Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

Filed by the Registrant  x

Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨		Preliminary Proxy Statement
¨		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x		Definitive Proxy Statement
¨		Definitive Additional Materials
¨		Soliciting Material under Rule 14a-12
Lamar Advertising Company
(Name of registrant as specified in its charter)
(Name of person(s) filing proxy statement, if other than the registrant)
Payment of Filing Fee (Check the appropriate box):
x		No fee required.
¨		Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
		(1)		Title of each class of securities to which transaction applies:
		(2)		Aggregate number of securities to which transaction applies:
		(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
		(4)		Proposed maximum aggregate value of transaction:
		(5)		Total fee paid:
¨		Fee paid previously with preliminary materials.
¨		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
		(1)		Amount Previously Paid:
		(2)		Form, Schedule or Registration Statement No.:
		(3)		Filing Party:
		(4)		Date Filed:

 

 

 

---

Table of Contents

October 16, 2014

Dear Stockholder:

I am pleased to invite you to attend a special meeting of stockholders of Lamar Advertising Company, or Lamar Advertising, a Delaware corporation, which will be held on November 17, 2014 at 9:00 a.m., local time, at the offices of Lamar Advertising Company, 5321 Corporate Boulevard, Baton Rouge, Louisiana 70808.

I am also pleased to report that the board of directors of Lamar Advertising has unanimously approved a plan to reorganize the business operations of Lamar Advertising to allow Lamar Advertising to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We refer to this reorganization plan as the REIT conversion.

The REIT conversion is being implemented through a series of steps including, among other things, the merger of Lamar Advertising into Lamar Advertising REIT Company, or Lamar REIT, a Delaware corporation and wholly owned subsidiary of Lamar Advertising, which was recently formed in connection with the REIT conversion. Effective at the time of the merger, Lamar REIT will be renamed “Lamar Advertising Company” and will hold, directly or indirectly through its subsidiaries, the assets currently held by Lamar Advertising and will conduct the existing businesses of Lamar Advertising and its subsidiaries. In the merger, you will receive a number of shares of Lamar REIT Class A common stock, Class B common stock and Series AA preferred stock equal to, and in exchange for, the number of shares of Lamar Advertising Class A common stock, Class B common stock and Series AA preferred stock you own. We anticipate that the shares of Lamar REIT Class A common stock will trade on the NASDAQ Global Select Market under the symbol “LAMR.”

We are requesting that our stockholders vote to adopt the Agreement and Plan of Merger dated August 27, 2014 by and between Lamar Advertising and Lamar REIT pursuant to which Lamar Advertising will merge with and into Lamar REIT. The affirmative vote of the holders of a majority of the votes represented by the outstanding shares of Lamar Advertising Class A common stock, Class B common stock and Series AA preferred stock entitled to vote, voting together as a single class, is required for the adoption of the merger agreement. After careful consideration, the board of directors has unanimously approved the REIT conversion, including the merger and other restructuring transactions, and recommends that all stockholders vote “FOR” the adoption of the merger agreement.

This proxy statement/prospectus is a prospectus of Lamar REIT as well as a proxy statement for Lamar Advertising and provides you with detailed information about the REIT conversion, the merger and the special meeting. We encourage you to read carefully this entire proxy statement/prospectus, including all its annexes, and we especially encourage you to read the section entitled “Risk Factors” beginning on page 24.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the shares of Class A common stock and Class B common stock to be issued by Lamar REIT hereunder or passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus is dated October 16, 2014 and is being

first mailed to stockholders on or about October 17, 2014.

---

Table of Contents

LAMAR ADVERTISING COMPANY

5321 Corporate Boulevard

Baton Rouge, Louisiana 70808

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF

LAMAR ADVERTISING COMPANY

TO BE HELD ON NOVEMBER 17, 2014

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Lamar Advertising Company, a Delaware corporation, will be held on November 17, 2014 at 9:00 a.m., local time, at the offices of Lamar Advertising Company, 5321 Corporate Boulevard, Baton Rouge, Louisiana 70808, for the following purposes:

 

(1)

To consider and vote upon a proposal to adopt the Agreement and Plan of Merger dated August 27, 2014 between Lamar Advertising Company and Lamar Advertising REIT Company, a newly formed wholly owned subsidiary of Lamar Advertising, which is part of the reorganization through which Lamar Advertising intends to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes; and

 

(2)	To consider and vote upon a proposal to permit Lamar Advertising’s board of directors to adjourn the special meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the special meeting to approve the foregoing proposal.

The board of directors of Lamar Advertising has unanimously approved the REIT conversion, including the merger and other restructuring transactions, and recommends that you vote “FOR” the proposals that are described in more detail in this proxy statement/prospectus.

Lamar Advertising reserves the right to cancel or defer the merger or the REIT conversion even if stockholders of Lamar Advertising vote to adopt the merger agreement and the other conditions to the completion of the merger are satisfied or waived, if the board of directors of Lamar Advertising determines that the merger or the REIT conversion are no longer in the best interests of Lamar Advertising and its stockholders.

If you own shares of Lamar Advertising Class A common stock, Class B common stock or Series AA preferred stock as of the close of business on October 3, 2014, you are entitled to notice of, and to vote those shares by proxy or at the special meeting and at any adjournment or postponement of the special meeting. During the ten-day period before the special meeting, Lamar Advertising will keep a list of stockholders entitled to vote at the special meeting available for inspection during normal business hours at Lamar Advertising’s offices in Baton Rouge, Louisiana, for any purpose germane to the special meeting. The list of stockholders will also be provided and kept at the location of the special meeting for the duration of the special meeting, and may be inspected by any stockholder who is present.

Your vote is important. Whether or not you plan to attend the special meeting in person, please complete, sign, date and promptly return the enclosed proxy card and return it in the enclosed envelope. Stockholders who return proxy cards by mail prior to the special meeting may nevertheless attend the special meeting, revoke their proxies and vote their shares at the special meeting.

We encourage you to read the attached proxy statement/prospectus carefully. If you have any questions or need assistance voting your shares, please call our proxy solicitor, Alliance Advisors, LLC, toll-free at (877) 777-5603.

By order of the board of directors,

James R. McIlwain

Secretary

Baton Rouge, Louisiana October 16, 2014

---

Table of Contents

ADDITIONAL INFORMATION

Lamar Advertising Company, or Lamar Advertising, files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. Lamar Advertising’s SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. Please note that the SEC’s website is included in this proxy statement/prospectus and any applicable prospectus supplement as an inactive textual reference only. The information contained on the SEC’s website is not incorporated by reference into this proxy statement/prospectus and should not be considered to be part of this proxy statement/prospectus, except as described in the following paragraph. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facility.

