Item 1
BUSINESS
General
Adams Outdoor Advertising Limited Partnership (the "Company") is the sixth largest owner and operator of outdoor advertising structures in the United States. Adams Outdoor Advertising, Inc. is the managing general partner of the Company. The Company provides outdoor advertising services to fourteen markets and surrounding areas in the Midwest, Southeast and mid-Atlantic states: Charlotte, NC; Charleston, SC; Orangeburg, SC; Florence, SC; Laurens, SC; Kalamazoo, MI; Lansing, MI; Jackson, MI; Lehigh Valley, PA; Northeast PA; Madison, WI; Minneapolis, MN; Norfolk, VA; and Peoria, IL. As of December 31, 2000, the Company operated, in the aggregate, 9,969 advertising displays, including 2,867 painted bulletins, 6,900 30-sheet posters, and 202 junior (8- sheet) posters.
History
The Company's business was founded in 1983 with the acquisition of Central Outdoor Advertising, which had offices in Lansing, Jackson and Kalamazoo, MI. Over the next five years, the Company pursued a strategy of geographic expansion into additional medium-sized markets, primarily through the acquisition of existing outdoor advertising businesses in selected Midwest, Southeast and mid- Atlantic markets. This geographic expansion strategy has enabled the Company to capitalize on the efficiencies, economies of scale and marketing opportunities associated with operating outdoor advertising businesses located in proximate or contiguous geographic markets to its primary markets. Since 1988, the Company's sales and growth in Operating Cash Flow (operating income plus depreciation, amortization and deferred compensation expense) have resulted from a concentration on rate and occupancy levels of existing inventory, construction of new displays, upgrading of displays in existing markets, acquisition of displays in existing markets, and new market acquisitions in South Carolina and Pennsylvania.
Industry Overview
Outdoor advertising is one of several major advertising media that includes television, radio, newspapers and magazines, among others. According to the Outdoor Advertising Association of America, Inc. ("OAAA"), an industry trade association, outdoor advertising in the United States generated total revenues of approximately $3.1 billion in 2000, a 52.1% increase over 1999. Because of its repetitive impact and relatively low cost-per-thousand impressions (a commonly used media standard), outdoor advertising is attractive to both large national advertisers and smaller local and regional businesses.
The principal outdoor advertising display is the billboard, of which there are three standardized formats:
. Painted bulletins are generally 14 feet high and 48 feet wide (672 square feet) and consist of panels or a single sheet of vinyl that are hand painted at the facilities of the outdoor advertising company or computer painted in accordance with design specifications supplied by the advertiser. The panels or vinyl are then transported to the billboard site and mounted to the face of the display. On occasion, to attract more attention, some of the displays are designed to extend beyond the linear edges of the display face and may include three-dimensional embellishments for which the outdoor advertising company often receives additional revenue. Because of painted bulletins' greater impact and higher cost relative to other types of billboards, they are usually located near major highways, and space is usually sold to advertisers for periods of four to twelve months.
. 30-sheet posters are generally 12 feet high by 25 feet wide (300 square feet) and are the most common type of billboard. Lithographed or silk-screened paper sheets that are supplied by the advertiser are pre-pasted and packaged in airtight bags by the outdoor advertising company and applied, like wallpaper, to the face of the display. The 30-sheet posters are concentrated on major traffic arteries and space is usually sold to advertisers for periods of one to twelve months.
. Junior (8-sheet) posters are usually 6 feet high by 12 feet wide (72 square feet). The displays are prepared and mounted in the same manner as 30-sheet posters. Most junior posters, because of their smaller size, are generally concentrated on city streets and are targeted at pedestrian traffic. Space on junior posters is usually sold to advertisers for periods of one to twelve months.
Typically, billboards are mounted on structures that are owned by the outdoor advertising company and located on sites that are owned or leased by it or on which it has an easement. Leases of structure sites usually provide for a term of three to ten years depending on locale. A structure may contain one or more displays (generally two), each of which is referred to as a "face."
A more recent addition to the various types of outdoor advertising displays is bus shelter displays and transit ads, which are located on the sides of buses. Bus shelter displays are usually enclosed within glassed, back-lit cases on two or more sides of a pedestrian shelter located at an urban bus stop. Transit displays are inserted into panels on the sides and back exteriors of buses. The advertisements appear on lithographed or silk-screened posters supplied in a single sheet by the advertiser. Transit displays and bus shelter displays generally are sold to advertisers for periods of one to twelve months.
Advertisers usually contract for outdoor displays (and other media exposure) 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. Outdoor advertising companies pay commissions to the agencies for advertising contracts secured through such agencies. Advertising contracts are negotiated on the basis of the monthly rates that are published in the outdoor advertising company's "rate card." These rates, which are typically set annually during the first quarter of each year, 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 (measured by the number of vehicles passing the site during a defined period and weighted to give effect to such factors as its proximity to other displays and the speed and viewing angle of approaching traffic) are determined by surveys that are verified by the Traffic Audit Bureau, an independent agency which is the outdoor advertising industry's equivalent of television's Arbitron ratings and which audits approximately 175,000 outdoor advertising sites annually.
Advertisers purchase outdoor advertising for a variety of reasons. In the case of restaurants, motels, service stations and similar roadside businesses, the message reaches potential customers close to the point of sale and provides ready directional information. For advertisers seeking to build product brand name awareness, outdoor advertising is attractive because of its constant repetition and comparatively low cost per thousand impressions.
According to the OAAA, the top ten categories of businesses ranked by outdoor advertising expenditures for 2000 were local services and amusements, retail establishments, public transportation/hotels and resorts, media and advertising, restaurants, automotive dealers and services, automotive accessories and equipment, insurance and real estate, telecommunications and financial.
Business Strategy
The Company's strategy is to focus its operations on providing value-added outdoor advertising services to advertisers in medium-sized markets in which it is or could be the leading provider of such services. The Company believes that its focus on medium-sized markets allows it to achieve a dominant share of outdoor advertising revenues and display faces within those markets. The Company also believes that by educating current and potential customers on the effectiveness of the outdoor medium, it has a significant opportunity to gain a larger share of overall advertising expenditures. The Company's business strategy comprises the following elements:
. Focus marketing efforts on local and regional advertisers in order to develop and maintain a diverse client base and to limit reliance on national advertising accounts. The Company believes that focusing on local and regional advertisers helps generate stable revenue growth and reduce its reliance on any single local economy or industry segment.
. Take advantage of recent technological advances in computer and printing technology, which allow the Company to provide higher quality reproduction to its customers, thereby attracting new advertisers to the outdoor medium.
. Raise potential customers' awareness of the reach, impact and value of outdoor advertising and convince customers to use outdoor advertising as an integral part of their advertising plan.
. Continue to enhance sales, marketing and customer service capabilities. The Company's salespersons are paid pursuant to a performance-based compensation system and supervised by a local sales manager executing a coordinated marketing plan.
. Increase revenues from existing display faces by developing programs that maximize advertising rates and optimize occupancy levels in each market. In addition, the Company also plans to continue to pursue new advertising categories, such as transit buses and passenger shelters, to further diversify the Company's revenue base.
. Expand operations within the Company's markets through construction of new display faces and the upgrading of existing displays, placing an emphasis on painted bulletins, which generally command higher rates and longer contracts from advertisers.
. Pursue strategic acquisitions of outdoor displays in existing and contiguous markets and capitalize on the efficiencies, economies of scale and significant opportunities for inter-market cross-selling that are associated with operating in proximate or contiguous geographic markets.
The Company recognizes, and closely monitors, the needs of its customers and seeks to provide them with a quality advertising product at a lower cost than competitive media. The Company believes it has a reputation of providing excellent customer service and quality outdoor advertising space. As such, the Company is nationally recognized as a five star member (the highest ranking) of the OAAA, a distinction currently held by only 35 of the approximately 800 members of the OAAA.
Markets
The Company operates in eleven geographically diverse medium-sized markets that offer to local, regional and national advertisers significant areas of population to whom advertising may be targeted. In addition, the Company offers comprehensive outdoor advertising services, including local production facilities and local representation, in all of its markets except in the Minneapolis market.
The following table sets forth information as of December 31, 2000 with respect to each of the Company's markets, including the ADI (as defined herein) rank of that market and the number of each display type operated by the Company in that market:
ADI Painted 30-Sheet 8-Sheet Market Ranking(a) Bulletins Posters Posters Total - ------ ---------- --------- -------- -------- ----- Charlotte, NC.............. 28 889 851 36 1,776 Lansing, MI................ 107 330 523 -- 853 Jackson, MI (b)............ -- 138 468 -- 606 Kalamazoo, MI.............. 38 288 738 -- 1,026 Lehigh Valley, PA (c)...... 4 197 785 -- 982 Madison, WI................ 84 71 248 -- 319 Norfolk, VA................ 41 140 623 29 792 Peoria, IL................. 112 74 343 26 443 Minneapolis, MN............ 13 117 -- -- 117 Northeast PA............... 4 91 588 -- 679 South Carolina............. 103 532 1,733 111 2,376 ----- ----- --- ----- Total................... 2,867 6,900 202 9,969 ===== ===== === ===== - -------------- (a) Indicates the market rank of the area of dominant influence ("ADI"), as determined by The Arbitron Company, within which the office is located. ADIs are ranked based on population, with the market having the largest population ranked first. ADI rank is the standard measure of market size used by the media industry. (b) The Jackson, MI market is included in the Lansing, MI ADI ranking. (c) The Lehigh Valley market is included in the Philadelphia ADI ranking. According to the U.S. Census Bureau, the Lehigh Valley market was the 86th largest metropolitan statistical area in the United States at December 31, 1990, the latest date for which such information is available.
The following tables set forth information with respect to the net revenues, operating income and operating margins for the Company's displays in each of its markets for each of the past five years. Amounts presented for Northeast PA and South Carolina include results from their acquisition dates of November 8, 1996 and December 2, 1996, respectively, through December 31, 2000.
