decrease in deferred tax assets................................. 22,848 8,497
Increase in accounts payable.................................... 199 4,112
(Decrease) increase in accrued expenses......................... 285 (5,135)
Increase (decrease) in other liabilities........................ (559) 382
-------- --------
Net cash provided by operating activities.................. 34,044 35,764
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment................ 1,000 12,783
Purchase of property, plant and equipment.......................... (6,494) (10,124)
Acquisition of outdoor entities.................................... (14,711) (11,449)
-------- --------
Net cash used for investing activities..................... (20,205) (8,790)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in GECC intercompany account............................ (36,130) 1,808
Net change in note payable to GECC................................. 20,454 (27,212)
Repayment of debt and capital leases............................... (818) (1,369)
Repurchase of common stock......................................... -- (201)
-------- --------
Net cash used in financing activities...................... (16,494) (26,974)
-------- --------
Net decrease in cash................................................. (2,655) --
Cash at beginning of year............................................ 2,655 --
-------- --------
Cash at end of year.................................................. $ -- $ --
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest to third parties............ $ 194 $ 99
======== ========
Cash paid during the year for interest to GECC on motor vehicle
leases.......................................................... $ 189 $ 238
======== ========
Cash paid (received) during the year for taxes to (from) third
parties......................................................... $ 18,399 $ (7,427)
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
82
PMG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS:
PMG Holdings, Inc. and subsidiaries (the "Company") is a wholly-owned
subsidiary of General Electric Capital Corporation ("GECC"). The Company's
primary operating subsidiary is Patrick Media Group, Inc. ("Group").
The Company entered into the PMG Agreement and Plan of Restructuring on
March 28, 1991 (the "Restructuring Agreement") with GECC and other stock and
noteholders. Pursuant to the Restructuring Agreement, GECC received 1 share of
new Class C common stock of the Company (having supermajority voting power) and
warrants to purchase (for a nominal exercise price) additional shares of Class C
common stock representing 75% of the equity of the Company.
The Company continued to be in default on its debt obligations to GECC
under the Restructuring Agreement and on September 23, 1992, GECC began a series
of recapitalizations whereby it first exercised its warrants and acquired a
direct equity interest of approximately 79% in the Company. After exercising its
warrants, GECC held all of the 1,616,001 issued shares of the Class C common
stock and 107,733 shares of the Class B common stock of the Company. The
remaining 323,200 shares of Class B common stock were held by various third
party investors. Additionally, Group assumed the debt and other obligations owed
to GECC by the Company, which obligations were then guaranteed by the Company,
in a taxable exchange for the discharge of certain intercompany notes between
Group and the Company. GECC then acquired 2,500 shares of preferred stock (par
value $1.00) issued by Group for $250.
The transaction was accounted for as a purchase as of September 30, 1992.
Property, plant and equipment was recorded at its net fair market value of
$520,896 based upon an independent appraisal. All other assets were stated at
their carrying value. GECC increased its direct equity interest in the Company
to 81% in January 1993.
On September 28, 1994, the Company was again recapitalized in a non-taxable
transaction by merging with New PMG Group, Inc., a wholly-owned subsidiary of
GECC, pursuant to an Agreement and Plan of Merger dated September 28, 1994 (the
"Merger Agreement"). Pursuant to the Merger Agreement: (i) each of the 430,933
outstanding shares of Class B common stock of the Company were converted into
the right to receive $0.46 per share, and subsequently canceled and retired;
(ii) all of the 100 outstanding shares of common stock issued by New PMG Group,
Inc. held by GECC, were converted into 100 shares of common stock of the
Company; and (iii) the issued and outstanding shares of Class C common stock of
the Company, all of which were owned by GECC, were canceled and retired. The
Company was the surviving entity in the merger.
Also pursuant to the Merger Agreement, the capitalization of the Company
was amended such that the total authorized capital of the Company at December
31, 1994 is 1,000 shares of common stock with par value of $0.01 (100 shares
issued and held by GECC), and 1,000 shares of preferred stock with par value of
$1.00 (all unissued).
On March 1, 1995, the Company, Group and GECC entered into the
Recapitalization Loan Amendment (the "Recapitalization") to further the
recapitalization of the Company. Prior to the Recapitalization, Group's issued
stock consisted of 1,000 shares of common stock (par value $1.00) and 2,500
shares of preferred stock (par value $1.00). Pursuant to the Recapitalization,
the Company surrendered 991 shares of common stock in Group to Group which were
subsequently canceled, and GECC contributed all of the 2,500 shares of preferred
stock in Group together with approximately $190,000 of Group's outstanding debt
obligations, to Group in exchange for 991 shares of common stock issued by Group
in a non-taxable transaction. The 2,500 shares of preferred stock in
F-25
83
PMG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Group were also canceled. The debt obligation of Group to GECC as of March 1,
1995 was approximately $375,000 after giving effect to the Recapitalization
which continues to be in default.
As of December 31, 1994, the Company had issued outstanding warrants to
purchase 1,280 shares of Class B common stock, all of which were held by one
employee as discussed in note 11.
On March 10, 1995, GECC purchased pursuant to a foreclosure sale, all of
the outstanding warrants from the employee, at which time the warrants were
returned to the Company and deemed canceled.
Description of the Business
The Company provides outdoor advertising displays primarily to advertisers
in major metropolitan areas in the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying consolidated financial statements of the Company include
the accounts and results of operations of the Company and its wholly owned
subsidiaries, and Target Media Group LLP, a partnership in which the Company
indirectly holds a 83.127% interest. All significant intercompany transactions
have been eliminated.
Under the terms of the partnership agreement, all income will be allocated
based upon ownership percentage while any losses will accrue only to PMG Target
Media Holdings, Inc., a wholly owned subsidiary of the Company and the general
partner of Target Media Group LLP.
Revenue
Consistent with industry practice, the portion of December billings
pertaining to January space sales has been recognized in operating income of
December.
Deferred revenue is recorded for the fair value of assets received in
non-monetary transactions. Revenue is recognized on a monthly basis over the
showing period.
Property, Plant and Equipment
Property, plant and equipment is carried at allocated cost. As discussed in
note 1, property, plant and equipment in place at September 30, 1992 was fair
valued and a new cost basis was established. The fair value for site leases was
computed by valuing the differential between the site lease rentals and the
corresponding fair market rental over the estimated lease term including
expected renewals. Depreciation is provided on the straight-line method over the
estimated useful lives of the respective assets as follows:
Buildings................................................................. 40 years
Shelters.................................................................. 10 years
Structure faces, transit displays......................................... 5 years
Advertising structures.................................................... 16 years
Leasehold improvements.................................................... 5 years
Furniture, fixtures, computers and equipment.............................. 5 years
Software applications..................................................... 5 years
Trucks and autos.......................................................... 4 years
F-26
84
PMG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Site leases are amortized straight-line over their composite estimated
remaining useful lives, generally 23 years. The capitalized excess of fair
market value of building leases greater than future payments are amortized
straight-line over 16 years.