We “incorporate by reference” into this proxy statement/prospectus, which means that we can disclose important information to you by referring you specifically to those documents. The information incorporated by reference is an important part of this proxy statement/prospectus. Certain information that we subsequently file with the SEC will automatically update and supersede information in this prospectus and in our other filings with the SEC. We incorporate by reference the documents listed below, which we have already filed with the SEC, and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, or Exchange Act, between the date of this proxy statement/prospectus and the date of the special meeting, except that we are not incorporating any information included in a Current Report on Form 8-K that has been or will be furnished (and not filed) with the SEC, unless such information is expressly incorporated herein by reference to a furnished Current Report on Form 8-K or other furnished document:

 

•

our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 27, 2014;

 

•

our Quarterly Report on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014, filed with the SEC on May 7, 2014 and August 7, 2014, respectively;

 

•

the information in our Definitive Proxy Statement on Schedule 14A filed with the SEC on April 25, 2014 that is deemed “filed” with the SEC under the Exchange Act;

 

•

our Current Reports on Form 8-K filed with the SEC on January 8, 2014, January 15, 2014, February 7, 2014, March 21, 2014, March 24, 2014, April 22, 2014, April 23, 2014, May 22, 2014, May 23, 2014, June 27, 2014, August 27, 2014 and September 2, 2014; and

 

•

the description of our Class A common stock contained in our Registration Statement on Form 8-A filed with the SEC on June 7, 1996 under the Exchange Act, and any subsequent amendments and reports filed to update such description.

You may request a copy of these filings at no cost, by writing or calling us at the following address: 5321 Corporate Boulevard, Baton Rouge, LA 70808, Tel: (225) 926-1000, Attention: Buster Kantrow, Director of Investor Relations. If you would like to request documents from us, please do so by November 6, 2014.

Lamar Advertising REIT Company, or Lamar REIT, has filed a registration statement on Form S-4 to register with the SEC the Lamar REIT Class A common stock and Lamar REIT Class B common stock that Lamar Advertising stockholders will receive in connection with the merger if the merger is approved and completed. This proxy statement/prospectus is part of the registration statement of Lamar REIT on Form S-4 and is a prospectus of Lamar REIT and a proxy statement of Lamar Advertising for its special meeting.

Upon completion of the merger, Lamar REIT will be required to file annual, quarterly and special reports, proxy statements and other information with the SEC.

You should only rely on the information in, or incorporated by reference into, this proxy statement/prospectus. No one has been authorized to provide you with different information. You should not assume that the information contained in this proxy statement/prospectus is accurate as of any date other than the date on the front page. We are not making an offer to exchange or sell (or soliciting any offer to buy) any securities, or soliciting any proxy, in any state where it is unlawful to do so.

---

Table of Contents

TABLE OF CONTENTS

 

---

Table of Contents

QUESTIONS AND ANSWERS ABOUT THE REIT CONVERSION AND THE MERGER

What follows are questions that you, as a stockholder of Lamar Advertising Company, or Lamar Advertising, may have regarding the REIT conversion, the merger and the special meeting of stockholders, or the special meeting, and the answers to those questions. You are urged to carefully read this proxy statement/prospectus and the other documents referred to in this proxy statement/prospectus in their entirety because the information in this section may not provide all of the information that might be important to you with respect to the REIT conversion and the merger or the special meeting. Additional important information is contained in the annexes to, and the documents incorporated by reference into, this proxy statement/prospectus.

The information contained in this proxy statement/prospectus, unless otherwise indicated, assumes the REIT conversion and all the transactions related to the REIT conversion, including the merger, will occur. When used in this proxy statement/prospectus, unless otherwise specifically stated or the context otherwise requires, all references to “Company,” “Lamar Advertising,” “we,” “our” and “us” refer to Lamar Advertising and its subsidiaries with respect to the period prior to the merger, and Lamar REIT and its subsidiaries with respect to the period after the merger.

 

Q.	What is the purpose of the special meeting?

 

A.	At the special meeting, our stockholders will vote on the following matters:

 

•

Proposal 1: To consider and vote upon a proposal to adopt the Agreement and Plan of Merger dated August 27, 2014 between Lamar Advertising Company and Lamar Advertising REIT Company, a newly formed wholly owned subsidiary of Lamar Advertising, which is part of the reorganization through which Lamar Advertising intends to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes.

 

•

Proposal 2: To consider and vote upon a proposal to permit Lamar Advertising’s board of directors to adjourn the special meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the special meeting to approve the foregoing proposal.

 

Q.	What are we planning to do?

 

A.

The board of directors has unanimously approved a plan to restructure our business operations to allow Lamar Advertising to be taxed as a REIT. We refer to this plan, including the related restructuring transactions, as the REIT conversion. The board of directors has determined that the REIT conversion would be in the best interests of Lamar Advertising and its stockholders. The REIT conversion includes the following key elements:

 

•

a restructuring of our business operations to facilitate the election to be taxed as a REIT which was completed during the course of 2013 and the early part of 2014;

 

•

the distribution of our earnings and profits, accumulated through 2013, which distribution is expected to be made as part of the payment of regular quarterly distributions in 2014 rather than through the payment of a one-time special distribution;

 

•

the payment of regular quarterly distributions to holders of our common stock, the amount of which will be determined, and is subject to adjustment, by the board of directors and the declaration of which commenced in the second quarter of 2014; and

 

•

the consummation of the merger of Lamar Advertising with and into Lamar REIT in order to effectively adopt the amended and restated certificate of incorporation of Lamar REIT that will contain provisions intended to facilitate our compliance with certain REIT rules relating to share ownership.

As announced on April 23, 2014, we received a private letter ruling from the U.S. Internal Revenue Service, or the IRS, regarding certain matters relevant to our qualification as a REIT.

 

1

---

Table of Contents

Q.	What is a REIT?

 

A.

A REIT is a company that qualifies for special treatment for U.S. federal income tax purposes because, among other things, it derives most of its income from real estate-based sources and makes a special election under the Internal Revenue Code of 1986, as amended, or the Code. We intend to operate as a REIT that principally invests in, and derives most of its income from the rental of advertising space on outdoor advertising displays, or billboards, and logo signs owned and maintained by us.

A corporation that qualifies as a REIT generally is not subject to U.S. federal income taxes on its income and gains that it distributes to its stockholders, reducing its corporate level income taxes and substantially eliminating the “double taxation” of corporate income.

Even if we qualify as a REIT, we will be required to pay U.S. federal income tax on earnings from all or a portion of our non-REIT assets and operations, which consist primarily of design, production, and installation of advertising copy, which we refer to as our advertising services business, and the provision of transit advertising displays on bus shelters, benches and buses, which we refer to as our transit advertising business. In addition, our assets and operations in Canada and Puerto Rico will continue to be subject to taxation in the jurisdictions where those assets are held or those operations are conducted. We also may be subject to U.S. federal income and excise taxes in certain circumstances, as well as U.S. state and local and non-U.S. income, franchise, property and other taxes.