Net Revenues
Year Ended December 31, ----------------------- Market 2000 1999 1998 1997 1996 - ------ ------- ------- ------- ------- ------- (dollars in thousands) Charlotte, NC............ $16,166 $13,925 $12,932 $11,882 $10,499 Lansing, MI.............. 7,629 7,755 7,059 5,965 8,683 Jackson, MI (a).......... 4,478 3,937 3,660 3,331 -- Kalamazoo, MI............ 8,280 7,634 7,094 6,460 5,628 Lehigh Valley, PA........ 8,396 7,487 7,113 6,461 6,293 Madison, WI.............. 4,437 4,041 3,951 3,782 3,430 Norfolk, VA.............. 7,013 6,634 6,980 6,065 6,359 Peoria, IL............... 3,399 3,116 3,266 3,016 2,836 Minneapolis, MN.......... 4,482 3,803 3,710 3,274 2,930 Northeast PA............. 2,663 2,709 2,685 2,212 273 South Carolina........... 6,854 6,999 6,119 4,837 329 HSP Graphics............. 6,887 -- -- -- -- ------- ------- ------- ------- ------- Total................. $80,684 $68,040 $64,569 $57,285 $47,260 ======= ======= ======= ======= ======= - -------------- (a) The 1996 figures for Jackson, MI are included with Lansing, MI.
Operating Income
Year Ended December 31, ----------------------- Market 2000 1999 1998 1997 1996 - ------ ------- ------- ------- ------- ------- (dollars in thousands) Charlotte, NC............. $ 9,393 $ 7,745 $ 6,322 $ 5,425 $ 4,251 Lansing, MI............... 3,178 3,017 2,479 1,332 3,738 Jackson, MI (a)........... 2,130 1,681 1,570 2,304 -- Kalamazoo, MI............. 4,080 3,552 3,141 2,646 2,409 Lehigh Valley, PA......... 4,343 3,624 3,107 2,500 2,495 Madison, WI............... 2,380 2,049 1,844 1,799 1,597 Norfolk, VA............... 2,963 3,404 3,424 2,479 2,798 Peoria, IL................ 1,425 1,274 1,494 1,329 1,110 Minneapolis, MN........... 1,814 1,329 1,188 1,036 889 Northeast PA.............. 194 420 379 166 (8) South Carolina............ (46) (8) (131) (735) (50) Corporate................. (7,542) (6,624) (8,439) (4,724) (4,342) HSP Graphics.............. 1,465 -- -- -- -- ------- ------- ------- ------- ------- Total.................. $25,777 $21,463 $16,378 $15,557 $14,887 ======= ======= ======= ======= ======= - -------------- (a) The 1996 figures for Jackson, MI are included with Lansing, MI.
Operating Margin
Year Ended December 31, --------------------------- Market 2000 1999 1998 1997 1996 - ------ ---- ---- ---- ----- ----
Charlotte, NC.............. 58.1% 55.6% 48.9% 45.7% 40.5% Lansing, MI................ 41.7 38.9 35.1 22.3 43.1 Jackson, MI (a)............ 47.6 42.7 42.9 69.2 -- Kalamazoo, MI.............. 49.3 46.5 44.3 41.0 42.8 Lehigh Valley, PA.......... 51.7 48.4 43.7 38.7 39.6 Madison, WI................ 53.6 50.7 46.7 47.6 46.6 Norfolk, VA................ 42.2 51.3 49.1 40.9 44.0 Peoria, IL................. 41.9 40.9 45.7 44.1 39.1 Minneapolis, MN............ 40.5 35.0 32.0 31.6 30.3 Northeast PA............... 7.3 15.5 14.1 7.5 -- South Carolina............. (.7) (.1) (2.1) (15.2) -- HSP Graphics............... 21.3 -- -- -- -- Total................... 31.9% 31.6% 25.4% 27.2% 31.5% ==== ==== ==== ===== ==== - -------------- (a) The 1996 figures for Jackson, MI are included with Lansing, MI.
Sales and Marketing
The growth in the Company's revenues and Operating Cash Flow is primarily a result of its focus on the use of sales and marketing staff to increase the productivity of its inventory of displays while maintaining strict controls on its expenses.
The Company's sales and marketing strategy has been successful largely due to the efforts of its team of general managers in its markets. These general managers have an average of over 16 years of experience in the outdoor advertising industry and are responsible for implementing the Company's sales and marketing strategy. Each of the Company's markets has a team of account executives that is supported locally by a creative department, which
provides innovative marketing ideas, generates art work and designs billboard advertising for potential customers' advertising campaigns. In addition, each market has a business development staff, which makes available comprehensive information about local market research, customer needs and advertising opportunities. This allows the Company to assess the impact and potential reach for a potential target customer's display in a given market. The sales and marketing departments focus on increasing revenues through developing new marketing programs for customers, educating both current and potential customers on the effectiveness of the outdoor advertising product relative to other advertising media and integrating this medium into a customer's marketing plan. The Company's sales personnel are compensated primarily on a commission basis which maximizes their incentive to perform.
The following table illustrates the diversity of the Company's markets and customers by setting forth the percentage of the Company's gross revenues for 2000 attributable to each of the top ten advertising categories:
2000 Revenues by Category (Percent of Gross Revenues)
Total ------ Auto/Boat/Motorcycle/Recreational........... 12.8% Restaurants................................. 9.7 Telecommunications.......................... 6.4 Amusement/Entertainment..................... 5.9 Hotel/Motel................................. 4.6 Radio/Television/Cable...................... 3.6 Beverages - Alcoholic....................... 3.4 Real Estate Agents/Brokers.................. 3.1 Banking/Financial Institutions.............. 3.1 Hospitals/Healthcare Providers.............. 2.8 All Others.................................. 44.6 ----- Total.................................... 100.0% =====
Local Market Operations
In each of its primary markets, the Company maintains a complete outdoor advertising operation including a sales office, a construction and maintenance facility, an art department equipped with state-of-the-art computer technology, a real estate unit and support staff. The Company conducts its outdoor advertising operations through these local offices, which is consistent with senior management's belief that an organization with decentralized sales and operations is more responsive to local market demand and provides greater incentives to employees. At the same time, the Company maintains consolidated accounting and financial controls, which allow it to monitor closely the operating and financial performance of each market. The general managers, who report directly to the Company's chief executive officer, are responsible for the day-to-day operations of their offices and are compensated based on the financial performance of their respective markets. In general, these local managers oversee market development, production and local sales.
Each local office is responsible for locating and ultimately obtaining sites for the displays in its market. Each office has a leasing department, which maintains an extensive data base containing information on local property ownership, lease contract terms, zoning ordinances and permit requirements. The Company owns certain of the sites on which its displays are located and leases others. Site lease contracts vary in term but typically range from three to ten years with various termination and renewal provisions. As of and for the twelve months ended December 31, 2000, the Company had approximately 4,710 active site leases accounting for a total land lease expense of approximately $9.2 million, representing approximately 11.4% of net revenues.
In each of its primary markets, the Company has construction and maintenance facilities, which facilitate the expeditious and economical construction and maintenance of displays and the painting and mounting of customers' advertisements. Typically, the Company uses vinyl skins for bulletins. The vinyl skins are reusable, thereby
reducing the Company's production costs, and are easily transportable. Due to the geographic proximity of the Company's markets and the transportability of vinyl skins, the Company can shift production among markets to use its available capacity more effectively. The local offices also maintain fully equipped art departments to assist local customers in the development and production of creative, effective advertisements.
Competition
The Company competes in each of its markets with other outdoor advertisers as well as other media, including broadcast and cable television, radio, newspaper and direct mail marketers. In competing with other media, outdoor advertising relies on its low cost-per-thousand impressions and its ability to repetitively reach a broad segment of the population in a specific market or geographic area within that market. In most of its markets, the Company encounters direct competition from other major outdoor media companies, including Outdoor Systems, Inc. and Whiteco, among others, each of which has a large national network and resources significantly greater than the Company's. The Company believes that its focus on local and regional advertisers and its position as the leading provider of full service outdoor advertising in each of its primary markets enable it to compete effectively with other outdoor media operators, as well as other media, both within those markets and in each respective region. The Company also competes with other outdoor advertising companies for sites on which to build new structures.
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 control outdoor advertising structures located within 660 feet of or visible from interstates and primary highways, except in commercial or industrial areas, and to force the removal at the owner's expense and without any compensation of any nonconforming structures 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 structures to be removed from federally-aided highways.
States and local jurisdictions have, in some cases, passed additional regulation on the construction, repair, upgrading, height, size and location of outdoor advertising structures adjacent to federally-aided highways and other thoroughfares. Such regulations, often in the form of municipal building, sign or zoning ordinances, specify standards for the height, size and location of outdoor advertising structures. In the event non-conforming advertising structures are damaged, including damage caused by natural events, such as windstorms and hurricanes, the Company may not be able to repair the structures. In some cases, the construction of new or relocation of existing structures is prohibited. Some jurisdictions also have restricted the ability to enlarge or upgrade existing structures, such as converting from wood to steel or from non- illuminated to illuminated structures. From time to time, governmental authorities order the removal of structures by the exercise of eminent domain or through various regulatory actions or other litigation. In such cases, the Company seeks compensation under appropriate procedures and thus far, the Company has been able to obtain satisfactory compensation for any of its structures removed at the direction of governmental authorities. However, compensation may not always be available in such circumstances. Some municipalities have attempted to regulate outdoor advertising by taxing revenues attributable to advertising structures, or by requiring the payment of annual permit fees based on factors such as the square footage of an outdoor advertising company's display faces, located in those municipalities. Other municipalities take into account lease payments received by lessors of property on which advertising structures are located in making property tax assessments. These taxes and fees can increase an outdoor advertising company's direct operating costs.