Losses on structures which existed at September 30, 1992 are charged
against a reserve which was initially established at $26,000 in purchase
accounting at September 30, 1992. $8,000 of additional reserves were provided in
each of the years 1993 and 1994.
The Company allocates the excess of purchase price over the estimated fair
value of net assets acquired to structure and site leases in acquisitions
accounted for as a purchase.
Taxes
General Electric Company, the ultimate parent of GECC, files a consolidated
U.S. federal income tax return which includes the Company and its subsidiaries.
The provisions for estimated taxes payable/receivable include the effect of the
Company and its subsidiaries on the consolidated return.
Prepaid Expenses
Prepaid expenses primarily represent site lease rentals which have been
paid in advance. Rental payments are made according to the contractual terms of
individual leases and are amortized to site lease rental expense over the
payment period.
Supplier Rebates
Rebates and discounts from suppliers are recognized as a reduction of
operating expenses in the period of utilization.
(3) RESERVE FOR STRUCTURE TAKEDOWN:
A summary of activity for the reserve for structure takedown is as follows:
1994
-------
Balance at beginning of the year.......................................... $23,974
Reserves added during the year............................................ 8,000
Losses incurred during the year........................................... (7,521)
-------
Balance at end of year.................................................... $24,453
=======
F-27
85
PMG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(4) DEBT:
Debt at December 31, 1994, consists of the following:
1994
--------
8.5% note payable by Target Media Group LLP.............................. $ 1,663
6.0% promissory notes payable, due 1996.................................. 701
Installment note payable, prime plus 1.5%, due 1996...................... 218
Capitalized leases....................................................... 2,019
Other, due in 1995....................................................... 17
--------
Total.......................................................... 4,618
Less current term installments, including $622 for capitalized leases.... 1,387
--------
Long-term debt........................................................... $ 3,231
========
Note payable to GECC..................................................... $557,422
========
The Company's note facility with GECC was established under the Revolving
Credit, Term Loan and Deferred Interest Loan Agreement dated September 15, 1986.
As discussed in note 1 the Company continues to be in default on its debt
obligations to GECC. All amounts due to GECC were consolidated into the
outstanding note facility. The debt obligation is treated as if it were a demand
note and is repaid based on the availability of the free cash flow of the
Company.
Interest on the note facility is paid quarterly in arrears in an amount
equal to 1.50% plus the greater of (i) the highest prime or base rate of
interest published by any of five major commercial banks, as defined, or (ii)
the most recent published annual yield on 90-day commercial paper. Such rate
shall be determined quarterly on the last day of each preceding quarter. The
effective interest rate on the note facility for the year ended December 31,
1994, was 9.25%.
On March 1, 1995, in connection with the recapitalization begun in 1992,
described in note 1, GECC converted approximately $190,000 of the outstanding
note facility to equity, with the remaining debt obligation being approximately
$375,000 as of that date after giving effect to the Recapitalization.
Under the terms of a note agreement between Target Media Group LLP and a
lender, all repayments of principal are deferred until 2000. Payments for
interest, at 8.50% of the outstanding loan balance and unpaid interest, are
deferred up to an aggregate balance of $1,770, at which time interest on the
balance above $1,770 must be paid. The repayment of the note is guaranteed by
the minority partner. Interest payments deferred were $215 in 1994.
The promissory notes were issued in connection with the acquisition of Blue
Wallscapes, Inc. in April 1993. The notes are repayable in equal monthly
installments, plus interest, through May 1996.
The installment note was issued in connection with the acquisition of
Mobile Outdoor Media in March 1993. The note is repayable in 36 equal monthly
installments, plus interest through March 1996. Principal balances outstanding
under the promissory and installment notes may be reduced by certain amounts
upon the occurrence of specified events as defined in the note agreements.
F-28
86
PMG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The aggregate maturities of term debt and capital leases, for the five
years subsequent to December 31, 1994 are as follows:
TERM CAPITAL
DEBT LEASES
------ -------
1995............................................................. $ 765 $ 759
1996............................................................. 171 782
1997............................................................. -- 572
1998............................................................. -- 234
1999............................................................. -- 99
Thereafter....................................................... 1,663 --
------ ------
Total.................................................. $2,599 2,446
======
Less amounts representing interest............................... 427
------
Present value of capital lease payments.......................... $ 2,019
======
(5) TRANSACTIONS WITH PARENT:
GECC provides a note facility to fund working capital and other financing
requirements.
The Company has made payments to (received payment from) GECC and its
affiliates for the years ended December 31,1994 and 1993 as follows:
1994 1993
-------- -------
Taxes......................................................... $(26,642) $ --
Interest...................................................... 50,103 45,254
Vehicle leases................................................ 844 744
Corporate services............................................ 560 629
Interest expense is recognized monthly and is included as a component of
the outstanding note payable balance. Current income taxes recoverable are
reflected as a component of the GECC intercompany account. Separate cash
payments are not made for taxes or interest from GECC transactions.
At December 31, 1994, the Company owed $12 to GECC for cumulative preferred
dividends. At December 31, 1994, the Company owed $50 to GECC for the 107,733
shares of Class B common stock repurchased in 1994.
(6) SALE OF BRANCH ASSETS:
In October 1994, an agreement was reached to sell the Company's Rochester
branch operations and assets, except for cash and accounts receivable, for
$5,000 resulting in an approximate loss of $4,020. This loss was recognized in
1994 and included in other income. In February 1995, as a result of a Phase II
environmental study conducted in conjunction with the aforementioned sale, it
was determined that there is contamination resulting from previously removed
underground tanks. If remediation is required by governmental authorities, the
Company would be responsible for all remediation costs associated with this
site. The appropriate governmental authorities have been informed with respect
to the contamination but have not yet imposed remediation requirements on the
Company. Management cannot predict with certainty the total cost of the cleanup
if cleanup is required, however, estimates range from $50-$500. No accrual has
been made as of December 31, 1994 for this required remediation. The Company
will retain title to the associated land and building
F-29
87
PMG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
until the environmental issues are resolved, although the sale of the other
assets and operations is proceeding.
In connection with the Restructuring Agreement described in note 1, the
Company received a note issued by Alabama Outdoor Advertising, Inc. ("AOA")
relating to the sale of its Alabama branch. The note was assigned a fair value
of $5,000 in connection with the purchase accounting described in note 1. AOA
defaulted under the terms of the note in 1993. The Company foreclosed on the
note, and disposed of the equity of AOA during 1994, resulting in proceeds of
$12,250 to the Company, including a $1,146 note resulting in a gain of $7,002,
subject to certain working capital adjustments. The aforementioned gain was
included in other income in 1994.