Please see the section entitled “Material United States Federal Income Tax Considerations — Taxation of Lamar REIT as a REIT” beginning on page 114 for a more detailed description of the requirements for qualification as a REIT and the rules applicable to taxation of REITs and their stockholders.

 

Q.	What will happen in the REIT conversion?

 

A.	The REIT conversion involves the following key elements:

Merger. Lamar Advertising will merge with and into Lamar REIT, a newly formed, wholly owned subsidiary of Lamar Advertising, and Lamar REIT will be the surviving entity in the merger and will continue the business and assume the obligations of Lamar Advertising. We refer to this transaction in this proxy statement/prospectus as the merger. The merger will facilitate our compliance with REIT tax rules by ensuring the effective adoption by Lamar REIT of a certificate of incorporation that implements share ownership and transfer restrictions that are intended to facilitate compliance with certain REIT rules related to share ownership.

As a consequence of the merger:

 

•

there will be no change in the assets we hold or in the businesses we conduct;

 

•

there will be no fundamental change to our current capital allocation strategy or current operational strategy;

 

•

the existing board of directors and executive management of Lamar Advertising immediately prior to the merger will be the board of directors and executive management, respectively, of Lamar REIT immediately following the merger;

 

•

the outstanding shares of capital stock of Lamar Advertising will be converted into the right to receive the same number and class of shares of capital stock of Lamar REIT;

 

•

effective at the time of the merger, Lamar REIT will be renamed “Lamar Advertising Company” and will become the publicly traded, NASDAQ Global Select Market, or NASDAQ, listed company that will continue to operate, directly or indirectly, all of our existing business; and

 

•

the rights of the stockholders of Lamar REIT will be governed by the amended and restated certificate of incorporation and amended and restated bylaws of Lamar REIT. The amended and restated certificate of Lamar REIT is substantially similar to Lamar Advertising’s restated certificate of incorporation with the principal difference being that it provides for restrictions on ownership and

 

2

---

Table of Contents

transfer of Lamar REIT stock that are intended to facilitate compliance with certain REIT rules related to share ownership. The bylaws of Lamar REIT are substantially similar to Lamar Advertising’s bylaws.

We have attached a copy of the merger agreement as Annex A, and a copy of the amended and restated certificate of incorporation and the amended and restated bylaws of Lamar REIT, as Annex B-1 and Annex B-2, respectively.

Other Restructuring Transactions. During the course of 2013 and the early part of 2014, we completed an internal corporate restructuring so that we would be in compliance with certain REIT qualification requirements for the 2014 taxable year. Following this restructuring, we now hold and operate certain of our assets that cannot be held and operated directly by a REIT through taxable REIT subsidiaries, or TRSs. A TRS is a subsidiary of a REIT that pays corporate taxes on its taxable income. The assets held in our TRSs primarily consist of our transit advertising business, advertising services business and our foreign operations in Canada and Puerto Rico.

Our TRS assets and operations will continue to be subject, as applicable, to U.S. federal and state corporate income taxes. Furthermore, our assets and operations outside the United States will continue to be subject to foreign taxes in the jurisdictions in which those assets and operations are located. Net income from our TRSs will either be retained by our TRSs and used to fund their operations, or distributed to us, where it will be reinvested by us in our business or be available for distribution to our stockholders.

Please see the section entitled “Material United States Federal Income Tax Considerations — Taxation of Lamar REIT as a REIT — Taxable REIT Subsidiaries” beginning on page 118 for a more detailed description of the requirements and limitations regarding the potential use of TRSs.

 

Q.	What are our reasons for the REIT conversion and the merger?

 

A.	We are proposing the REIT conversion and the merger primarily for the following reasons:

 

•

To increase stockholder value. As a REIT, we believe we will be able to increase the value of Lamar REIT common stock by reducing corporate level taxes on most of our domestic income, primarily the income we receive from leasing advertising space on our billboards and logo signs, which in turn may increase the amount of future distributions to our stockholders;

 

•

To establish regular distributions to stockholders. We believe our stockholders will benefit from our establishment of regular cash distributions, resulting in a yield-oriented stock;

 

•

To expand our base of potential stockholders. By becoming a company that makes regular distributions to its stockholders, our stockholder base may expand to include investors attracted by yield, which may improve the liquidity of Lamar REIT common stock and provide a broader stockholder base; and

 

•

To comply with REIT qualification rules. The merger will facilitate our compliance with certain REIT rules by merging Lamar Advertising with and into Lamar REIT, the latter of which will adopt an amended and restated certificate of incorporation which implements share ownership and transfer restrictions necessary to facilitate our compliance with the REIT rules related to share ownership.

To review the background of, and the reasons for, the REIT conversion and the merger in greater detail, and the related risks associated with the reorganization, see the sections entitled “Background of the REIT Conversion and the Merger” beginning on page 41, “Reasons for the Merger and REIT Conversion” beginning on page 44 and “Risk Factors” beginning on page 24.

 

3

---

Table of Contents

Q.	What will holders of Lamar Advertising common stock receive in connection with the completion of the merger? When will holders of Lamar Advertising common stock receive it?

 

A.

Lamar Advertising has two classes of common stock: Class A Common Stock, $0.001 par value per share, which we refer to as Class A common stock, and Class B Common Stock, $0.001 par value per share, which we refer to as Class B common stock. We refer to the Class A common stock and the Class B common stock collectively as our common stock.

At the time of completion of the merger:

 

•

each holder of Class A common stock will have the right to receive a number of shares of Lamar REIT Class A common stock equal to, and in exchange for, the number of shares of Class A common stock that the holder then owns;

 

•

each holder of Class B common stock will have the right to receive a number of shares of Lamar REIT Class B common stock equal to, and in exchange for, the number of shares of Class B common stock that the holder then owns; and

 

•

each holder of Class A common stock and each holder of Class B common stock will hold the same percentage ownership in Lamar REIT as each such holder previously held in Lamar Advertising.

As of October 3, 2014, we had 80,828,878 shares of Class A common stock outstanding and 14,610,365 shares of Class B common stock outstanding.

 

Q.	Will the voting rights of the common stock remain the same following completion of the merger?

 

A.

Yes, the respective voting rights of the Class A common stock and the Class B common stock will be unchanged following completion of the merger. The respective powers, preferences, rights, qualifications, limitations and restrictions relating to the Lamar REIT Class A common stock and the Lamar REIT Class B common stock received in the merger will be identical to the respective powers, preferences, rights, qualifications, limitations and restrictions relating to the Class A common stock and the Class B common stock immediately prior to the merger. Therefore, holders of Class A common stock will be entitled to one (1) vote for each share of Lamar REIT Class A common stock held and holders of Class B common stock will be entitled to ten (10) votes for each share of Lamar REIT Class B common stock held.