Amortization legislation has also been adopted in some areas across the country, including Charlotte, NC, one of the Company's markets. Amortization only permits the owner of an outdoor advertising structure to operate its structure as a non-conforming use for a specified period of time, after which it must remove or otherwise conform its structure to the applicable regulations at its own cost without any compensation. Some jurisdictions require the removal of certain structures without any compensation if there is a change in use of the premises (e.g., construction on previously unimproved land). Amortization and such other regulations requiring the removal of structures
without compensation currently are subject to vigorous litigation in the state and federal courts, which have reached differing conclusions as to their constitutionality.
In 1988, the company reached an agreement with the city of Charlotte, NC that no boards will have to be removed for 5 years in settlement of the 1998 lawsuit with Charlotte, NC.
In other localities in which the Company operates, outdoor advertising is subject to restrictive and, in some cases, prohibitive zoning regulations. Management expects federal, state, and local regulations to continue to be a significant factor in the operation of the Company's business.
Employees
As of December 31, 2000, the Company employed 340 persons, of whom approximately 127 were primarily engaged in sales and marketing, 142 were engaged in painting, posting, construction and maintenance of displays, and the balance were employed in financial, administrative and similar capacities. No employees are covered by a collective bargaining agreement except for five production shop workers in Peoria, IL covered by a collective bargaining agreement with the Brotherhood and Painters and Allied Trades that expires on December 31, 2001. Management considers its employee relations to be good.
Item 2
Item 2
Facilities
The Company's corporate office is located in Atlanta, GA. In addition, the Company has an office and complete production and maintenance facilities in each of Charlotte, NC; Charleston, SC; Orangeburg, SC; Florence, SC; Laurens, SC; Kalamazoo, MI; Lansing, MI; Jackson, MI; Lehigh Valley, PA; Northeast PA; Madison, WI; Norfolk, VA; and Peoria, IL. Additionally, the Company has a sales office in Minneapolis, MN. The Peoria and Minneapolis facilities are leased, and all other facilities are owned. The Company considers its facilities to be well maintained and adequate for its current and reasonably anticipated future needs.
The Company owns approximately 147 parcels of real property that serve as the sites for its outdoor displays. The Company also has easements on approximately 137 parcels of real property on which it has outdoor displays. Additionally, the Company's displays are located on sites leased or licensed by the Company, typically for three to ten years with renewal options.
Item 3
Item 3
Legal Proceedings
The Company from time to time is involved in litigation in the ordinary course of business, including disputes involving advertising contracts, site leases, employment claims, construction matters, condemnation and amortization. The Company is also involved in routine administrative and judicial proceedings regarding permits and fees relating to outdoor advertising structures 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. See "Business--Government Regulation."
Information contained in this Annual Report, including, without limitation information in this Business section, may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology as "may," "will," "would," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. Certain factors, including, the Company's substantial leverage, regulation of outdoor advertising by federal, state and local governments, tobacco advertising patterns, competition and general economic conditions, could cause actual results to differ materially from those in such forward-looking statements.
Item 4
Item 4
Submission of matters to a vote of security holders
None.
Part II
Item 5
Item 5
Market for Registrant's Common Equity and Related Stockholder Matters
Not Applicable.
Item 6
Item 6
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data, insofar as it relates to each of the years in the five-year period ended December 31, 2000, has been derived from the Company's financial information and should be read in conjunction with the audited financial statements, including the Company's balance sheets at December 31, 2000 and 1999 and the related statements of operations for each of the years in the three-year period ended December 31, 2000 and the notes thereto appearing elsewhere in this Form 10-K. The selected consolidated financial data should also be read in conjunction with the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations."
SELECTED CONSOLIDATED FINANCIAL DATA (dollars in thousands)
- -------------- (a) Deferred compensation expense represents accrued expenses under certain deferred compensation arrangements, including phantom stock and nonqualified retirement plan agreements with certain key management personnel. The phantom stock agreements in effect provide for the repurchase of the "phantom stock" in three equal annual payments after each executive's termination, death or disability, the sale of the Company, or the fifth anniversary of the agreement's execution. See "Executive Compensation--Agreements with Management--Incentive Compensation under Phantom Stock Agreements."
(b) The following table sets forth the calculation of "Operating Cash Flow."
Year Ended December 31, ------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- Operating income.................. $25,777 $21,463 $16,378 $15,557 $14,887 Depreciation and amortization..... 8,698 6,930 7,875 8,148 6,105 Deferred compensation expense..... 1,927 2,479 4,316 901 1,451 ------- ------- ------- ------- ------- Operating Cash Flow............... $36,402 $30,872 $28,569 $24,606 $22,443 ======= ======= ======= ======= =======
Operating Cash Flow is not intended to represent net cash flow provided by operating activities as defined by generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of the Company's operating performance or to net cash provided by operating, investing and financing activities as a measure of liquidity or ability to meet cash needs. 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. However, the definition of Operating Cash Flow or of similarly defined terms may vary among companies and such differences should be noted in comparing the Company's operating performance relative to other companies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(c) Earnings consist of operating income plus fixed charges adjusted to exclude capitalized interest. The Company's fixed charges consist of interest expense plus amortization of deferred financing costs and the estimated interest portion of rents.
Item 7
Item 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is the sixth largest owner and operator of outdoor advertising structures in the United States. The Company provides outdoor advertising services through fourteen facilities in the Midwest, southeast and mid-Atlantic states: Charlotte, NC; Charleston, SC; Orangeburg, SC; Florence, SC; Laurens, SC; Kalamazoo, MI; Lansing, MI; Jackson, MI; Lehigh Valley, PA; Northeast PA; Madison, WI; Minneapolis, MN; Norfolk, VA; and Peoria, IL. As of December 31, 2000, the Company operated 9,969 advertising displays, including 2,867 painted bulletins, 6,900 30-sheet posters, and 202 junior (8-sheet) posters.
The Company's business was founded in 1983 with the acquisition of Central Outdoor Advertising, which had offices in Lansing, Jackson and Kalamazoo, MI. Over the next five years, the Company pursued a strategy of geographic expansion into additional medium-sized markets, primarily through the acquisition of existing outdoor advertising businesses in selected Midwest, Southeast and mid- Atlantic markets. This geographic expansion strategy has enabled the Company to capitalize on the efficiencies, economies of scale and marketing opportunities associated with operating outdoor advertising businesses located in proximate or contiguous geographic markets.
As a result of its acquisition of outdoor advertising businesses from 1983 to 1988, the Company incurred substantial debt. Interest expense required to service such debt, together with depreciation and amortization, has contributed to historical marginal profits for the Company.
Since 1991, the Company has continued to strengthen its market share through the construction and acquisition of displays in its existing markets, introduction of transit advertising in its Madison, WI market and acquisitions, in the last quarter of 1996, of operations in South Carolina and Pennsylvania. This expansion has been financed through internally generated cash flow and borrowings from the Company's $80 million credit facilities.
The following table presents certain information from the Consolidated Statements of Operations as a percentage of net revenues for each of the three years in the three-year period ended December 31, 2000.
Years Ended December 31, ------------------------ 2000 1999 1998 ----- ----- ----- Net revenues........................................ 100.0% 100.0% 100.0% Direct advertising expenses......................... 49.9 49.2 49.7 Corporate general and administrative expenses....... 5.0 5.4 6.0 ----- ----- -----
Operating Cash Flow................................. 45.1 45.4 44.3 Depreciation and amortization....................... 10.8 10.2 12.2 Deferred compensation expense....................... 2.4 3.6 6.7 ----- ----- -----
Operating income.................................... 31.9 31.6 25.4 Interest expense.................................... 20.7 19.6 22.3 Payments to partners................................ - 3.7 - Investment loss..................................... .9 - - Other expenses (income), net........................ .2 (1.0) .2 Loss on disposals of property and equipment, net.... .2 .5 .6 Income tax provision................................ .4 - - Extraordinary loss on early extinguishment of debt.. - .3 .5 ----- ----- ----- Net income.......................................... 9.5% 8.5% 1.8% ===== ===== =====
The Company's revenues are a function of both the occupancy rate of the Company's outdoor advertising display inventory (the percentage of time that its displays contain paid-for advertisements) and the rates that the Company charges for use of its displays. The Company's business strategy includes the optimization of the mix of rate and occupancy of its display inventory in order to maximize revenues. Advertising rates for the Company's displays are based upon a variety of factors, including historical base rates, the time of year, and the occupancy rate of a particular market's display inventory.
The following table presents the number of painted bulletins and 30-sheet poster displays operated by the Company and the average rates and occupancy levels with respect to such displays for the three years ended December 31, 2000. These figures do not include junior-posters and route town paints.
Years Ended December 31, -------------------------- 2000 1999 1998 ------ ----- ----- Number of Displays: Painted Bulletins........................ 2,867 2,567 2,529 30-Sheet Posters......................... 6,900 6,809 6,704 Average Rates: (1) Painted Bulletins........................ $1,799 $1,729 $1,583 30-Sheet Posters......................... $ 592 $ 538 $ 489 Average Occupancy: Painted Bulletins........................ 74% 75% 78% 30-Sheet Posters......................... 62% 64% 69% - -------------- (1) Represents average rate per display per month
The primary operating expenses incurred by the Company are advertising agency commissions, lease payments to property owners for use of the land on which the Company's displays are located, operational and administrative costs and sales expenses (primarily commissions). Of these expenses, advertising agency commissions, sales expenses, and certain operational and administrative costs are considered direct costs. Commissions are paid to advertising agencies that contract for the use of the Company's advertising displays on behalf of advertisers. These agency commissions are deducted from gross revenues to calculate net revenues.
The Company currently maintains a phantom stock program under which certain executive management personnel and general managers have the ability to earn deferred compensation based upon the operating performance of the Company or, in the case of the general managers, their respective divisions. Annual accruals under the program are based upon exceeding a base level of operating profit. The Company believes that its phantom stock program provides its senior employees incentives to continue improving the operating performance of the Company.