(7) INCOME TAXES:
The Company has recorded an income tax benefit of $9,950 and $27,015 in
1994 and 1993, respectively. These amounts have been determined in accordance
with the intercompany income tax sharing arrangement between the Company and
GECC. Taxes receivable from parent, included as a component of the GECC
intercompany amount, represents amounts owing from GECC relating to a portion of
current tax benefits attributable to the Company under the income tax sharing
arrangement. The Company has a net deferred tax asset of $29,622 at December 31,
1994.
The deferred tax asset arises primarily from Federal net operating losses
and minimum tax credits including amounts carried forward from years prior to
GECC exercising its warrant rights in September 1992. This asset is partially
offset by deferred tax liabilities resulting from differences in book and tax
depreciation which have arisen subsequent to September 1992. Management has
concluded, based upon the expected implementation of certain tax planning
strategies, that the net deferred tax asset is fully realizable.
The 1993 tax benefit recognized includes $2,491 due to the enactment of the
Revenue Reconciliation Act of 1993, increasing corporate income tax rates from
34% to 35%, and a state income tax benefit of $14,289 resulting from a refund of
state taxes paid in 1992.
(8) NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company purchased several businesses in 1994 and 1993 as follows:
1994 1993
-------- --------
Fair value of fixed assets acquired.......................... $ 11,449 $ 18,195
Net working capital acquired................................. 562 1,099
Cash paid for assets......................................... (12,011) (15,810)
-------- --------
Notes assumed................................................ $ -- $ 3,484
======== ========
Capital lease obligations of $238 and $1,054 in 1994 and 1993,
respectively, were incurred when the Company entered into leases, primarily for
automobiles, with a GECC affiliated company.
(9) RETIREMENT PLANS:
The Company has two defined benefit plans covering substantially all union
employees in its Cleveland, San Francisco, Chicago, Milwaukee and Dallas
branches. The plans also allow for voluntary contributions by participants.
Benefits provided by these plans are based primarily on years of service.
Assets are invested in insurance deposit annuity contracts.
F-30
88
PMG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
The following table summarizes the defined benefit plans' funded status as
of December 31, 1993, the latest date available:
Actuarial present value of the vested accumulated benefit obligation........ $ 883
======
Projected benefit obligation................................................ $1,098
Fair value of plan assets................................................... (947)
------
Projected benefit obligation in excess of plan assets....................... 151
Unrecognized net loss....................................................... (190)
Unrecognized net transition obligation...................................... (65)
------
Prepaid pension cost........................................................ $ (104)
======
The net periodic pension cost for 1993 was $115.
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation and the expected long-term
rate of return on assets was 7.50% in 1993. The actuarial valuations also
include assumptions for salary increases. The Company's funding policy for the
defined benefit plans is to fund the minimum contributions as required by law.
The Company also sponsors a defined contribution (401k) plan that allows
contributions of 1% to 15% of base compensation for eligible employees.
Participation in this plan is available to salaried employees and to certain
groups of hourly employees. Employees covered by collective bargaining units are
not eligible. The Company matches the employer contribution, at its discretion,
in amounts equal to approximately 10% of the employee's contribution up to 8%
subject to certain regulatory wage base limits. The Company also contributes, at
its discretion, an annual contribution based on the Company's year-end results
up to a maximum Social Security integration level. Total costs of the plan to
the Company for 1994 and 1993 were $473 and $292, respectively.
Pursuant to collective bargaining agreements covering certain employees,
the Company made payments to, and charged to expense, one Company sponsored plan
and 34 multi-employer pension and welfare plans in the sum of $1,922 and $1,928
in 1994 and 1993, respectively.
(10) MAJOR CUSTOMERS:
A significant source of the Company's revenues is from the tobacco and
distilled beverage industries which provided, respectively, 14% and 12% of total
gross revenues in 1994 and 20% and 15% in 1993. One tobacco company provided 8%
and 10% of total gross revenues in 1994 and 1993, respectively.
(11) COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company's leases for structure sites are generally cancelable on less
than one year's notice and are excluded from the schedule below. Total site
lease expense in 1994 and 1993 was $33,858 and $32,645, respectively.
F-31
89
PMG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Future minimum lease payments under noncancelable operating leases for
facilities, transportation and other equipment as of December 31, 1994 are:
YEARS ENDING DECEMBER 31,
--------------------------------------------------------------------------
1995...................................................................... $ 4,344
1996...................................................................... 4,236
1997...................................................................... 3,252
1998...................................................................... 2,202
1999...................................................................... 1,090
Subsequent................................................................ 4,525
-------
Total minimum lease payments.............................................. $19,649
=======
Total rental expense for noncancelable operating leases in 1994 and 1993
was $5,339 and $2,985, respectively.
The Company leases substantially all of its vehicles from a wholly-owned
subsidiary of GECC. The lease terms are generally five years and require the
annual payment of all insurance and maintenance expenses. The leases are
capitalized and included as a component of furniture, fixtures and equipment. A
summary of the leased vehicles follows:
1994
------
Capitalized leases.......................................................... $3,238
Less accumulated depreciation............................................... 1,282
------
Net lease value............................................................. $1,956
======
Letters of Credit
At December 31, 1994, the Company had outstanding irrevocable letters of
credit in the aggregate face amount of $11,663. The majority of these letters of
credit, $10,023 in 1994, support the Company's casualty, liability and workers
compensation self-insurance programs. The remaining letters of credit support
payment and performance obligations. Performance under the letters of credit is
guaranteed by GECC.
Litigation
The Company, together with GECC, are co-defendants in an action brought by
an employee of the Company. The employee has alleged that the Company's actions
in foreclosing upon warrants for common stock and consummating the Merger
Agreement were a violation of the employee's employment contract and a warrant
agreement between the Company and the employee. Management believes the
employee's claims are without merit.
In various areas in which the Company operates, outdoor advertising is the
object of restrictive and, in some cases, prohibitive zoning and other
regulatory provisions, either enacted or proposed. The impact on the Company of
loss of displays due to governmental action has been mitigated by federal and
state laws mandating compensation for such loss and constitutional restraints.
Although the Company cannot predict the outcome of existing litigation or the
enactment of zoning and other regulatory provisions concerning outdoor
advertising, the Company, to date, has incurred no significant losses from the
removal of outdoor advertising structures resulting from litigation or
governmental enactments without just compensation.
The Company also has been named as a defendant in an employment
discrimination suit by a former employee, claiming damages of up to $800.
While the ultimate resolution of the above matters is uncertain, management
believes the ultimate outcome will not have a material adverse effect on the
financial position of the Company.