 

Q.	What will holders of Lamar Advertising preferred stock receive in connection with the completion of the merger? When will holders of Lamar Advertising preferred stock receive it?

 

A.	Lamar Advertising has one class of preferred stock issued and outstanding: Series AA Preferred Stock, $0.001 par value per share, which we refer to as Series AA preferred stock.

At the time of completion of the merger:

 

•

each holder of Series AA preferred stock will have the right to receive a number of shares of Lamar REIT Series AA preferred stock equal to, and in exchange for, the number of shares of Series AA preferred stock that the holder then owns; and

 

•

each holder of Series AA preferred stock will hold the same percentage ownership in Lamar REIT as each such holder previously held in Lamar Advertising.

The powers, preferences, rights, qualifications, limitations and restrictions relating to the Lamar REIT Series AA preferred stock received in the merger will be identical to the powers, preferences, rights, qualifications, limitations and restrictions relating to the Series AA preferred stock immediately prior to the merger.

As of October 3, 2014, Lamar Advertising had 5,719.49 shares of Series AA preferred stock outstanding, which were held by 3 holders of record. The aggregate outstanding preferred stock represents less than 0.01% of the outstanding capital stock of Lamar Advertising.

 

4

---

Table of Contents

Q.	What distributions will you receive?

 

A.

As a REIT, we will be required to distribute annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gain). Our REIT taxable income generally does not include income earned by our TRSs except to the extent the TRSs pay dividends to the REIT. We estimate that we had approximately $328 million in federal net operating loss carry forwards, or NOLs, as of January 1, 2014. To the extent we use these NOLs to offset our REIT taxable income, the required distributions to stockholders would be reduced. However, in this case, we may be subject to the alternative minimum tax.

On June 30, 2014 the Company paid a cash dividend to its common stockholders of approximately $79.0 million or $0.83 per share of common stock, in anticipation of commencing to operate as a REIT effective January 1, 2014. On August 26, 2014, the board of directors of Lamar Advertising declared a cash dividend of $0.83 per share of common stock, payable on September 30, 2014 to holders of record of Lamar Advertising Class A common stock and Class B common stock on September 22, 2014. We expect to continue to declare regular quarterly distributions to holders of Lamar REIT common stock on an ongoing basis, the amount of which will be determined, and is subject to adjustment, by the board of directors. Any such dividends will be paid on all shares of common stock outstanding at the time of such payment. The actual timing and amount of the distributions will be as determined and declared by the board of directors and will depend on, among other factors, our financial condition, earnings, debt covenants and other possible uses of such funds. See the section entitled “Dividend and Distribution Policy” beginning on page 53.

If you did not hold shares of common stock on September 22, 2014 or dispose of your shares of common stock before the record date for any subsequent quarterly distribution, you will not receive the second quarterly distribution or any other regular quarterly distribution. As discussed below, we do not expect to pay a one-time special distribution of our non-REIT accumulated earnings and profits.

 

Q.	When will we distribute our non-REIT accumulated E&P?

A REIT is not permitted to retain earnings and profits accumulated during years when the company or its predecessor was taxed as a regular “C” corporation. For Lamar REIT to elect REIT status for the taxable year that began on January 1, 2014, we must distribute to our stockholders on or before December 31, 2014 our previously undistributed accumulated earnings and profits attributable to the taxable periods ending prior to January 1, 2014, which we refer to as our non-REIT accumulated earnings and profits, or E&P. We currently estimate that the aggregate amount of the distribution of non-REIT accumulated E&P will be approximately $40 million, and we expect to pay it solely with cash. We expect that the amounts declared and paid in connection with regular quarterly distributions, which commenced in the second quarter of 2014, will be in an amount sufficient to enable us to distribute our non-REIT accumulated E&P no later than December 31, 2014. As a result, we do not expect to pay a one-time special distribution of non-REIT accumulated E&P.

Following completion of the merger and REIT conversion, holders of Lamar REIT Series AA preferred stock will continue to be entitled to preferential dividends in an annual aggregate amount of $364,904 before any dividends may be paid on Lamar REIT common stock.

If you dispose of your shares of common stock before the record date for any of the regular quarterly distributions in 2014, you will not receive any of the regular quarterly distributions, a portion of which will include a distribution of our non-REIT accumulated E&P.

 

Q.	Will the REIT conversion change our current operational strategy?

 

A.	We do not anticipate that the REIT conversion will change our current operational strategy. We expect to continue focusing on the following objectives:

 

•

Continuing to provide high quality national, regional and local rentals and services;

 

5

---

Table of Contents

•

Continuing a centralized control and decentralized management structure;

 

•

Continuing to focus on internal growth, including improving pricing and occupancy statistics;

 

•

Continuing to pursue other outdoor advertising opportunities; and

 

•

Continuing to invest in profitable digital billboards.

 

Q.	Who will be the board of directors and management after the merger and REIT conversion is completed?

 

A.	The board of directors and executive management of Lamar Advertising immediately prior to the merger will be the board of directors and executive management, respectively, of Lamar REIT.

 

Q.	Do any of our directors and executive officers have any interests in the REIT conversion or the merger that are different from mine?

 

A.

No. Our directors and executive officers and their affiliates have equity interests in Lamar Advertising through the ownership of shares of Class A common stock, Class B common stock and Series AA preferred stock and/or options to purchase shares of Class A common stock and, to that extent, their interest in the REIT conversion and the merger is the same as that of the other holders of shares of Class A common stock, Class B common stock and Series AA preferred stock and options to purchase shares of Class A common stock. Our non-employee directors also hold Class A common stock subject to restrictions. We do not anticipate that the REIT conversion or the merger will cause any vesting or acceleration of benefits.

 

Q.	When and where is the special meeting?

 

A.	The special meeting will be held on November 17, 2014 at 9:00 a.m., local time, at the offices of Lamar Advertising Company, 5321 Corporate Boulevard, Baton Rouge, Louisiana 70808.

 

Q.	What will I be voting on at the special meeting?

 

A.

As a stockholder, you are entitled to, and requested to, vote on the proposal to adopt the merger agreement pursuant to which Lamar Advertising will be merged with and into Lamar REIT, a wholly owned subsidiary of Lamar Advertising, with Lamar REIT as the surviving entity. In addition, you are requested to vote on the proposal to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal regarding the adoption of the merger agreement. You are not being asked to vote on any other element of the REIT conversion.

 

Q.	Who can vote on the merger?

 

A.

If you are a stockholder of record at the close of business on October 3, 2014, which we refer to as the record date, you may vote the Class A common stock, Class B common stock and Series AA preferred stock that you hold on the record date at the special meeting. On or about October 17, 2014, we will begin mailing this proxy statement/prospectus to persons entitled to vote at the special meeting.