The Company's sales and marketing strategy has been successful largely due to its team of general managers in its markets. These key managers have an average of 16 years of industry experience. The Company also has integrated a business development department into each market, making available to each region's sales force comprehensive information about local market research, customer needs and advertising opportunities. The business development departments have given the Company's sales departments significantly improved information and tools to develop additional local and regional advertising customers, especially with many customers that have not historically advertised through the outdoor medium. Sales representatives have been able to use these additional resources to develop creative ideas for new customers and educate them about the cost effectiveness of outdoor advertising in attempting to reach their customers. The Company considers its emphasis on local and regional sales, the expertise and tenure of its managers and its marketing and customer service capabilities to be factors which enhance the productivity of its inventory of advertising displays.
Acquisitions
On March 9, 2000, two indirect wholly owned subsidiaries of the Company together acquired all of the outstanding stock of HSP Graphics ("HSP"), a printing operation headquartered in Canada which was majority-owned by two officers of the Company. The total amount of consideration was $21,000,000 and was financed by issuing notes payable to the former owners, bearing interest at 20% and payable over a one-year period. The transaction was accounted for as a purchase and, as such, the results of HSP's operations have been included in the Company's financial statements from the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired, which was approximately $20,000,000, was allocated to goodwill and is being amortized on a straight-line basis over a period of 20 years.
On June 28, 2000, the Company acquired all of the outstanding stock of Horizon Outdoor ("Horizon"), an outdoor advertising company in Charlotte, North Carolina. The total amount of consideration was $17,000,000, consisting of $15,500,000 in cash and a $1,500,000 note payable to the former owners and payable over an 18-month period. The transaction was accounted for as a purchase and, as such, the results of Horizon's operations have been included in the Company's financial statements from the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired, which was approximately $15,900,000, was allocated to goodwill and is being amortized on a straight-line basis over a period of 20 years.
Results of Operations
Year Ended December 31, 2000 Compared With Year Ended December 31, 1999
Net revenues (gross revenues net of agency commissions) for 2000 of $80.7 million increased by 18.6% from $68.0 million for 1999. This increase resulted from higher advertising rates in certain markets and an increase in the number of displays sold, as well as revenues generated by HSP and Horizon since the purchase date.
Direct advertising expenses for 2000 of $40.2 million increased by 20.0% from $33.5 million in 1999. The increase was attributable to direct costs associated with increased sales from new displays and an increase in sales commissions due to higher average rates, as well as direct advertising expenses generated by HSP and Horizon since the purchase date.
Corporate general and administrative expenses for 2000 of $4.1 million increased by 11.0% from $3.7 million in 1999. This was attributable to an increase in travel expenses, corporate taxes and insurance expense.
Depreciation and amortization for 2000 of $8.7 million increased by 25.5% from $6.9 million in 1999. Amortization expense increased due to the amortization of goodwill for HSP and Horizon.
Deferred compensation expense for 2000 of $1.9 million decreased by 22.3% from $2.5 million in 1999 primarily due to the inclusion of the Chief Executive Officer in the Phantom Stock Plan to acquire his 3% interest in the company and the additional vesting of General Managers under the Phantom Stock Plan in 1999.
Interest expense for 2000 of $16.7 million increased by 25.0% from $13.4 million in 1999. This increase was attributable to higher interest rates in 2000, as well as a higher outstanding loan balance. The Company's effective interest rate increased to 10.5% for 2000 from 10.0% for 1999.
Net income for 2000 increased to $7.6 million from $5.8 million in 1999 as a result of the items discussed above.
Operating cash flow for 2000 of $36.4 million increased by 17.9% from $30.9 million in 1999. This increase was attributable to the aforementioned increase in net revenues coupled with only a modest increase in total operating expenses.
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
Net revenues (gross revenues net of agency commissions) for 1999 of $68.0 million increased by 5.4% from $64.6 million for 1998. This increase resulted from higher advertising rates in certain markets and an increase in the number of displays sold.
Direct advertising expenses for 1999 of $33.5 million increased by 4.4% from $32.1 million in 1998. The increase was attributable to direct costs associated with increased sales from new displays and an increase in sales commissions due to higher average rates.
Corporate general and administrative expenses for 1999 of $3.7 million decreased by 6.2% from $3.9 million in 1998. This decrease was attributable to a couple of things in particular: the Company purchased an airplane in 1999, which eliminated the lease costs which were incurred for air travel during 1998. In addition, all costs associated with the new Company logo and identification project were incurred in 1998.
Depreciation and amortization for 1999 of $6.9 million decreased by 12.0% from $7.9 million in 1998. Depreciation expense decreased as a result of the expiration of the depreciable life of certain assets during 1999.
Deferred compensation expense for 1999 of $2.5 million decreased by 42.6% from $4.3 million in 1998 primarily due to the inclusion of the Chief Executive Officer in the Phantom Stock Plan to acquire his 3% interest in the company and the additional vesting of General Managers under the Phantom Stock Plan in 1998.
Interest expense for 1999 of $13.4 million decreased 7.3% from $14.4 million in 1998. This decrease was attributable to a lower interest rate in 1999, as well as a lower outstanding loan balance. The Company's effective interest rate decreased to 10.0% for 1999 from 10.2% for 1998.
Net income for 1999 increased to $5.8 million from $1.2 million in 1998 as a result of the items discussed above.
Operating cash flow for 1999 of $30.9 million increased by 8.1% from $28.6 million in 1998. This increase was attributable to the aforementioned increase in net revenues coupled with only a modest increase in total operating expenses.
Liquidity and Capital Resources
Historically, the Company's cash needs have arisen from operating expenses (primarily direct advertising expenses and corporate general and administrative expenses), debt service, capital expenditures and deferred compensation payments under phantom stock agreements. The Company's interest expense was $16.7 million in 2000, $13.4 million in 1999 and $14.4 million in 1998.
The Company's primary sources of cash are net cash generated from operating activities and borrowings under its credit facility. The Company's net cash provided from operations increased by 32.6% to $15.0 million for 2000, decreased by 4.6% to $11.3 million for 1999 and increased by 66.1% to $11.9 million for 1998.
During 1998, the Company had interest expense of $14.4 million on average outstanding indebtedness of $136.7 million, resulting in an effective annual interest rate of 10.2%. During 1999, the Company had interest expense of $13.4 million on average outstanding indebtedness of $127.6 million, resulting in an effective annual interest rate of 10.0%. During 2000, the Company had interest expense of $16.7 million on average outstanding indebtedness of $148.6 million, resulting in an effective annual interest rate of 10.5%. Scheduled interest payments on the Senior Notes aggregate approximately $10.5 million per year.
In 2000, the senior unsecured credit facility was increased to $45 million. At December 31, 2000, $25.3 million was outstanding under such facility.
Substantially all of the assets of the Company are pledged to secure indebtedness of up to $35.0 million (all of which was outstanding as of December 31, 2000) under the revolving credit facility and, accordingly, the lenders thereunder will have a prior claim on those assets. Permitted borrowings under the revolving credit facility are subject to various conditions. In addition, the availability of borrowings are subject to compliance with certain financial covenants. The agreement governing the revolving credit facility contains a number of covenants that are more restrictive than those contained in the indenture, including covenants requiring the Company to maintain certain financial ratios that become more restrictive over time. Adverse operating results could cause noncompliance with one or more of these covenants, reducing the Company's borrowing availability, and, in certain circumstances, entitling the lenders to accelerate the maturity of outstanding borrowings. In 2000, the senior unsecured credit facility was increased to $45 million. At December 31, 2000 and 1999, the Company was in compliance with all covenants.
On March 31, 1998, the Company entered into an additional $3 million senior unsecured credit facility. In September 1998, the proceeds from the senior unsecured facility were used to purchase $4 million of the Company's Senior Notes on the open market at 105% of principal plus accrued interest. As a result of the redemption, the Company recognized an extraordinary loss of $330,000, which represented the redemption premium plus recognition of a proportionate share of the associated deferred financing fees.
On June 30, 1999, the Company purchased $1,250,000 of its Senior Notes on the open market at 106% of principal plus accrued interest. During the third quarter of 1999, additional amounts of $2,000,000 and $75,000 were purchased at 105 3/4% and 105 1/2%, respectively. As a result of these redemptions, the Company recognized an extraordinary loss of $194,000, which represented the redemption premium plus recognition of a proportionate share of the associated deferred financing fees.
The Company believes that net cash provided from operations and available credit under the revolving credit facility will be sufficient to meet its cash needs for its current operations, required debt payments, anticipated capital expenditures and the deferred compensation payments for the reasonably foreseeable future.
The Company increased its debt by $41.9 million in 2000, reduced its debt by $13.8 million in 1999 and reduced its debt by $2.3 million in 1998. The Company also made capital expenditures, primarily for new billboard construction in existing markets, of $9.4 million in 2000, $10.2 million in 1999 and $10.1 million in 1998. The Company expects that its capital expenditures during 2001 will be approximately $25.0 million and will be primarily for new billboard construction and the upgrading of existing displays. The Company expects to finance such capital expenditures with cash flow provided by operating activities or borrowings under the revolving credit facilities.
Impact of Inflation
Though increases in operating costs could adversely affect the Company's operations, management does not believe that inflation has had a material effect on operating profit during the past several years.
Seasonality
Although revenues during the first and fourth quarters are slightly lower than the other quarters, management does not believe that seasonality has a significant impact on the operations or cash flow of the Company.
Forward Looking Statements
Information contained in this Form 10-K, including, without limitation in the foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology as "may," "will," "would," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. Certain factors, including the Company's substantial leverage, regulation of outdoor advertising by federal, state and local governments, tobacco advertising patterns, competition and general economic conditions, could cause actual results to differ materially from those in such forward-looking statements.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, which will be effective for the Company beginning January 1, 2001, establishes accounting and reporting standards requiring that every derivative instrument (including certain embedded in other contracts) be recorded in the balance sheet as either assets or liabilities measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company has not yet quantified the impact of adopting SFAS No. 133 and has not determined the timing or method of its adoption, however it is not expected that adoption will have a material impact on earnings.