F-32
90
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Eller Investment Company, Inc.:
We have audited the accompanying combined balance sheet of ELLER INVESTMENT
COMPANY, INC. (an Arizona corporation) as of December 31, 1994, and the related
combined statements of operations, stockholders' deficit and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Eller Investment
Company, Inc. as of December 31, 1994, and the results of its operations and
cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
PHOENIX, ARIZONA,
MARCH 9, 1995.
F-33
91
ELLER INVESTMENT COMPANY, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1994
ASSETS
CURRENT ASSETS:
Cash........................................................................ $ 490,553
Accounts receivable, net of allowance for doubtful accounts of $72,000...... 2,638,430
Prepaid land leases and other assets........................................ 741,442
-----------
Total current assets................................................ 3,870,425
PREPAID LAND LEASES, net of current portion................................... 179,100
PROPERTY AND EQUIPMENT, net (Note 3).......................................... 34,869,672
DEFERRED LOAN FEES, net of accumulated amortization of $181,691............... 3,334,078
GOODWILL AND OTHER INTANGIBLE ASSETS, net of accumulated amortization of
$1,354,966 (Note 4)......................................................... 3,745,455
-----------
$45,998,730
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................................................ $ 510,794
Accrued liabilities......................................................... 1,593,762
Current portion of advertising obligation................................... 500,000
Notes payable to OSI (Note 6)............................................... 1,088,218
Current portion of long-term debt (Note 7).................................. 3,450,000
Current portion of capitalized lease obligations (Note 8)................... 267,638
-----------
Total current liabilities........................................... 7,410,412
ADVERTISING OBLIGATION, net of current portion................................ 551,600
LONG-TERM DEBT, net of current portion (Note 7)............................... 35,550,000
CAPITALIZED LEASE OBLIGATIONS, net of current portion (Note 8)................ 952,740
-----------
Total liabilities................................................... 44,464,752
-----------
COMMITMENTS AND CONTINGENCIES (Note 12)
SERIES A-1 PREFERRED STOCK (Note 9)........................................... 1,700,000
-----------
SERIES B PREFERRED STOCK (Note 9)............................................. 1,500,000
-----------
STOCKHOLDERS' DEFICIT (Note 10):
Class B common stock........................................................ 200
Accumulated deficit......................................................... (2,895,122)
Warrants outstanding........................................................ 2,000,000
Class A common stock, held in treasury...................................... (771,100)
-----------
Total stockholders' deficit......................................... (1,666,022)
-----------
$45,998,730
===========
The accompanying notes are an integral part of this combined balance sheet.
F-34
92
ELLER INVESTMENT COMPANY, INC.
COMBINED STATEMENT OF OPERATIONS
DECEMBER 31,
1994
------------
ADVERTISING REVENUES........................................................ $ 12,942,911
AGENCY COMMISSIONS AND DISCOUNTS............................................ (1,350,668)
-----------
Net revenues...................................................... 11,592,243
-----------
OPERATING EXPENSES, excluding depreciation and amortization:
Cost of sales and production.............................................. 5,256,136
Selling, general and administrative....................................... 1,366,995
-----------
Total operating expenses other than depreciation and
amortization..................................................... 6,623,131
-----------
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION....................... 4,969,112
-----------
DEPRECIATION AND AMORTIZATION............................................... 1,713,407
-----------
Operating income.................................................. 3,255,705
INTEREST EXPENSE AND FINANCE COST AMORTIZATION.............................. 2,636,960
MANAGEMENT FEES AND OTHER EXPENSE........................................... 204,825
-----------
Income before income taxes and extraordinary item................. 413,920
PROVISION FOR INCOME TAXES.................................................. 80,420
-----------
Income before extraordinary item.................................. 333,500
EXTRAORDINARY ITEM -- Loss on extinguishment of debt........................ (2,172,997)
-----------
Net loss.......................................................... $ (1,839,497)
===========
The accompanying notes are an integral part of these financial statements.
F-35
93
ELLER INVESTMENT COMPANY, INC.
COMBINED STATEMENT OF STOCKHOLDERS' DEFICIT
CLASS B CLASS A CLASS A
CLASS COMMON COMMON COMMON
B SHARES STOCK SHARES TOTAL
COMMON ISSUED AND ACCUMULATED WARRANTS HELD IN HELD IN STOCKHOLDERS'
STOCK OUTSTANDING DEFICIT OUTSTANDING TREASURY TREASURY DEFICIT
------ ----------- ----------- ----------- ----------- -------- -------------
BALANCE AT
DECEMBER 31, 1993....................... $200 20,000 $ (458,750 ) $ -- $(1,100,000) 2,004 $(1,558,550)
Dividends on preferred stock............. -- -- (267,975 ) -- -- -- (267,975)
Retirement of treasury stock............. -- -- (328,900 ) -- 328,900 (599) --
Issuance of Class B common stock warrants
as consideration for deferred loan
fees................................... -- -- -- 2,000,000 -- -- 2,000,000
Net loss................................. -- -- (1,839,497 ) -- -- -- (1,839,497)
---- ------ ----------- ---------- ----------- ------ -----------
BALANCE AT
DECEMBER 31, 1994...................... $200 20,000 $(2,895,122) $2,000,000 $ (771,100) 1,405 $(1,666,022)
==== ====== =========== ========== =========== ====== ===========
The accompanying notes are an integral part of these combined financial
statements.
F-36
94
ELLER INVESTMENT COMPANY, INC.
COMBINED STATEMENT OF CASH FLOWS
DECEMBER 31,
1994
------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................ $ (1,839,497)
Adjustments to reconcile net loss to net cash provided by operating activities --
Depreciation...................................................................... 1,171,507
Amortization of deferred loan fees................................................ 492,639
Amortization of goodwill and other intangible assets.............................. 541,900
Extraordinary item -- loss on extinguishment of debt.............................. 2,172,997
Revenue recorded under Circle K advertising obligation............................ (428,450)
Changes in assets and liabilities, net of effect of acquisition --
Accounts receivable, net.......................................................... (1,459,365)
Prepaid land leases and other assets.............................................. (533,662)
Deferred tax benefit.............................................................. 128,200
Accounts payable and accrued liabilities.......................................... 701,146
-----------
Net cash provided by operating activities.................................... 947,415
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................................. (276,363)
Acquisition of property and equipment from OSI...................................... (22,335,588)
-----------
Net cash used in investing activities........................................ (22,611,951)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt.......................................................... (8,347,000)
Payment of fee to CIBC.............................................................. (3,000,000)
Reimbursement from OSI for payments on long-term debt and fee to CIBC............... 6,752,563
Proceeds from long-term debt........................................................ 27,355,000
Payment of deferred loan fees and acquisition costs................................. (1,532,749)
Proceeds from notes payable to OSI.................................................. 1,088,218
Principal payments on capitalized lease obligations................................. (229,622)
Payment of dividends................................................................ (267,975)
Redemption of preferred stock....................................................... (300,000)
-----------
Net cash provided by financing activities.................................... 21,518,435
-----------
NET DECREASE IN CASH.................................................................. (146,101)
-----------
CASH, beginning of year............................................................... 636,654
-----------
CASH, end of year..................................................................... $ 490,553
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.............................................................. $ 2,163,215
===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capitalized lease obligations incurred.............................................. $ 1,450,000
===========
Class B common stock warrants issued as consideration for deferred loan fees........ $ 2,000,000
===========
Retirement of 599 shares of Class A common stock held in treasury................... $ 328,900
===========
The accompanying notes are an integral part of these financial statements.