 

Q.	Why is my vote important?

 

A.

If you do not submit a proxy or vote in person at the meeting, it will be more difficult for us to obtain the necessary quorum to hold the special meeting. In addition, your failure to submit a proxy or to vote in person will have the same effect as a vote against the adoption of the merger agreement. If you hold your shares through a broker, bank, or other nominee, your broker, bank, or other nominee will not be able to cast a vote on the adoption of the merger agreement without instructions from you.

 

Q.	What constitutes a quorum for the special meeting?

 

A.	The presence at the special meeting, in person or by proxy, of the holders of one-third of the shares of Class A common stock, Class B common stock, and Series AA preferred stock issued and outstanding on

 

6

---

Table of Contents

the record date constitutes a quorum for the meeting. There must be a quorum for business to be conducted at the special meeting. Failure of a quorum to be represented at the special meeting will necessitate an adjournment or postponement and will subject us to additional expense. For the purposes of determining the presence of a quorum, abstentions will be included in determining the number of shares present and entitled to vote at the special meeting; however, because brokers, banks or other nominees are not entitled to vote on the proposal to adopt the merger agreement absent specific instructions from the beneficial owner (as more fully described below), shares held by brokers, banks, or other nominees for which instructions have not been provided will not be included in the number of shares present and entitled to vote at the special meeting for the purposes of establishing a quorum.

 

Q.	What vote is required?

 

A.

The affirmative vote of the holders of a majority of the votes represented by the outstanding shares of Class A common stock, Class B common stock and Series AA preferred stock, voting together as a single class, is required for the adoption of the merger agreement. The affirmative vote of a majority of the votes represented by the shares of Class A common stock, Class B common stock and Series AA preferred stock, voting together as a single class, that are present or represented by proxy at the special meeting is required to approve the adjournment proposal. Each share of outstanding Class A common stock and Series AA preferred stock is entitled to one vote, and each share of outstanding Class B common stock is entitled to ten votes, on each proposal submitted for consideration. As of the close of business on the record date, there were 80,828,878 shares of Class A common stock, 14,610,365 shares of Class B common stock and 5,719.49 shares of Series AA preferred stock, outstanding and entitled to vote at the special meeting.

 

Q.	Have any stockholders already agreed to approve the merger?

 

A.

No. There are no agreements between us and any stockholder in which a stockholder has agreed to vote in favor of adoption of the merger agreement. We expect, however, that members of the Reilly family, including Kevin P. Reilly, Jr., the Company’s Chairman and President, and Sean E. Reilly, the Company’s Chief Executive Officer, and their affiliates will vote the shares that they beneficially own in favor of adoption of the merger agreement. As of October 3, 2014, they owned in the aggregate approximately 16% of the Company’s outstanding common stock, assuming the conversion of all Class B common stock to Class A common stock. As of that date, their combined holdings represented 65% of the voting power of Lamar Advertising’s outstanding capital stock.

 

Q.	How does the board of directors recommend I vote on the proposals?

 

A.	The board of directors of Lamar Advertising believes that the REIT conversion, including the merger, is advisable and in the best interests of the Company and its stockholders. The board of directors of Lamar Advertising recommends that you vote “FOR” both proposals:

 

•

Proposal 1: To consider and vote upon a proposal to adopt the Agreement and Plan of Merger dated August 27, 2014 between Lamar Advertising Company and Lamar Advertising REIT Company, a newly formed wholly owned subsidiary of Lamar Advertising, which is part of the reorganization through which Lamar Advertising intends to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes.

 

•

Proposal 2: To consider and vote upon a proposal to permit Lamar Advertising’s board of directors to adjourn the special meeting, if necessary, for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the special meeting to approve the foregoing proposal.

 

Q.	When is the merger expected to be completed and the REIT election expected to be made?

 

A.

We expect to complete the merger following the special meeting of stockholders, receipt of stockholder approval of the adoption of the merger agreement and the satisfaction or waiver of the other conditions to the merger. We expect to convert to REIT status effective January 1, 2014. However, we reserve the right to

 

7

---

Table of Contents

cancel or defer the merger or the REIT conversion even if stockholders of Lamar Advertising vote to adopt the merger agreement and other conditions to the completion of the merger are satisfied or waived, if the board of directors determines that the merger or the REIT conversion is no longer in the best interests of Lamar Advertising and its stockholders. Additionally, even if the merger is effected, the board of directors of Lamar Advertising may decide not to elect REIT status, or to delay such election, if it determines in its sole discretion that it is not in the best interests of Lamar Advertising and its stockholders. See the section entitled “Terms of the Merger” beginning on page 45 for a more detailed description of the merger.

 

Q.	Are there risks associated with the REIT conversion and the merger that I should consider in deciding how to vote?

 

A.	Yes. There are a number of risks relating to the REIT conversion and the merger, including the following:

 

•

If we fail to qualify as a REIT or fail to remain qualified as a REIT, we would be taxed as a regular “C” corporation and may owe substantial amounts of U.S. federal and state income taxes, interest and penalties, and may have reduced funds available for distribution to our stockholders;

 

•

There is no assurance that our cash flows from operations will be sufficient for us to fund required distributions;

 

•

Compliance with REIT requirements may hinder our ability to make certain attractive investments and to that extent limit our opportunities;

 

•

There will be restrictions on ownership of Lamar REIT common stock; and

 

•

Our current management has no experience operating a REIT and we cannot assure you that our management will be able to manage successfully our business as a REIT.

To review the risks associated with the REIT conversion and the merger, see the sections entitled “Reasons for the Merger and REIT Conversion” beginning on page 44 and “Risk Factors” beginning on page 24.

 

Q.	Will REIT qualification requirements restrict any of our business activities or limit our financial flexibility?

 

A.

As summarized in the section entitled “Material United States Federal Income Tax Considerations” beginning on page 112, to qualify as a REIT, we must continually satisfy various qualification tests imposed under the Code, concerning, among other things, the sources of our income, the nature and diversification of our assets, the diversity of our share ownership and the amounts we distribute to our stockholders. In particular, the REIT qualification requirements could restrict our business activities and financial flexibility because:

 

•

we may be required to liquidate or otherwise forego attractive investments to satisfy the asset and income tests or to qualify under certain statutory relief provisions; and

 

•

to meet annual distribution requirements, we may be required to distribute amounts that may otherwise be used for our operations, including amounts that may otherwise be invested in future acquisitions, capital expenditures or repayment of debt and it is possible that we might be required to borrow funds, sell assets or raise equity to fund these distributions, even if the then-prevailing market conditions are not favorable for these borrowings, sales or offerings.

To review in greater detail the risks associated with our status as a REIT, see the section entitled “Risk Factors — Risks Related to the REIT Conversion and REIT Qualification” beginning on page 24.