Item 7A
Item 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. The information below summarizes the Company's market risk associated with its debt obligations as of December 31, 2000. The information presented below should be read in conjunction with Note 8 of the Notes to Consolidated Financial Statements.
Interest Rate Risk
The Company carries some floating rate debt and thus is exposed to the impact of interest rate changes. At December 31, 2000, indebtedness under its revolving credit facility, representing approximately 34.4% of the Company's total debt, bears interest at variable rates. Accordingly, the Company's net income and cash flow are affected by changes in interest rates. A 105 basis point move in interest rates (10% of the Company's weighted average interest rate) would have an immaterial impact on earnings and cashflow.
Fluctuations in interest rates may also adversely affect the fair market value of the Company's fixed rate borrowings. The fair value of debt with a fixed interest rate will increase as interest rates fall and decrease as interest rates rise. The Company's fixed rate borrowings consist of $97.7 million of senior notes bearing interest at
10 3/4%. A 105 basis point move in interest rates would also have an immaterial effect on the fair value of the Company's fixed rate senior notes.
Item 8
Item 8
Financial Statements and Supplementary Data
Item 9
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The information required by Item 9 was previously reported by the Company. Please see the Company's report on Form 8-K filed on September 15, 1998.
Part III
Item 10
Item 10
Management
Executive Officers and Directors
The executive officers and directors of Adams Outdoor Advertising, Inc., the managing general partner of the Company, are as follows:
Name Age Position ---- ---- ------------------------------------ Stephen Adams......... 63 Chairman of the Board
J. Kevin Gleason...... 49 Chief Executive Officer, President and Director
Abe Levine............ 47 Chief Financial Officer, Vice President, Secretary and Treasurer
George Pransky........ 60 Director
David Frith-Smith..... 55 Director
Andris A. Baltins..... 55 Director
Stephen Adams has been Chairman of Adams Outdoor Advertising, Inc. since its founding in 1983. Since the 1970's, Mr. Adams has served as chairman of privately owned banking, bottling, publishing, outdoor advertising, television and radio companies in which he held a controlling ownership interest. Mr. Adams is Chairman of the Board of Directors of Affinity Group, Inc., a membership- based marketing company.
J. Kevin Gleason has served as the Chief Executive Officer of the Company and President of Adams Outdoor Advertising, Inc. since 1991. Mr. Gleason has eighteen years of experience in advertising, twelve of which have been dedicated to the outdoor advertising industry. Mr. Gleason has been with Adams Outdoor Advertising, Inc. since 1987, serving as General Manager of various local markets and then as Executive Vice President at the corporate level. Prior to joining Adams Outdoor Advertising, Inc., Mr. Gleason served as General Manager of
Naegele Outdoor Advertising ("Naegele") of Southern California from 1985 to 1987. Mr. Gleason also currently serves as a Vice-Chairman of the Outdoor Advertising Association of America.
Abe Levine has served as Chief Financial Officer of the Company and as Vice President of Adams Outdoor Advertising, Inc. since 1991. From 1988 to 1991, Mr. Levine worked as Controller of Adams Outdoor Advertising of Atlanta, Inc. Mr. Levine was employed by Gulf + Western Industries, Inc. from 1979 through 1987 in various senior accounting and financial positions, and by KPMG Peat Marwick from 1975 through 1979 in various auditing positions.
George Pransky, Ph.D. has been in private practice as co-director of Pransky and Associates in La Conner, Washington since 1988. He is a frequent consultant for government and private agencies and has been a contract faculty member for a number of educational institutions, including the University of Washington, the University of Oregon and Antioch College. Dr. Pransky has trained management groups in team building, stress elimination and management development for fifteen years.
David Frith-Smith has served as managing partner of Frith-Smith & Archibald, Certified Public Accountants, since 1988. Mr. Frith-Smith was a principal in Maidy and Lederman, Certified Public Accountants, from 1980 to 1984, and with Maidy Biller Frith-Smith & Brenner, Certified Public Accountants, from 1984 to 1988. Mr. Frith-Smith is a director of various private and non-profit corporations.
Andris A. Baltins has been a member of the law firm of Kaplan, Strangis and Kaplan, P.A. since 1979. He is a director of Polaris Industries Inc., a manufacturer of snowmobiles, all-terrain vehicles, personal watercraft and related products. Mr. Baltins is also a director of various private and non- profit corporations.
Other Significant Management Personnel
The following table sets forth certain information with respect to other significant management personnel:
Name Age Position ---- ---- ------------------------------- Jim Allgeier........... 38 General Manager - Lansing, MI
Brian Criswell......... 37 General Manager - Jackson, MI
Mike Peters............ 38 General Manager - Kalamazoo, MI
John Hayes............. 47 General Manager - Lehigh Valley
Karen Vallone.......... 36 General Manager - Northeast PA
Michelle Kullmann...... 32 General Manager - Madison, WI
Gardner King........... 48 General Manager - Norfolk, VA
Barry M. Asmann........ 43 General Manager - Charlotte, NC
Robert J. Lord......... 41 General Manager - Peoria, IL
Robert A. Graiziger.... 47 General Manager - Minneapolis, MN
Jerry Heinz............ 58 General Manager - South Carolina
Jim Allgeier became General Manager of the Lansing, Michigan division in June, 2000 after first joining the Company in 1998 as Sales Manager in Lansing. Prior to joining Adams, Mr. Allgeier owed Allgeier Outdoor Printing in Fort Wayne, Indiana, which the Company purchased in 1995. Mr. Allgeier started his outdoor career in
1985 as an account executive with Burkhart Advertising and left there in 1995 as Vice President/General Manager of their Fort Wayne, Indiana office.
Brian Criswell started as General Manager of the Jackson, Michigan market in October, 2000. Brian began his career with Adams in 1996 as an Account Executive in the Kalamazoo market. In July of 1999, he was promoted to Sales Manager of the Kalamazoo market. He continued as Sales Manager until his October, 2000 promotion.
Mike Peters has been general manager of the Kalamazoo, MI division since October, 1996. He began his outdoor advertising career in 1985 as an account executive with Creative Displays in Lehigh Valley, PA. Mr. Peters stayed on as an account executive when Adams purchased Creative Displays and in 1989 was promoted to sales manager. He has fifteen years of experience in the outdoor advertising industry.
John Hayes has served as general manager of the Lehigh Valley, PA division from 1985 to 1991 and from 1994 to the present. He began his career in outdoor advertising in 1976 as an account executive with Creative Displays in the Lehigh Valley market, later becoming sales manager in 1979 and assistant manager in 1981. From 1991 to 1994, Mr. Hayes managed a paging business in the Lehigh Valley area.
Karen Vallone became General Manager of the Northeast Pennsylvania market on January 1, 2001. She started with Adams in 1993 as an Account Executive in the Lehigh Valley, Pennsylvania division. In 1998, she joined the Company's national accounts team and held a national sales position until her recent promotion.
Michelle Kullmann has been general manager of the Madison, Wisconsin division since June 1997. Michelle first started with Adams in 1991 as an account executive. In 1993 she was promoted to sales manager of Madison and held that position until her most recent promotion to General Manager.
Gardner King has served as general manager of the Norfolk, VA division since January 1988. From 1980 through 1985, Mr. King was the founder and sole proprietor of an outdoor advertising company in Norfolk, VA, which he sold to Whiteco. After the expiration of his non-compete agreement with Whiteco, Mr. King joined the Company in 1988. Mr. King has twenty years of experience in the outdoor advertising industry.
Barry Asmann has served as general manager of the Charlotte, NC division since January 1993 and prior thereto was sales manager in both the Charlotte, NC and Lehigh Valley, PA divisions. Mr. Asmann has 19 years of experience in the outdoor advertising industry, working in various markets throughout the country with the Company and Naegele.
Robert Lord has served as general manager of the Peoria, IL division since December 1993. From February 1993 to December 1993, he served as the sales manager of the Company's Charlotte division and from 1989 to January 1993, he served as the sales manager of the Company's Peoria, IL division. Mr. Lord served as an account executive in the Peoria division from 1986 to 1989.
Robert Graiziger has served as general manager of the Minneapolis, MN division since 1988, when he sold an outdoor advertising company that he founded and operated in Minneapolis to the Company. Mr. Graiziger has been involved in the outdoor advertising business in various capacities since 1978.
Jerry Heinz has served as general manager of the South Carolina division since December 1996. He came to Adams Outdoor from Burkhart Advertising, Inc. Mr. Heinz joined Burkhart Advertising, Inc. in 1969 as an account executive. During the next 27 years, Mr. Heinz held the positions of sales manager, general manager and finally as President and CEO.
Item 11
Item 11
Executive Compensation
The following table provides certain summary information concerning the compensation incurred by the Company for its Chief Executive Officer and each of the two other executive officers for the years ended December 31, 2000, 1999 and 1998.
- -------------- (a) All amounts represent accruals under deferred phantom stock agreements. (b) Less than the lesser of (i) 10% of total annual salary and bonus and (ii) $50,000. (c) Amounts for 2000, 1999 and 1998 include contributions to the accounts of Messrs. Gleason and Levine under the Company's nonqualified retirement plan of $30,000 and $15,000, respectively. All other amounts represent Company contributions to the Company's 401(k) plan. (d) The Company entered into an employment agreement with Mr. Adams providing for a salary of $200,000 per year, adjusted for annual cost of living increases, and the reimbursement of business expenses. (e) Does not include reimbursement of company travel and entertainment expense advanced by Mr. Adams aggregating $200,000 in 2000. Nothing was reimbursed to Mr. Adams in 1999 or 1998.
Employment Agreement
The Company and Stephen Adams entered into an employment agreement effective January 1, 1996. Under the employment agreement, Mr. Adams is employed as Chairman of Adams Outdoor Advertising, Inc. until December 31, 2001 at a base salary of $200,000 plus an annual cost of living increase.