F-37
95
ELLER INVESTMENT COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION:
Organization and Basis of Presentation
Eller Investment Company, Inc. and Eller Holdings, Inc. (collectively, the
"Company") are both majority owned subsidiaries under the control of Loel
Ranches, Inc. The accompanying 1994 financial statements include the combined
accounts of Eller Investment Company, Inc. and Eller Holdings, Inc. Eller
Investment Company, Inc. includes the consolidated accounts of its wholly owned
subsidiaries, Eller Outdoor Advertising Company, Eller Outdoor of El Paso, Inc.
and Eller Outdoor Advertising Company of Atlanta.
In July 1994, Eller Holdings, Inc. ("Eller Holdings") was merged into Eller
Investment Company, Inc. ("Eller Investment"). In conjunction with this merger,
Eller Investment exchanged one share of its Class A and Class B common stock for
every five shares of the same class stock of Eller Holdings. Eller Investment
also exchanged one share of its Series A-1 and Series B preferred stock for
every share of the same class stock of Eller Holdings. The non-class common
stock of Eller Investment was retired. The accounts of Eller Holdings and Eller
Investment have been combined in the accompanying statements of operations,
stockholders' equity and cash flows as if the merger had taken place at December
31, 1993.
The Company is engaged in the business of providing rental space on outdoor
advertising structures and production services for outdoor advertisements in the
metropolitan Phoenix, El Paso and Atlanta areas.
Acquisition
Effective December 31, 1994, Eller Outdoor of Atlanta, which was
incorporated as a wholly owned subsidiary of Eller Investment during 1994,
acquired the outdoor advertising structures and other property and equipment
located in Atlanta, Georgia from Outdoor Systems, Inc. ("OSI"). In accordance
with APB No. 16, Accounting for Business Combinations, this acquisition has been
accounted for as a purchase. The aggregate cash consideration paid for these
assets, including certain legal and other transaction costs, was approximately
$22.3 million. Approximately $21.8 million of the acquisition cost has been
allocated to advertising displays and structures and the remaining $585,000 has
been allocated to other property and equipment that was acquired.
In addition to the assets described in the preceding paragraph, the
accounts receivable and prepaid land leases related to OSI's Atlanta operation
were acquired. Accounts receivable of approximately $722,000 and prepaid land
leases of approximately $365,000 were acquired in return for the Notes Payable
to OSI described in Note 6. The following unaudited pro forma summary presents
the combined results of operations as if the acquisition had occurred at the
beginning of 1994, after giving effect to certain adjustments, including
amortization of deferred loan fees and interest expense on the acquisition debt
and depreciation expense on the acquired assets. These pro forma results have
been prepared for comparative purposes only and do not purport to be indicative
of what would have occurred had the acquisition been made at that date or of
results which may occur in the future.
(IN THOUSANDS)
Net revenues......................................................... $ 19,522
=======
Loss before extraordinary item....................................... $ (106)
=======
During 1994, the Company experienced significant growth by means of the
merger and acquisition discussed above. As a result, the Company has grown from
total net assets of approximately $7.8 million at December 31, 1993 to $46.0
million at December 31, 1994.
F-38
96
ELLER INVESTMENT COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to the July 1994 merger discussed above, the Company had a financing
arrangement with Canadian Imperial Bank of Commerce ("CIBC"; see Note 7) under
the terms of which the Company and OSI, a competing outdoor advertising company,
were jointly liable for advances made to both parties to fund the acquisition of
certain assets of Gannett Outdoor Co. of Arizona ("Gannett") by each Company.
Additionally, the Company was obligated to reimburse OSI for interest expense on
other debt that OSI incurred to fund the acquisition. To afford the Company the
ability to operate independently of OSI, the financing arrangement with CIBC and
the obligation to OSI were terminated in July 1994, resulting in the loss on
extinguishment of debt of $2.2 million recorded in the accompanying financial
statements. The accumulated deficit of $2.9 million recorded as of December 31,
1994, and the net loss of $1.8 million recorded for the year then ended are
largely the result of this transaction. A new financing agreement was entered
into between CIBC and the Company subsequent to the termination of the initial
agreement.
(2) SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
The Company provides outdoor advertising services under the terms of
contracts covering periods up to 36 months, which are generally billed monthly.
Revenues for outdoor advertising space rental is recognized ratably over the
contract term. Revenues from design, production and certain other services are
recognized as the services are provided. All costs are recognized in the period
in which the related services are provided.
Prepaid Land Leases
Prepaid land leases represents amounts paid for leases of land occupied by
outdoor advertising structures prior to the period for which the amounts are
due. Prepaid land leases are amortized on a straight-line basis over the term of
the related lease period.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed on a
straight-line basis over the following useful lives:
Advertising displays and structures.................................... 15 years
Machinery and equipment................................................ 3 to 5 years
Vehicles............................................................... 3 years
Furniture and fixtures................................................. 3 years
Deferred Loan Fees
Deferred loan fees are amortized over the terms of the related loans.
Goodwill
Goodwill represents the excess of consideration paid over the fair market
values of identifiable net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
F-39
97
ELLER INVESTMENT COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual amounts may differ from these
estimates.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, 1994:
Advertising structures................................................ $39,831,708
Land.................................................................. 728,239
Building.............................................................. 171,196
Vehicles.............................................................. 576,000
Machinery and equipment............................................... 267,904
Furniture and fixtures................................................ 556,764
Construction-in-process............................................... 89,195
-----------
42,221,006
Less: accumulated depreciation........................................ (7,351,334)
-----------
$34,869,672
===========
(4) GOODWILL AND OTHER INTANGIBLE ASSETS:
Included in goodwill and other intangible assets is $3.4 million of
unamortized goodwill, which represents the excess of consideration paid over the
fair market value of identifiable net assets acquired.
Also included in goodwill and other intangible assets is the unamortized
cost of payments for certain covenants not to compete. The Company paid $399,965
in 1993 to the Series A-1 and Series B preferred stockholders for their
agreement not to compete or invest in any outdoor advertising business in Texas
for two years. In conjunction with the purchase of the Class A common stock in
1993 from The Circle K Corporation ("Circle K"), $400,000 of the purchase price
was allocated to an agreement of Circle K not to compete with the Company in
Texas for two years. These covenants are being amortized on a straight-line
basis over their two year life. The unamortized balance at December 31, 1994, of
$299,987 is included in goodwill and other intangible assets in the accompanying
combined balance sheet.