In reaching its determination regarding a possible REIT conversion, the board of directors considered these REIT qualification requirements and other potential disadvantages regarding a potential REIT conversion, which are more fully described in the sections entitled “Background of the REIT Conversion and the Merger” beginning on page 41 and “Reasons for the Merger and REIT Conversion” beginning on page 44.

 

8

---

Table of Contents

Q.	Will I have to pay U.S. federal income taxes as a result of the REIT conversion?

 

A.

You will not recognize gain or loss for U.S. federal income tax purposes as a result of the exchange of your shares of common stock and Series AA preferred stock of Lamar Advertising for shares of common stock and Series AA preferred stock of Lamar REIT in the merger. However, if you are a non-United States person who owns or has owned more than 5% of the outstanding common stock of Lamar Advertising, it may be necessary for you to comply with reporting and other requirements of the Treasury regulations in order to achieve nonrecognition of gain on the exchange of your Lamar Advertising common stock for Lamar REIT common stock in the merger.

The distribution of non-REIT accumulated E&P will result in the recognition of ordinary dividend income by you, which may qualify as qualified dividend income that is potentially eligible for reduced maximum rates of taxation depending on your circumstances. However, other ordinary dividends paid by Lamar REIT generally will not be treated as qualified dividend income.

The U.S. federal income tax treatment of holders of Lamar Advertising common stock and Lamar REIT common stock depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax laws for which no clear precedent or authority may be available. In addition, the tax consequences of holding Lamar Advertising common stock or Lamar REIT common stock to any particular stockholder will depend on that stockholder’s particular tax circumstances. We urge you to consult your tax advisor, particularly if you are a non-United States person, regarding the specific tax consequences, including the U.S. federal, state and local tax consequences and foreign tax consequences to you in light of your particular investment in, or the tax circumstances of acquiring, holding, exchanging, selling or otherwise disposing of, Lamar Advertising common stock or Lamar REIT common stock.

 

Q.	Am I entitled to dissenters’ rights as a holder of Lamar Advertising Class A common stock?

 

A.	No. Under Delaware law, you are not entitled to any dissenters’ rights of appraisal in connection with the REIT conversion or the merger.

 

Q.	Am I entitled to dissenters’ rights as a holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock?

 

A:

Yes. If you wish to exercise dissenters’ rights and receive the fair value of your Lamar Advertising Class B common stock or your Lamar Advertising Series AA preferred stock in cash as determined in a judicial proceeding instead of the merger consideration described in this proxy statement/prospectus, your shares must not be voted for approval of the merger proposal, and you must follow other procedures in accordance with applicable Delaware law. If you return a signed proxy without voting instructions, your proxy will be voted as recommended by the board of directors of Lamar Advertising and you may lose dissenters’ rights. If you return a signed proxy with instructions to vote “FOR” the merger agreement, your shares will be voted in favor of the merger agreement and you will lose dissenters’ rights. Thus, if you wish to dissent and you execute and return a proxy, you must specify that your shares are to be either voted “AGAINST” or “ABSTAIN” with respect to approval of the merger. For additional information on exercising dissenters’ rights, see “Terms of the Merger — Dissenters’ Rights for Holders of Lamar Advertising Class B common stock and Lamar Advertising Series AA preferred stock” included elsewhere in this proxy statement/prospectus.

 

Q.	How do I vote without attending the special meeting?

 

A.	You may vote by completing, signing and promptly returning the proxy card in the self-addressed stamped envelope provided. If you are a holder of Class A common stock, as described in your proxy card.

 

9

---

Table of Contents

Q.	Can I attend the special meeting and vote my shares in person?

 

A.

Yes. All stockholders are invited to attend the special meeting. Stockholders of record at the close of business on the record date are invited to attend and vote at the special meeting. If your shares are held by a broker, bank or other nominee, then you are not the stockholder of record. Therefore, to vote at the special meeting, you must bring the appropriate documentation from your broker, bank or other nominee confirming your beneficial ownership of the shares.

 

Q.	If my shares are held in “street name” by my broker, bank or other nominee, will my broker, bank or other nominee vote my shares for me?

 

A.

No. If your shares are held in “street name” by your broker, bank or other nominee, you should follow the directions provided by your broker, bank or other nominee. Your broker, bank or other nominee will vote your shares only if you provide instructions on how you would like your shares to be voted.

 

Q.	What do I need to do now?

 

A.	You should carefully read and consider the information contained in this proxy statement/prospectus including its annexes. It contains important information about what the board of directors of Lamar Advertising considered in evaluating and approving the REIT conversion and the merger agreement.

You should then complete and sign your proxy card and return it in the enclosed envelope as soon as possible so that your shares will be represented at the special meeting. If your shares are held through a broker, bank or other nominee, you should receive a separate voting instruction form with this proxy statement/prospectus.

 

Q.	Can I change my vote after I have mailed my signed proxy card?

 

A.

Yes. You can change your vote at any time before your proxy is voted at the special meeting. To revoke your proxy, you must either (1) notify the secretary of Lamar Advertising in writing, (2) mail a new proxy card dated after the date of the proxy you wish to revoke, or (3) attend the special meeting and vote your shares in person. Merely attending the special meeting will not constitute revocation of your proxy. If your shares are held through a broker, bank, or other nominee, you should contact your broker, bank or other nominee to change your vote.

 

Q.	Should I send in my stock certificates now?

 

A.

No. If the merger is completed, your shares of Lamar Advertising common stock or Series AA preferred stock (whether certificated or uncertificated) will be converted into the right to receive the same number and class of shares of Lamar REIT common stock or Series AA preferred stock. Initially, the shares of Lamar REIT common stock and Lamar REIT Series AA preferred stock will not be represented by certificates, but rather will exist as entries on the record books of Lamar REIT’s transfer agents.

If you hold certificated shares of Lamar Advertising Class A common stock, as soon as practicable following completion of the merger, an exchange agent, appointed by Lamar REIT, will send you a letter of transmittal explaining how to exchange your certificates, which represented shares of Lamar Advertising common stock, for certificates representing shares of Lamar REIT common stock.

If you hold uncertificated shares of Lamar Advertising Class A common stock, your shares will automatically be converted into uncertificated shares of Lamar REIT common stock. In addition, within a reasonable time following the issuance or transfer of shares of Lamar REIT common stock, Lamar REIT will send to each record holder of uncertificated shares a written notice containing the information set forth in the applicable legend affixed to certificated shares of Lamar REIT Class A common stock in accordance with Delaware law.

If you hold shares of Lamar Advertising Class B common stock or Series AA preferred stock, as soon as practicable following completion of the merger, Lamar REIT will send you a letter of transmittal explaining

 

10

---

Table of Contents

how to exchange your certificates, which represented shares of Lamar Advertising Class B common stock or Series AA preferred stock, as applicable, for certificates representing shares of Lamar REIT Class B common stock or Series AA preferred stock.