Agreements with Management--Incentive Compensation Under Phantom Stock Agreements
The Company has deferred phantom stock agreements with certain managers, including each general manager with respect to the performance of his respective market. The compensation is calculated using a multiple of the operating profit of the general manager's respective division for the fiscal year ending immediately prior to the determination date over the value of the division at the time of agreement. The agreements provide for three equal
annual payments to the participants upon the determination date, which is defined as termination of employment, death, disability, sale of the Company or the fifth anniversary of the execution of the agreement. The Company incurred deferred compensation expense related to the phantom stock agreements of $2.4 million, $2.5 million and $4.3 million, respectively, for the years ended December 31, 2000, 1999 and 1998, respectively.
As of December 31, 2000, the Company has accrued the following amounts of deferred compensation expense payable related to the phantom stock agreements:
Name Amount - ---- ------ (dollars in thousands) Kevin Gleason $3,607 Others 1,836 ------ Total $5,443 ======
If amounts accrued as of December 31, 2000 as deferred compensation payable related to the phantom stock agreements are paid as currently scheduled (assuming no executive terminations, deaths or disabilities), such payments will occur as follows:
Name 2001 2002 2003 2004 2005 2006 Total ---- ---- ---- ---- ---- ---- ---- ------ (dollars in thousands) Kevin Gleason $ -- $1,202 $1,202 $1,203 $ -- $ -- $3,607 Others 278 427 403 403 215 13 1,739 ----- ------ ------ ------ ----- ----- ------ Total $ 278 $1,629 $1,605 $1,606 $ 215 $ 13 $5,346 ===== ====== ====== ====== ===== ===== ======
Agreements with Management Incentive Compensation Under Nonqualified Retirement Plan
The Company also maintains a deferred compensation plan for each of Messrs. Gleason, Levine and each of the area general managers. Under such plan, the Company contributes $30,000 per year to the retirement account of Mr. Gleason and $15,000 per year to the account of each of the other participants. In addition, Messrs. Gleason and Levine deferred a substantial portion of their 1999 and 1998 compensation into a similar plan. Deferred compensation payable as of December 31, 2000 related to the nonqualified retirement plans was approximately $2.7 million.
401(k) Savings Plan
Company employees also participate in a deferred savings and profit sharing plan (the "401(k) Plan") qualified under Section 401(a) and 401(k) of the Internal Revenue Code (the "Code"). All employees over age 21 who have completed one year of service are eligible to participate in the 401(k) Plan. Eligible employees may contribute to the 401(k) Plan up to 15% of their salary subject to an annual maximum established under the Code, and the Company matches these employee contributions at a rate of 50% up to the first 6% of the employee's salary. Employees may make additional voluntary contributions.
Director Compensation
Following the refinancing, the Company pays directors who are not also employees (Messrs. Pransky, Frith-Smith and Baltins) director fees of $5,400 per quarter.
Item 12
Item 12
Security Ownership of Certain Beneficial Owners & Management
PRINCIPAL SECURITY HOLDERS
The table below sets forth, the beneficial ownership interests in the Company as of December 31, 2000.
General Limited Aggregate Partnership Partnership Partnership Name Interest Interest Interests - ---------------------------------- ----------- ----------- ----------- Adams Outdoor Advertising, Inc.(a) 0.01% 1.02% 1.03% 1380 W. Paces Ferry Road, NW Suite 170, South Wing Atlanta, GA 30327
Stephen Adams 0.70 73.51 74.21 2575 Vista Del Mar Drive Ventura, CA 93001
Stephen M. Adams(b) -- 6.19 6.19 26529 Oliver Road Carmel, CA 93923
Mark C. Adams(b) -- 6.19 6.19 70662 Placerville Road Rancho Mirage, CA 92270
Scott L. Adams(b) -- 6.19 6.19 755 Canyon Road Geyserville, CA 95441
Kent R. Adams(b) -- 6.19 6.19 172 Westwood Lane Wayzata, MN 55391
0.71% 99.29% 100.00% - -------------- (a) Stephen Adams holds 100% of the issued and outstanding shares of Adams Outdoor Advertising, Inc., the managing general partner of the Company, and, accordingly, may control the affairs of the Issuers. (b) Stephen M. Adams, Mark C. Adams, Scott L. Adams and Kent R. Adams are sons of Stephen Adams.
Item 13
Item 13
Certain Relationships and Related Transactions
CERTAIN TRANSACTIONS
None.
Item 14
Item 14
Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) Documents filed (1) Financial statements (included under Item 8)
(2) Financial statement schedules S-1 Independent Public Accountants' Reports on Schedule S-2 Schedule II - Valuation and Qualifying Accounts
(3) Exhibits
(b) Reports on Form 8-K
The Company filed statements on Form 8-K due to the following transactions occurring on the dates noted:
Acquisitions
On March 9, 2000, two indirect wholly owned subsidiaries of the Company together acquired all of the outstanding stock of HSP Graphics ("HSP"), a printing operation headquartered in Canada which was majority-owned by two officers of the Company. The total amount of consideration was $21,000,000 and was financed by issuing notes payable to the former owners, bearing interest at 20% and payable over a one-year period. The transaction was accounted for as a purchase and, as such, the results of HSP's operations have been included in the Company's financial statements from the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired, which was approximately $20,000,000, was allocated to goodwill and is being amortized on a straight-line basis over a period of 20 years.
On June 28, 2000, the Company acquired all of the outstanding stock of Horizon Outdoor ("Horizon"), an outdoor advertising company in Charlotte, North Carolina. The total amount of consideration was $17,000,000, consisting of $15,500,000 in cash and a $1,500,000 note payable to the former owners and payable over an 18-month period. The transaction was accounted for as a purchase and, as such, the results of Horizon's operations have been included in the Company's financial statements from the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired, which was approximately $15,900,000, was allocated to goodwill and is being amortized on a straight-line basis over a period of 20 years.
(c) Exhibits Included in Item 14 (a) (3) above.
(d) Financial Statements Schedules Included in Item 14 (a) (2) above.
Financial Statement Schedules - Identify
Signature Page - Power of Attorney
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To: Adams Outdoor Advertising Limited Partnership
We have audited in accordance with auditing standards generally accepted in the United States, the consolidated balance sheets of Adams Outdoor Advertising Limited Partnership as of December 31, 2000 and 1999 and the related consolidated statements of operations, partners' equity (deficit), and cash flows for the years then ended, and have issued our report thereon dated February 23, 2001. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying Schedule II-Valuation and Qualifying Accounts is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Atlanta, GA February 23, 2001
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(a) The "balance at beginning of period" for 2000 includes $51,329 for HSP Graphics as of March 31, 2000.
(b) Write-offs, net of recoveries
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP By: Adams Outdoor Advertising, Inc., its general partner
By: /s/ J. Kevin Gleason ----------------------------------------------------- J. Kevin Gleason President and Chief Executive Officer
ADAMS OUTDOOR ADVERTISING, INC.
By: /s/ J. Kevin Gleason --------------------------------- J. Kevin Gleason President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
J. Kevin Gleason, pursuant to powers of attorney, executed by each of the officers and directors listed above whose name is marked by an "*" filed as an exhibit hereto to this Report, by signing his name hereto, does hereby sign and execute this report of Adams Outdoor Advertising, Inc. on behalf of each such officers and directors in the capacities in which the names of each appear.
POWER OF ATTORNEY - ----------------- (FORM 10-K)
KNOW ALL MEN BY THESE PRESENTS, that ADAMS OUTDOOR ADVERTISING, INC., a Minnesota corporation (the "Company"), and each of the undersigned directors of the Company, hereby constitutes and appoints J. Kevin Gleason and Abe Levine and each of them (with full power to each of them to act alone) its/his/her true and lawful attorney-in-fact and agent, for it/him/her and on its/him/her and in its/his/her name, place and stead, in any and all capacities to sign, execute, affix its/his/her seal thereto and file the Annual Report on Form 10-K of the Company and Adams Outdoor Advertising Limited Partnership for the year ended December 31, 2000 under the Securities Exchange Act of 1933, as amended, with any amendment or amendments thereto, with all exhibits and any and all documents required to be filed with respect thereto with any regulatory authority.
There is hereby granted to said attorneys, 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 respect of the foregoing as fully as it/he/she or itself/himself/herself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute one and the same instrument and any of the undersigned directors may execute this Power of Attorney by signing any such counterpart.
Adams Outdoor Advertising, Inc. has caused this Power of Attorney to be executed in its name by its Chief Executive Officer on the 2nd day of April, 2001.
ADAMS OUTDOOR ADVERTISING, INC.
By /s/ J. Kevin Gleason --------------------------- J. Kevin Gleason Chief Executive Officer and President
The undersigned, directors of ADAMS OUTDOOR ADVERTISING, INC., have hereunto set their hands as of the 2nd day of April, 2001.
/s/ Stephen Adams /s/ J. Kevin Gleason --------------------- -------------------- Stephen Adams J. Kevin Gleason
/s/ David Frith-Smith /s/ George Pransky --------------------- -------------------- David Frith-Smith George Pransky
/s/ Andris A. Baltins --------------------- Andris A. Baltins
D I R E C T O R S
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS
Consolidated Balance Sheets--December 31, 2000 and 1999
Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999, and 1998
Consolidated Statements of Changes in Partners' (Deficit) Equity for the Years Ended December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Adams Outdoor Advertising Limited Partnership:
We have audited the accompanying consolidated balance sheets of ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP (a Minnesota limited partnership) AND SUBSIDIARIES as of December 31, 2000 and 1999 and the related consolidated statements of operations, changes in partners' (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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 Adams Outdoor Advertising Limited Partnership and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP - ----------------------- Arthur Andersen LLP
Atlanta, Georgia February 23, 2001
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
The accompanying notes are an integral part of these consolidated balance sheets.
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these consolidated statements.
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN PARTNERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these consolidated statements.
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
The accompanying notes are an integral part of these consolidated statements.