(5) CIRCLE K ADVERTISING OBLIGATION:
In conjunction with the acquisition of the El Paso operation in 1993, all
shares of the Company's Class A common stock were acquired from Circle K by the
Company and held in treasury. Circle K, which was a major shareholder, also
agreed not to compete with the Company in Texas for two years. As consideration
for the stock and covenant not to compete, the Company agreed to provide $1.5
million of advertising services, at market value, to Circle K over a three year
period.
During 1994, the Company provided approximately $430,000 of advertising
services, at market value, under the agreement, and the balance of advertising
services yet to be provided as of December 31, 1994 was $1.1 million.
The Class A common shares held in treasury are pledged as security to
Circle K for performance under this advertising agreement, and are to be
released and retired quarterly as advertising services are provided. During
1994, 599 shares were released and retired.
F-40
98
ELLER INVESTMENT COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(6) NOTES PAYABLE TO OSI:
In conjunction with the acquisition described in Note 1, the Company
entered into the following note payable agreements with OSI:
Note payable issued in conjunction with acquisition of prepaid
land leases, unsecured, interest at 7%, principal and interest
due August 31, 1995........................................... $ 365,803
Note payable issued in conjunction with acquisition of accounts
receivable, unsecured, interest at 7%, principal and interest
due August 31, 1995. In April 1995, Eller may return any
uncollected receivables to OSI for full credit against the
note payable.................................................. 722,415
--------
$1,088,218
========
(7) LONG-TERM DEBT:
At December 31, 1993, $13.2 million was outstanding under a credit
agreement with CIBC, the proceeds from which the Company used to purchase the
assets of Gannett in 1992. Under the terms of the agreement, the Company was
obligated to pay all outstanding principal and interest on December 31, 1995. An
additional fee of $3.0 million was also due on that date, which was being
accrued on a straight-line basis over the term of the contract. The Company had
related agreements with OSI whereby OSI was obligated to repay a portion of the
principal and interest and a portion of the additional fee. Additionally, the
Company was obligated to reimburse OSI for interest expense that OSI incurred on
debt related to the acquisition of Gannett.
In July 1994, Eller obtained a new credit agreement with CIBC and the
credit agreement with CIBC described above was terminated. The unaccrued portion
of the additional $3.0 million fee, unamortized deferred loan fees from the
previous credit agreement and the settlement with OSI related to the obligation
described above resulted in the loss on extinguishment of debt of $2.2 million
recorded in the accompanying financial statements.
In conjunction with the acquisition of assets in Atlanta from OSI in
December 1994, the existing credit agreement with CIBC was amended. The amended
credit agreement provides the Company with up to $40.0 million, of which $39.0
million was outstanding at December 31, 1994. The agreement provides for a
floating interest rate based on the Company's leverage ratio (ratio of debt to
operating cash flow, as defined). As draws on the credit agreement are made, the
Company elects the rate of interest to be based on either the banks' base rate
or the LIBOR rate at the time of the draw. The rate of interest varies from 2.50
to 3.25 percent over the banks' base rate or from 3.75 to 4.50 percent over
LIBOR, depending on the leverage ratio for the most recently completed fiscal
quarter. At December 31, 1994, all draws outstanding were at LIBOR + 4.50
percent, with $20.0 million carrying an interest rate of 10.40 percent and $19.0
million carrying an interest rate of 10.60 percent.
The credit agreement has an excess cash flow recapture provision whereby
the $40.0 million commitment is reduced by 50-65 percent of excess cash flow, as
defined, at the end of each fiscal year. The credit agreement also has an annual
commitment fee of 0.5 percent of the unused portion of the commitment.
All obligations under the credit agreement are collateralized by all
tangible and intangible assets of the Company and a pledge of 100 percent of the
stock of the Company, Loel Ranches, Inc. (Loel) and the parent company of Loel.
The majority stockholder has guaranteed up to $4.5 million of the amounts
outstanding under the credit agreement.
F-41
99
ELLER INVESTMENT COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Under the credit agreement, the Company is required to comply with certain
financial covenants, including a maximum leverage ratio, minimum cash flow to
debt service and fixed charge coverage ratios. Compliance with these covenants
is not required until fiscal 1995. There are also certain limitations on
indebtedness, dividends, management, mergers, capital expenditures and certain
other transactions.
The warrants discussed in Note 10 were issued to CIBC in conjunction with
the funds provided by CIBC during 1994. As discussed in Note 10, the estimated
value of the warrants of $2.0 million are included in the deferred loan fees
balance of $3.5 million in the accompanying financial statements, which are
being amortized over the six-year life of the credit agreement.
Maturities of principal under the credit agreement for the years ended
December 31 are as follows:
1995.................................................................. $ 3,450,000
1996.................................................................. 4,900,000
1997.................................................................. 5,810,000
1998.................................................................. 6,900,000
1999.................................................................. 8,800,000
2000.................................................................. 9,140,000
-----------
39,000,000
Less: current portion................................................. 3,450,000
-----------
$35,550,000
===========
(8) CAPITALIZED LEASE OBLIGATION:
On February 1, 1994, the Company acquired certain advertising structures
through a capital lease agreement. In accordance with Statement of Financial
Accounting Standards No. 13, Accounting for Leases, the acquired advertising
structures have been recorded at the present value of the future minimum lease
payments and are being depreciated over their estimated useful life of 15 years.
The lease agreement requires monthly payments of $28,711 through January 1999,
after which time the Company will own the assets. The Company can exercise its
option to acquire the assets at any time prior to January 1999 through payment
of the remaining lease obligation, and can terminate the agreement after June 1,
1997.
(9) PREFERRED STOCK:
At December 31, 1994, there were 20,000 and 15,000 shares authorized of
$.01 par value Series A-1 and Series B preferred stock, respectively, and 17,000
shares of Series A-1 and 14,997 shares of Series B preferred stock issued and
outstanding. Both classes of preferred stock have a liquidation preference equal
to their redemption value ($100 per share), are entitled to cumulative dividends
of 8 percent on the redemption value, are non-voting, and are non-convertible.
F-42
100
ELLER INVESTMENT COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled redemptions of Series A-1 preferred stock for the years ended
December 31 are as follows:
1995.................................................................... $ 300,000
1996.................................................................... 400,000
1997.................................................................... 500,000
1998.................................................................... 500,000
-----------
$1,700,000
===========
The Series B preferred stock is scheduled to be redeemed prior to December
1998. The redemption of both the Series A-1 and Series B preferred stock is
subject to certain restrictions established in the CIBC credit agreement.