 

Q.	Will the Class A common stock of Lamar REIT be publicly traded?

 

A.

Yes. We will apply to list the new shares of Lamar REIT Class A common stock on NASDAQ upon completion of the merger. We expect that the Lamar REIT Class A common stock will trade under our current symbol “LAMR.” We will not complete the merger unless and until the shares of Lamar REIT Class A common stock are approved for listing on NASDAQ. Upon completion of the merger, Lamar REIT Class B common stock and Lamar REIT Series AA preferred stock will not be publicly traded and will continue to be held by members of the Reilly Family, including Kevin P. Reilly, Jr., our Chairman and President, and Sean E. Reilly, our Chief Executive Officer, and their affiliates and other related parties. Each share of Lamar REIT Class B common stock will be convertible at the option of its holder into one share of Lamar REIT Class A common stock at any time.

 

Q.	Will a proxy solicitor be used?

 

A.

Yes. We have engaged Alliance Advisors, LLC to assist in the solicitation of proxies for the meeting and estimate we will pay Alliance Advisors, LLC a fee of approximately $3,000. We have also agreed to reimburse Alliance Advisors, LLC for reasonable out-of-pocket expenses and disbursements incurred in connection with the proxy solicitation and to indemnify Alliance Advisors, LLC against certain losses, costs and expenses. In addition, our directors, officers and employees may request the return of proxies by telephone or in person, but no additional compensation will be paid to them.

 

Q.	Whom should I call with questions?

 

A.

You should call Alliance Advisors, LLC, our proxy solicitor, toll-free at (877) 777-5603 with any questions about the REIT conversion or merger, or to obtain additional copies of this proxy statement/prospectus or additional proxy cards. You also may also call Buster Kantrow, Director of Investor Relations, at (225) 926-1000.

 

11

---

Table of Contents

STRUCTURE OF THE TRANSACTION

In order to help you better understand the merger and how it will affect Lamar Advertising, Lamar REIT and the subsidiaries of Lamar Advertising, the charts below illustrates, in simplified form, the following:

 

•

Before the Merger: the organizational structure of Lamar Advertising, Lamar Media Corp. and Lamar REIT before the merger;

 

•

Merger: the steps involved in, and the effects of, the merger of Lamar Advertising with and into Lamar REIT and the exchange of shares of Lamar Advertising Class A common stock, Class B common stock and Series AA preferred stock for shares of Lamar REIT Class A common stock, Class B common stock and Series AA preferred stock; and

 

•

After the Merger: the organizational structure of Lamar REIT and its taxable REIT subsidiaries and other operating subsidiaries, immediately after the completion of the transactions.

 

 

12

---

Table of Contents

 

 

1.	Lamar Advertising merges with and into Lamar REIT. During the course of 2014, Lamar Advertising distributes its non-REIT accumulated E&P to its stockholders.

 

2.

Each outstanding share of Lamar Advertising Class A common stock will be converted into the right to receive the same number of shares of Lamar REIT Class A common stock, each outstanding share of Lamar Advertising Class B common stock will be converted into the right to receive the same number of shares of Lamar REIT Class B common stock and each outstanding share of Lamar Advertising Series AA preferred stock will be converted into the right to receive the same number of Lamar REIT Series AA preferred stock. At the time of completion of the merger, each stockholder will hold the same percentage ownership in Lamar REIT as each holder previously held in Lamar Advertising.

 

13

---

Table of Contents

 

 

14

---

Table of Contents

 

15

---

Table of Contents

 

16

---

Table of Contents

 

17

---

Table of Contents

 

18

---

Table of Contents

 

19

---

Table of Contents

 

20

---

Table of Contents

 

21

---

Table of Contents

 

22

---

Table of Contents

 

23

---

Table of Contents

RISK FACTORS

In addition to the other information in this proxy statement/prospectus, you should carefully consider the following risk factors relating to the proposed REIT conversion in determining whether or not to vote for adoption of the merger agreement. You should carefully consider the additional risks described in Lamar Advertising’s annual, quarterly and current reports, including those identified in Lamar Advertising’s Annual Report on Form 10-K for the year ended December 31, 2013, as updated by its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014. This section includes or refers to certain forward-looking statements. See the section entitled “Special Note Regarding Forward-Looking Statements” beginning on page 37 for the qualifications and limitations of these forward-looking statements.

Risks Related to the REIT Conversion and REIT Qualification

If we fail to qualify as a REIT or fail to remain qualified as a REIT, we would be subject to U.S. federal income tax as a regular “C” corporation and would not be able to deduct distributions to stockholders when computing our taxable income.

We intend to elect and qualify as a REIT for U.S. federal income tax purposes starting with our taxable year ending December 31, 2014. REIT qualification involves the application of highly technical and complex provisions of the Code to our assets and operations as well as various factual determinations concerning matters and circumstances not entirely within our control. There are limited judicial or administrative interpretations of these provisions. We believe that we have been and are organized and have operated and will operate, in a manner that will allow us to qualify as a REIT commencing with our taxable year ending December 31, 2014. However, we cannot assure you that we have been and are organized and have operated or will operate as such.

If, in any taxable year, we fail to qualify for taxation as a REIT, and are not entitled to relief under the Code:

 

•

we will not be allowed a deduction for distributions to stockholders in computing our taxable income;

 

•

we will be subject to U.S. federal and state income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates; and

 

•

we would be disqualified from electing REIT tax treatment for the four taxable years following the year during which we were so disqualified.

Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, may require us to borrow funds (under Lamar Media’s senior credit facility or otherwise) or liquidate some investments to pay any such additional tax liability, which in turn could have an adverse impact on the value of Lamar REIT common stock. This adverse impact could last for five or more years because, unless we are entitled to relief under certain statutory provisions, we will be taxable as a corporation, beginning in the year in which the failure occurs, and we will not be allowed to re-elect to be taxed as a REIT for the following four years.

While we expect our tax counsel to opine prior to the effectiveness of this registration statement that we are properly organized and operate as a REIT in accordance with applicable law commencing with our taxable year ending December 31, 2014, this opinion is not binding on the IRS or any court and does not guarantee our qualification as a REIT.