ADAMS OUTDOOR ADVERTISING LIMITED PARTNERSHIP
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. ORGANIZATION AND NATURE OF OPERATIONS
Adams Outdoor Advertising Limited Partnership ("Adams" or the "Company" or the "Partnership") was organized under the Minnesota Uniform Limited Partnership Act on December 12, 1985 and will terminate on December 31, 2025 unless terminated sooner under the provisions of the partnership agreement. The Company was organized for the purpose of acquiring and operating businesses engaged in the outdoor advertising industry. The Company owns and operates outdoor advertising structures in 11 markets in the Midwest, Southeast, and Mid-Atlantic states. The managing general partner is Adams Outdoor Advertising, Inc.
The partnership agreement was amended and restated on March 31, 1995 to convert and transfer 99% of the general partners' interest to the limited partners' interests. The partnership agreement was amended and restated on January 1, 1996 to, among other matters, eliminate classes of limited partner interests resulting in general partners' interests of .71% and limited partners' interests of 99.29%.
The partnership agreement provides that losses will be allocated 100% to the general partners. Profits will be allocated to the general and limited partners in the same proportion, based on their aggregate interest in the Company, as they have received distributions of distributable cash (defined as annual cash gross receipts, less cash expenses and any amount set aside for reserves) for such calendar year. In the event there are profits in a calendar year in which no distribution of distributable cash has been made, profits will be allocated 100% to the general partners.
In the event of a sale, refinancing, or dissolution of the Partnership, the proceeds available for distribution, after payment of all expenses and previously outstanding debt of the Partnership, will be distributed first to the partners up to an amount equal to the respective partner's adjusted aggregate interest in the Partnership.
In May 1999, the Partnership's majority partner contributed his direct and indirect interests in the Company and Adams Outdoor Advertising, Inc. to a newly formed limited liability company, AOA Holding LLC ("AOA Holding"). Following the reorganization, AOA Holding and its 100%-owned subsidiary, AOA Capital Corp., issued $50 million of 10 3/8% senior notes due 2006. The net proceeds from the offering were used by AOA Holding to make a distribution to its sole member, to repay $13.5 million of indebtedness of the Company, and to make a $2.5 million payment to the minority limited partner. Amounts loaned to the Company are noninterest bearing and are reflected as advances from AOA Holding LLC in the accompanying balance sheets.
In connection with the reorganization, the partnership agreement was amended to provide that the limited partnership interest of AOA Holding LLC become a "priority" interest whereby all limited partner distributions (other than permitted tax distributions) will be made only to AOA Holding until the notes are paid in full. In recognition of the change in the partnership agreement, the Company paid to the minority limited partners approximately $2.5 million, which has been reflected as other expense in the accompanying statements of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements include the financial statements of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Investments
Investments consist primarily of corporate and U.S. government debt instruments and equity securities. Securities are classified in one of three categories: trading, available-for-sale, or held-to-maturity. Management of the Company determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date.
The Company has classified all securities purchased and held during 2000 and 1999 as trading securities, as they are intended to be sold in the near term. Trading securities are carried at fair value, with realized and unrealized gains and losses included in net income.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. Market approximates net realizable value.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are as follows:
Intangible Assets
Intangible assets include financing costs, noncompete agreements, and goodwill. Goodwill is being amortized using the straight-line method over periods of 12 years to 40 years. The remaining intangible assets are recorded at cost and are amortized using the straight-line method over the assets' estimated useful lives of 2 years to 5 years for noncompete agreements and the terms of the related debt for financing costs.
Impairment of Long-Lived Assets
The Company periodically reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted operating cash flow analyses to determine if an impairment exists.
Income Taxes
The Company is not considered a taxable entity for federal and state income tax purposes. Any taxable income or loss, tax credits, and certain other items are reported by the partners on their own tax returns in accordance with the partnership agreement.
One of the Company's subsidiaries, HSP Graphics ("HSP"), is a C corporation, and accordingly, the provision for the year ended December 31, 2000 reflects federal and state tax expense of $337,846.
Revenue Recognition
Revenues represent outdoor advertising services provided by the Company. The Company recognizes revenue usually on a monthly basis in accordance with contract terms, as advertising services are provided and collectibility is reasonably assured.
Barter Transactions
Barter transactions, which represent the exchange of advertising for goods or services, are recorded at the estimated fair value of the advertising provided and the products or services received. Barter revenue is recognized when advertising services are rendered, and barter expense is recognized when the related products or services are received.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and short-term investments, trade receivables, notes receivable, accounts payable and long- term debt. In management's opinion, the carrying amounts of these financial instruments, with the exception of long-term debt (note 9), approximate their fair values at December 31, 2000 and 1999.
Foreign Currency Translation
The Company translates the results of operations of its foreign subsidiary using average exchange rates during each period, whereas balance sheet accounts are translated using exchange rates at the end of each period. Foreign currency translation adjustments are recorded as a component of partners' (deficit) equity.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and 138 in June 1999 and June 2000, respectively. These statements, which will be effective for the Company beginning January 1, 2001, require the Company to recognize all derivative instruments (including certain imbedded in other contracts) on the balance sheet at fair value. The statements also established new accounting rules for hedging instruments which, depending on the nature of the hedge, require that changes in the fair value either be offset against the change in the fair value of assets, liabilities, or firm commitments through income or be recognized in comprehensive income until the hedged item is recognized in income. Any ineffective portion of a derivative's change in fair value must be immediately recognized in income. The Company adopted the provisions of SFAS No. 133, as amended, on January 1, 2001, which had no impact on the results of operations and financial position.
Comprehensive Income
The Company had other comprehensive losses in the form of cumulative translation adjustments, which resulted in total comprehensive income of $7,570,555 in 2000.
3. ACQUISITIONS
On March 9, 2000, two indirect wholly owned subsidiaries of the Company acquired together all of the outstanding stock of HSP, an outdoor advertising printing operation headquartered in Canada which was majority- owned by two officers of the Company. The total amount of consideration was $21,000,000 and was financed by issuing notes payable to the former owners, bearing interest at 20% and payable over a one-year period. The transaction was accounted for as a purchase and, as such, the results of HSP's operations have been included in the Company's financial statements from the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired, which was approximately $20,000,000, was allocated to goodwill and is being amortized on a straight-line basis over a period of 20 years.
On June 28, 2000, the Company acquired all of the outstanding stock of Horizon Outdoor ("Horizon"), an outdoor advertising company in Charlotte, North Carolina. The total amount of consideration was $17,000,000, consisting of $15,500,000 in cash and a $1,500,000 note payable to the former owners and payable over an 18-month period. The transaction was accounted for as a purchase and, as such, the results of Horizon's operations have been included in the Company's financial statements from the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired, which was approximately $15,900,000, was allocated to goodwill and is being amortized on a straight-line basis over a period of 20 years.
The following unaudited pro forma information presents the combined results of operations as if the acquisitions had occurred at the beginning of 2000 and 1999. The unaudited pro forma information is based upon the historical financial statements of the Company and the acquired businesses. Pro forma results give effect to additional interest expense on borrowings related to the acquisitions as well as additional amortization expense on the increased goodwill. The pro forma results are not necessarily indicative of what actually would have occurred had the acquisitions been consummated at the beginning of each year, nor are they necessarily indicative of future results.
2000 1999 ---- ---- Gross revenues $91,203,000 $87,396,000 Net income 5,744,000 1,075,000
4. RELATED-PARTY TRANSACTIONS
During 2000, the Company entered a sales agreement with a director of the Company for advertising space sold by each individual location. Revenues of approximately $1,000,000 related to this transaction have been included in gross revenue during 2000.
Certain officers of the Company had ownership interests in HSP prior to its acquisition by the Company (Note 3). The Company paid the salary and expenses of HSP employees, and HSP reimbursed the Company for these expenses in cash or services. At December 31, 1999 and 1998, the Company had accounts receivable of $21,870 and $114, respectively, outstanding related to this arrangement with HSP. The Company expensed $0, $0 and $11,000 for printing services provided by HSP during 2000, 1999 and 1998, respectively.
In connection with the acquisition of HSP, the Company issued notes payable to officers in the original amount of $21,000,000. These notes are payable over a one-year period and bear interest at 20%. At December 31, 2000, approximately $5,133,000 remained on these notes.
During 1998, the Company entered into a building lease with an officer of the Company. The lease term was for ten years and had been classified as an operating lease. Rent expense of approximately $37,000 and $52,000 related to this transaction is included in direct advertising expense in 1999 and 1998,
respectively. During 1999, the Company purchased this building from the officer of the Company for $461,000.
During 1997, the Company entered into an aircraft lease with a party related to the Company. The lease term was for seven years and had been classified as an operating lease. At the beginning of 1999, the Company purchased an aircraft and was released from the lease agreement. Lease and operating expenses of approximately $549,000 related to this transaction have been included in corporate general and administrative expense during 1998.
During 1999, the Company purchased outdoor advertising displays from two related parties in Peoria for $100,000 in cash paid to each of the parties.