(10) STOCKHOLDERS' DEFICIT
The Company's $0.01 par value nonvoting Class A common stock has a
liquidation preference of $500 per share. There were 2,000 shares authorized at
December 31, 1994.
There were 25,000 shares of the Company's $0.01 par value Class B common
stock authorized at December 31, 1994.
Two warrants for the purchase of 2,223 aggregate shares of the Company's
Class B common stock were issued to CIBC in conjunction with the funds provided
by CIBC during 1994. The warrants enable the holder to purchase the stock for
$0.01 per share and expire in July through December of 2004. The warrants
include a put option whereby the holder may require the Company, at any time, to
purchase the warrants for a put price, as defined. The warrants also contain a
provision whereby the holder may require the Company to issue a public offering
of its stock, including the stock represented by the warrants. In the case such
a request is made by the warrant holder, the Company may elect to call the
warrants at 105 percent of the put price. The current put price for both
warrants of $2.0 million has been recorded as deferred loan fees in the
accompanying combined financial statements.
(11) INCOME TAXES:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for Income
Taxes. SFAS 109 requires the use of an asset and liability approach in
accounting for income taxes. Deferred tax assets and liabilities are recorded
based on the differences between the financial statement and tax bases of assets
and liabilities and the tax rates in effect when these differences are expected
to reverse. Should income tax rates legislatively change, the deferred tax
assets and liabilities will be adjusted in the period of change.
The Company has a net deferred tax asset, which arises primarily from net
operating loss carryforwards for federal income tax purposes. The Company has
net operating loss carryforwards of approximately $3.5 million, the majority of
which expire in 2009. SFAS 109 requires the reduction of deferred tax assets by
a valuation allowance if, based on the weight of the available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized. The Company has recorded a valuation allowance equal to its net
deferred tax asset. Accordingly, the net losses recorded in the accompanying
statements of operations have not been reduced by any income tax benefit.
F-43
101
ELLER INVESTMENT COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes of $80,420 recorded in the accompanying
financial statements results from the elimination of the net deferred tax asset
recorded on the books of Eller Holdings prior to the merger discussed in Note 1.
(12) COMMITMENTS AND CONTINGENCIES:
The Company has a qualified salary-reduction plan ("Plan") under Section
401(k) of the Internal Revenue Code covering certain employees of the Company
upon their attainment of age 21 and completion of one year of service. The
participants may elect to have up to 12 percent of their compensation
contributed to the Plan. The employee's contribution, up to 3 percent of
compensation, is matched by the Company. During 1994, the Company contributions
to the Plan totaled approximately $16,000.
The Company has entered into management agreements with the parent company
of Loel. For the year ended December 31, 1994, $200,000 in management fee
expense has been recorded. Beginning in 1995, the management agreement calls for
annual management fees of $300,000.
In the normal course of business, the Company is subject to certain
administrative proceedings and litigation. In management's opinion, the outcome
of such matters will not materially affect the financial position of the
Company.
The Company is also subject, from time to time, to audit by various taxing
authorities reviewing the Company's income, property, sales, use and payroll
taxes. Management believes that any findings from such audits will not have a
material impact on its financial statements.
Eller Outdoor of Atlanta, Inc. has entered into a letter of intent
agreement with a key employee. Under the terms of the agreement, the Company has
committed to the payment in 1995 of $350,000 in bonuses, in return for a
three-year employment commitment from the employee.
The Company leases its offices, paint shop facilities and the majority of
the land occupied by its advertising structures under noncancelable operating
lease agreements. Rent expense under operating leases of approximately $2.3
million was recorded for the year ended December 31, 1994. Future minimum lease
payments under these noncancelable operating leases for the years ended December
31 are as follows:
1995.................................................................. $ 2,511,987
1996.................................................................. 2,394,771
1997.................................................................. 2,128,228
1998.................................................................. 1,730,444
1999.................................................................. 1,061,425
Thereafter............................................................ 1,981,400
-----------
$11,808,255
===========
F-44
102
======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors.......................... 8
Special Note Regarding Forward-Looking
Statements.......................... 13
Use of Proceeds....................... 13
Dividend Policy....................... 13
Dilution.............................. 14
Capitalization........................ 15
Selected Consolidated Financial and
Other Data.......................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 27
Management............................ 37
Principal and Selling Stockholders.... 46
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 50
Description of Indebtedness and Other
Commitments......................... 52
Underwriting.......................... 54
Certain Legal Matters................. 55
Experts............................... 55
Available Information................. 55
Index to Financial Statements......... F-1
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
SHARES
LOGO
ELLER MEDIA CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
ALEX. BROWN & SONS
INCORPORATED
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FURMAN SELZ
, 1997
==========================================================
103
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered hereby. All the amounts shown
are estimates, except for the Commission Registration Fee and NASD Filing Fee.
Commission Registration Fee............................................... $60,606
NASD Filing Fee........................................................... 20,500
Nasdaq National Market Listing Fees....................................... *
Accounting Fees and Expenses.............................................. *
Legal Fees and Expenses (other than Blue Sky)............................. *
Blue Sky Fees and Expenses................................................ *
Printing and Engraving Expenses........................................... *
Transfer Agent Fees and Expenses.......................................... *
Miscellaneous Expenses.................................................... *
-------
Total........................................................... $ *
========
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") gives Delaware corporations broad powers to
indemnify their present and former directors and officers against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with threatened, pending or
completed actions, suits or proceedings to which they are parties or are
threatened to be made parties by reason of being or having been such directors
or officers, subject to specified conditions and exclusions; gives a director or
officer who successfully defends an action the right to be so indemnified; and
permits a corporation to buy directors' and officers' liability insurance. Such
indemnification is not exclusive of any other rights to which those indemnified
may be entitled under any by-law, agreement, vote of stockholders or otherwise.
As permitted by Section 145 of the Delaware Corporation Law, Article VIII
of the Bylaws of the Company provides for the indemnification by the Company of
its directors, officers, employees and agents against liabilities and expenses
incurred in connection with actions, suits or proceeds brought against them by a
third party or in the right of the corporation, by reason of the fact that they
were or are such directors, officers, employees or agents.
Article VIII of the Company's Certificate of Incorporation provides that to
the fullest extent permitted by the Delaware Corporation Law as the same exists
or may hereafter be amended, a director of the Company shall not be liable to
the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director.
The Company has entered into, or intends to enter into, agreements to
indemnify its directors and executive officers in addition to the
indemnification provided for in the Certificate of Incorporation and Bylaws.
These agreements, among other things, will indemnify the Company's directors and
executive officers for certain expenses (including attorneys' fees), and all
losses, claims, liabilities, judgments, fines and settlement amounts incurred by
such person arising out of or in
II-1
104
connection with such person's service as a director or officer of the Company to
the fullest extent permitted by applicable law.