5. INVESTMENTS
The cost and estimated fair values of investment securities at December 31, 2000 and 1999 are summarized as follows:
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following at December 31, 2000 and 1999:
7. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 2000 and 1999:
2000 1999 ---- ---- Goodwill $43,565,124 $ 7,582,597 Noncompete agreements 2,325,500 2,325,500 Financing costs 6,255,202 5,368,952 ----------- ----------- 52,145,826 15,277,049 Less accumulated amortization (9,601,853) (7,373,168) ----------- ----------- $42,543,973 $ 7,903,881 =========== ===========
8. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following at December 31, 2000 and 1999:
2000 1999
Accrued insurance $1,020,885 $ 376,677 Accrued payroll 365,295 215,698 Other 3,146,002 2,768,905 ---------- ---------- $4,532,182 $3,361,280 ========== ==========
9. LONG-TERM DEBT
Long-term debt at December 31, 2000 and 1999 consists of the following:
On March 12, 1996, the Company completed a refinancing (the "Refinancing") of its outstanding debt. Pursuant to the Refinancing, substantially all of the Partnership's existing debt was repaid, $105 million of 10.75% senior notes due 2006 (the "Senior Notes") were issued, and a credit agreement (the "Credit Agreement") was executed which provided for a revolving credit facility with total availability of $15 million. On December 2, 1996, the Credit Agreement was amended and restated to increase the availability on the revolving credit facility from $15 million to $35 million for a fee of $387,500. On March 31, 1998, the Company entered into an additional $3 million senior unsecured credit facility to increase the line of credit to $38 million. In September 1998, proceeds from the senior unsecured facility were used to purchase $4 million of the Company's Senior Notes on the open market at 105% of principal plus accrued interest. As a result of the redemption, the Company recognized an extraordinary loss of $329,778, which represented the redemption premium plus recognition of a proportionate share of the associated deferred financing fees. In November 1998, the senior unsecured credit facility was increased to $8 million. On June 30, 1999, the Company used proceeds from the $50 million of 10.375% Senior Notes due 2006 (Note 1) to purchase $1.3 million of the Senior Notes on the open market for 105% of principal plus accrued interest. On August 10, 1999, the Company purchased an additional $2 million of the Senior Notes at 105% of principal plus accrued interest. As a result of these redemptions, the Company recognized an extraordinary loss of $194,125 which represents the redemption premium plus recognition of a proportionate share of the associated deferred financing fees. In June 2000, the revolving credit facility was increased to $60 million. Effective January 2001, the revolving credit facility was increased to $80 million.
Borrowings under the Credit Agreement bear interest at a rate equal to, at the option of the Company, either (i) the base rate (which is defined as the higher of the prime rate or the federal funds rate plus .5%), or (ii) LIBOR, in each case plus an applicable margin, as defined, determined by reference to the ratio of total debt to cash flow of the Company. At December 31, 2000 and 1999, the weighted-average interest rate was 10.2% and 9.1%, respectively, on outstanding borrowings.
The obligations of the Company under the Credit Agreement are secured primarily by a first priority pledge of the stock of Adams Outdoor Advertising, Inc., the corporate general partner; a first priority pledge of the Company's interests; and a first priority lien on all the assets of the Company, with the exception of certain real estate assets which are subject to a negative pledge.
The Credit Agreement contains, among other things, covenants restricting the ability of the Company to dispose of assets, make distributions to its partners, create liens, make capital expenditures, make certain investments or acquisitions, enter into transactions with affiliates, and otherwise restrict certain activities. The Credit Agreement also contains financial covenants related to minimum interest coverage, maximum leverage ratio, and a minimum fixed-charge coverage ratio. At December 31, 2000 and 1999, the Company was in compliance with all covenants.
The Credit Agreement expires on December 31, 2001. The Company is currently negotiating to extend or refinance beyond that date. Management believes the Company will be successful in their efforts.
The 10.75% Senior Notes due 2006 were issued under an indenture dated March 12, 1996 (the "Indenture") among the Company and the trustee of the notes. The notes are senior unsecured obligations of the Company ranking pari passu in right of payment with all existing and future senior indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company that by its terms is subordinated in right of payment to the notes. The notes are effectively subordinated to all secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness.
The notes mature on March 15, 2006 and bear interest at an annual rate of 10.75% from the date of issuance until maturity. Interest is payable semiannually in arrears on March 15 and September 15 to holders of record of the notes.
The notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 15, 2001 at the following redemption prices (expressed as a percentage of principal amount), together, in each case, with accrued and unpaid interest to the redemption date if redeemed during the 12-month period beginning on March 15 of each year, as listed below:
Year: 2002 103.583% 2003 101.792 2004 and thereafter 100.000
Also, up to 25% of the notes are redeemable at the option of the Company in the event of a public equity offering.
The Indenture contains, among other things, covenants restricting the ability of the Company to incur additional indebtedness, make certain distributions, make certain investments, change the status of company subsidiaries, create liens, enter into transactions with affiliates, dispose of assets, enter into sale and leaseback transactions, make payments for consents, enter into any additional lines of business, and otherwise restrict certain activities.
At December 31, 2000, the fair value of the Company's long-term debt based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of similar remaining maturities was approximately $101.7 million.
Annual minimum maturities of long-term debt based on amounts outstanding at December 31, 2000 are as follows:
2001 $ 56,406,238 2002 500,000 2003 0 2004 0 2005 0 Thereafter 98,797,108 ------------ $155,703,346 ============
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) deferred savings and profit-sharing plan. Employees must be at least age 21 and must have completed one year of service to participate in the plan. Employees may contribute up to 15% of their salaries, and the Company matches employee contributions at the rate of 50%, up to 6% of
the employee's salary. The Company's contributions to the plan were approximately $255,000, $254,000, and $240,000 in 2000, 1999, and 1998, respectively.
11. DEFERRED COMPENSATION BENEFITS
Phantom Stock Agreements
The Company has deferred compensation benefits referred to as phantom stock agreements with certain management personnel. The compensation is calculated using a multiple of the operating profit of a division or the Company for the year ending immediately prior to the determination date over the base cost, which is the assigned value of the division or the Company, at the date of the agreement's execution. The agreements provide for three equal annual payments to the participants on the determination date, which is defined as termination, death, disability, the sale of the Company, or the fifth anniversary of the agreement's execution. The Company incurred deferred compensation expense related to these agreements of $1,686,562, $2,261,909, and $4,098,470 as of December 31, 2000, 1999, and 1998, respectively.
Nonqualified Retirement Plans
The Company also maintains certain nonqualified retirement plans (the "Plans") to provide deferred compensation benefits for certain members of management. The Company has established trusts (the "Trusts") for contributions to provide sources of funds for liabilities under the Plans. The Trusts are revocable and constitute unfunded arrangements, as their assets are subject to the claims of the Company's creditors in the event of insolvency, until such time as the obligations have been paid to plan participants in accordance with the Plans. Earnings of the trusts are allocated proportionately to participant accounts. During the years ended December 31, 2000, 1999, and 1998, the Company recorded deferred compensation expense of $240,000, $217,500, and $217,501, respectively, to these plans.
12. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases real estate to erect signs in commercial and industrial areas along traffic routes in cities or close to populated urban areas. The Partnership also leases certain vehicles used in its operations. These leases have terms ranging from one to ten years.
Approximate future minimum lease payments under noncancelable operating leases with terms in excess of one year at December 31, 2000 are as follows:
2001 $ 5,700,915 2002 4,954,032 2003 4,051,460 2004 3,340,851 2005 2,187,325 Thereafter 18,198,544 ----------- $38,433,127 ===========
Rent expense incurred under operating leases aggregated $10,304,840, $8,617,282, and $7,315,000 for 2000, 1999, and 1998, respectively.
Zoning Regulations
In 1988, the city of Charlotte, North Carolina, adopted a comprehensive sign ordinance prohibiting the construction of virtually all new, off-premise outdoor advertising signs within the city limits and mandating that all nonconforming signs either be brought into compliance or be removed by February 1, 1998 at the owner's expense without payment of compensation. Through March 1998, the Company had received a total of 307 notices of violation ("NOVs"). The Company does not anticipate receiving any additional NOVs at this time. In 1998, the Company filed a lawsuit in the Superior Court of Mecklenburg County, North Carolina, challenging the constitutionality of the Charlotte sign ordinance. In 1998, the case was settled, and approximately 160 of the billboards in question must be removed at the Company's expense by December 5, 2002. This will result in a material adverse impact on the gross revenues and cash flow attributable to the Charlotte market but, in the opinion of management, not on the financial condition of the Company as a whole.
In other localities in which the Company operates, outdoor advertising is subject to restrictive and, in some cases, prohibitive zoning regulations. Management expects federal, state, and local regulations to continue to be a significant factor in the operation of the Company's business.
Litigation
The Company is a party to a number of lawsuits and claims which it is vigorously defending. Such matters arise out of the normal course of business and relate to government regulations and other issues. Certain of these actions seek damages in significant amounts. While the results of litigation cannot be predicted with certainty, management believes that based on the advice of company counsel, the final outcome of such litigation will not have a material adverse effect on the financial statements of the Company.
Concentration of Risks
Approximately 0%, 2.9%, and 10.3% of the Company's net revenues for the years ended December 31, 2000, 1999, and 1998, respectively, were attributable to the tobacco products industry. In November 1998, the major U.S. tobacco companies (the "Tobacco Companies") reached an out-of-court settlement (the "Agreement") with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, and four other U.S. territories (the "Settling States"). The remaining four states had already reached similar settlements with the Tobacco Companies. The Agreement called for the removal of tobacco advertising from out-of-home media, including billboards, along with signs and placards in arenas, stadiums, shopping malls, and video game arcades by April 23, 1999. Additionally, the Agreement provided that, at the Settling States' option, the Tobacco Companies must, at their expense, substitute for tobacco advertising alternative advertising which discourages youth smoking. That alternative advertising must remain in place for the duration of the Tobacco Companies' out-of-home media advertising contracts which existed as of the date of the Agreement. Although the extent of the future impact on operations is not known, the Company has been successful thus far in replacing tobacco advertising in its markets.
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes supplemental cash paid and noncash activities for the years ended December 31, 2000, 1999, and 1998:
14. SEGMENT AND ENTERPRISE-WIDE INFORMATION
The Company's primary business consists of its outdoor advertising operations. Beginning in 2000 with the acquisition of HSP, the Company's business expanded to printing operations. The Company evaluates the performance of its operations on the basis of gross revenues and operating income. The table below presents information about reported segments for 2000, 1999, and 1998:
The following are gross revenue and long-lived asset information by geographic area as of and for 2000, 1999, and 1998:
15. SUBSEQUENT EVENT
On January 9, 2001, the Company acquired all of the assets of PNE Media LLC and Four Winds, Inc. used in the operation of their outdoor advertising businesses in Charleston, Orangeburg, and Florence, South Carolina. The total amount of consideration was approximately $19,000,000 in cash, financed by borrowings against the Company's revolving credit facilities. The transaction was accounted for as a purchase.