Polices of insurance may be obtained and maintained by the Company under
which its directors and officers will be insured, within the limits and subject
to the limitations of the policies, against certain expenses in connection with
the defense of, and certain liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been such directors or officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following discussion specifies securities sold by the Registrant within
the last three years and not registered under the Securities Act of 1933, the
date of each sale, the title and amount of securities sold, and the nature and
aggregate amount of consideration received by the issuer in connection with each
sale.
Registrant was organized to acquire the businesses of Eller Investment
Company, Inc. ("EIC") and Patrick Media Group, Inc. ("PMG") in August 1995.
In August 1995 Registrant issued 284 shares of common stock for all the
outstanding common stock of EIC (valued at approximately $28.5 million) to EM
Holdings LLC, which had four members, including Scott Eller, Loel Ranches, Inc.
(controlled by Karl Eller and 49% indirectly owned by Scott Eller), and two
other holders whose interest in the aggregate approximated 2% of EM Holdings
LLC.
In August 1995 Registrant issued 1,633 shares of common stock to the
entities affiliated with Hellman & Friedman named in the Prospectus under
"Principal and Selling Stockholders" for $163 million.
In August 1995, in connection with his employment agreement, Registrant
issued to Karl Eller certain options described in the Prospectus under the
caption "Management -- Executive Officers' Stock Options."
In November 1995, in connection with his employment by Registrant,
Registrant issued to Timothy J. Donmoyer certain options described in the
Prospectus under the caption "Management -- Executive Officers' Stock Options."
In November 1995, Registrant issued certain non-qualified stock options to
four directors and in August 1996 issued options to a fifth director, all in
connection with their service as directors and as described in the Prospectus
under "Management -- Executive Officers and Directors."
In April 1996, in connection with his employment by Registrant, Registrant
issued to Paul J. Meyer certain non-qualified stock options.
In June 1996, Registrant issued to four employees phantom stock units, and
in October 1996, modified such units, as described in the Prospectus under the
caption "Management -- Phantom Equity Plan."
In December 1996, Registrant entered an agreement to acquire (and in
January 1997 did acquire) certain display faces and related assets from an
individual in exchange for a $9.5 million secured convertible promissory note,
as described in the Prospectus under the caption "Description of Indebtedness
and Other Commitments -- Convertible Promissory Note."
II-2
105
In January 1997, Registrant reclassified its outstanding common stock, with
each outstanding share being converted into shares of Common Stock,
par value $.01 per share.
All sales of securities described herein were exempt by virtue of the
exemptions from registration contained in Sections 3(a)(9), 4(2), or Rule 701
under the Securities Act of 1933, as applicable.
ITEM 16. EXHIBITS
(a) Exhibits.
EXHIBITS DESCRIPTION
- -------- ---------------------------------------------------------------------------------
*1.1 Form of Underwriting Agreement.
2.1 Stock Purchase Agreement between Eller Investment Company, Inc. and General
Electric Capital Corporation Relating to the Capital Stock of PMG Holdings, Inc.
and Patrick Media Group, Inc. dated as of July 14, 1995.
2.2 Contribution Agreement among Eller Media Company, Loel, Inc., and EM Holdings LLC
dated as of August 18, 1995
3.1 Form of Restated Certificate of Incorporation of the Company.
3.2 Form of Restated Bylaws of the Company.
4.1 Amended and Restated Credit Agreement dated as of November 19, 1996.
*5.1 Opinion of Latham & Watkins as to the validity of the securities being registered
hereby.
10.1 Employment Agreement between Eller Media Company and Karl Eller dated as of
August 18, 1995.
10.2 Form of 1996 Equity Participation Plan of Eller Media Corporation.
*11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of Eller Media Corporation.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG Peat Marwick LLP.
*23.3 Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Powers of Attorney (included on page II-5).
27.1 Financial Data Schedule.
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnifications for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 14 hereof, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore,
II-3
106
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or Rule 497(h) under the Securities Act shall be deemed to be a part of
this Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Phoenix,
State of Arizona, on December 11, 1996.
ELLER MEDIA CORPORATION
By: /s/ KARL ELLER
--------------------------------------
Karl Eller
Chairman and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Karl
Eller, Scott S. Eller and Paul J. Meyer and each or any of them, his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitutes or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in their
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------- ------------------
/s/ KARL ELLER Chairman and December 11, 1996
- ------------------------------------------ Chief Executive Officer
Karl Eller (Principal Executive
Officer)
/s/ TIMOTHY J. DONMOYER Executive Vice President/ December 11, 1996
- ------------------------------------------ Chief Financial Officer
Timothy J. Donmoyer (Principal Financial and
Accounting Officer)
/s/ JOHN L. BUNCE, JR. Director December 11, 1996
- ------------------------------------------
John L. Bunce, Jr.
/s/ JOSEPH M. NIEHAUS Director December 11, 1996
- ------------------------------------------
Joseph M. Niehaus
/s/ BRUCE T. HALLE Director December 11, 1996
- ------------------------------------------
Bruce T. Halle
/s/ F. WARREN HELLMAN Director December 11, 1996
- ------------------------------------------
F. Warren Hellman
II-5
108
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------- ------------------
/s/ ARTHUR H. KERN Director December 11, 1996
- ------------------------------------------
Arthur H. Kern
/s/ PATRICIA SALAS PINEDA Director December 11, 1996
- ------------------------------------------
Patricia Salas Pineda
/s/ RICHARD REISS, JR. Director December 11, 1996
- ------------------------------------------
Richard Reiss, Jr.
Director December , 1996
- ------------------------------------------
H. Irving Grousbeck
II-6
109
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- ---------------------------------------------------------------------------------
*1.1 Form of Underwriting Agreement.
2.1 Stock Purchase Agreement between Eller Investment Company, Inc. and General
Electric Capital Corporation Relating to the Capital Stock of PMG Holdings, Inc.
and Patrick Media Group, Inc. dated as of July 14, 1995.
2.2 Contribution Agreement among Eller Media Company, Loel, Inc., and EM Holdings LLC
dated as of August 18, 1995
3.1 Form of Restated Certificate of Incorporation of the Company.
3.2 Form of Restated Bylaws of the Company.
4.1 Amended and Restated Credit Agreement dated as of November 19, 1996.
*5.1 Opinion of Latham & Watkins as to the validity of the securities being registered
hereby.
10.1 Employment Agreement between Eller Media Company and Karl Eller dated as of
August 18, 1995.
10.2 Form of 1996 Equity Participation Plan of Eller Media Corporation.
*11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of Eller Media Corporation.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG Peat Marwick LLP.
*23.3 Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Powers of Attorney (included on page II-5).
27.1 Financial Data Schedule.
- ---------------
* To be filed by amendment.