We expect our tax counsel, Goodwin Procter LLP, prior to the effectiveness of this registration statement, to provide an opinion that (i) commencing with our taxable year ending December 31, 2014 we have been organized in conformity with the requirements for qualification as a REIT and (ii) our prior and proposed organization, ownership and method of operation as represented by management have enabled and will enable us to satisfy the requirements for qualification and taxation as a REIT commencing with our taxable year ending December 31, 2014. Investors should be aware, however, that opinions of counsel are not binding on the IRS or any court, and either could take a position different from that expressed by counsel. Any opinion of Goodwin

 

24

---

Table of Contents

Procter LLP will represent only their view based on a review and analysis of existing law and will be conditioned upon the timely closing of the merger, the assumption that the Lamar REIT charter, the Lamar REIT bylaws, our contracts and all other applicable legal documents have been and will be complied with by all parties to those documents, upon the accuracy and completeness of the factual matters described in this proxy statement/prospectus, upon a ruling received by us from the IRS as to certain federal income tax matters, and upon representations made by us as to certain factual matters relating to our organization, operations and expected manner of operation during the relevant periods. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given by Goodwin Procter LLP or us that we will so qualify for any particular year. Any opinion of Goodwin Procter LLP as to our qualification and taxation as a REIT will be expressed as of the date issued. Goodwin Procter LLP will have no obligation to advise us or our stockholders of any subsequent change in the matters stated, represented, or assumed, or of any subsequent change in the applicable law.

Furthermore, both the validity of any opinion of Goodwin Procter LLP and our qualification and taxation as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Our compliance with the REIT income and quarterly asset requirements will depend upon our ability to successfully manage the composition of our income and assets on an ongoing basis. While we believe that we will satisfy these tests, Goodwin Procter LLP will not review compliance with these tests on a continuing basis.

Even if we qualify as a REIT, certain of our business activities will be subject to U.S. and foreign taxes on our income and assets, which will continue to reduce our cash flows, and we will have potential deferred and contingent tax liabilities.

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes and foreign taxes on our income and assets, including alternative minimum taxes, taxes on any undistributed income, and state, local or foreign income, franchise, property and transfer taxes. In addition, we could in certain circumstances be required to pay an excise or penalty tax, which could be significant in amount, in order to utilize one or more relief provisions under the Code to maintain qualification for taxation as a REIT.

In order to qualify as a REIT, we plan to hold certain of our non-qualifying REIT assets and to receive certain non-qualifying items of income through one or more TRSs. These non-qualifying REIT assets consist principally of our advertising services business and our transit advertising business. Those TRS assets and operations would continue to be subject, as applicable, to U.S. federal and state corporate income taxes. Furthermore, our assets and operations outside the United States will continue to be subject to foreign taxes in the jurisdictions in which those assets and operations are located. In addition, we may incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm’s-length basis. Any of these taxes would decrease our earnings and our cash available for distributions to stockholders.

We will also be subject to a U.S. federal income tax at the highest regular corporate rate (currently 35%) on all or a portion of the gain recognized from a sale of assets occurring within a specified period (generally, ten years) after the effective date of our REIT conversion, to the extent of the built-in gain based on the fair market value of those assets held by us on the effective date of REIT conversion in excess of our then tax basis in those assets. If we elect REIT status for the taxable year ending December 31, 2014, then the tax on subsequently sold assets will be based on the fair market value and built-in gains of those assets as of January 1, 2014. The same rules would apply to any assets we acquire from a “C” corporation in a carry-over basis transaction with built-in gain at the time of the acquisition by us. Gain from a sale of an asset occurring after the specified period ends will not be subject to this corporate level tax. We currently do not expect to sell any asset if the sale would result in the imposition of a material tax liability. We cannot, however, assure you that we will not change our plans in this regard.

 

25

---

Table of Contents

In addition, the IRS and any state or local tax authority may successfully assert liabilities against us for corporate income taxes for taxable years of Lamar Advertising prior to the effective time of the REIT election, in which case we will owe these taxes plus applicable interest and penalties, if any. Moreover, any increase in taxable income for these pre-REIT periods will likely result in an increase in non-REIT accumulated E&P, which could either increase the taxable portion of the distributions to our stockholders made in 2014 or cause us to pay an additional taxable distribution to our stockholders after the relevant determination.

Failure to make sufficient distributions would jeopardize our qualification as a REIT and/or would subject us to U.S. federal income and excise taxes.

A REIT is required to distribute to its stockholders with respect to each taxable year at least 90% of its taxable income (computed without regard to the dividends paid deduction and our net capital gain and net of any available NOLs) in order to qualify as a REIT, and 100% of its taxable income (computed without regard to the dividends paid deduction and our net capital gain and net of any available NOLs) in order to avoid U.S. federal income and excise taxes. For these purposes, our non-TRS subsidiaries will be treated as part of the REIT and therefore we also will be required to distribute out their taxable income. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders for a calendar year is less than a minimum amount specified under the Code.

Generally, we expect to distribute all or substantially all of our REIT taxable income. However, we may determine to utilize our existing NOLs to reduce all or a portion of our taxable income in lieu of making corresponding distributions to our stockholders. If our cash available for distribution falls short of our estimates, we may be unable to maintain the proposed quarterly distributions that approximate our taxable income and, as a result, may be subject to U.S. federal income tax on the shortfall in distributions or may fail to qualify for taxation as a REIT. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of nondeductible expenditures, such as capital expenditures, payments of compensation for which Section 162(m) of the Code denies a deduction, the creation of reserves or required debt service or amortization payments. Because the REIT distribution requirements will prevent the Company from retaining earnings, it may be required to refinance debt at maturity with additional debt or equity, which may not be available on acceptable terms, or at all.

Covenants specified in our existing senior credit facility and any future credit facilities and our debt instruments may limit our ability to make required REIT distributions.

Although Lamar Media’s senior credit facility generally permits Lamar Media to conduct its affairs in a manner that would allow us to qualify and remain qualified as a REIT — including by allowing Lamar Media to make distributions to us as necessary for us to qualify and remain qualified for taxation as a REIT, subject to certain restrictions — Lamar Media’s senior credit facility and the indentures relating to Lamar Media’s outstanding notes contain certain covenants that could nevertheless limit our ability to make distributions to our stockholders. Under the senior credit facility, Lamar Media would not be permitted to make distributions to us in order to satisfy our REIT distribution requirements, or make additional distributions up to 100% of our REIT taxable income, if Lamar Media was in default due to the failure to make a required payment (subject to a cure period in the case of payments of interest, reimbursement obligations in respect of letters of credit and fees) or in the event of a voluntary or involuntary bankruptcy proceeding. Under the indentures governing its outstanding senior subordinated notes and senior notes, Lamar Media may make distributions to us to satisfy our REIT distribution requirements and additional amounts intended to distribute up to 100% of our REIT taxable income, so long as Lamar Media is in compliance with certain restricted payment baskets and certain other conditions are met, including that no default or event of default exists or would result therefrom. As of June 30, 2014, Lamar Media is permitted to make up to approximately $2.2 billion in distributions pursuant to these baskets. In addition,

 

26

---

Table of Contents

under the indenture governing Lamar Media’s senior notes, Lamar Media is permitted to make distributions to us outside of such restricted payment baskets to the extent we believe in good faith that we qualify as a REIT and such distributions are necessary to maintain our status as a REIT, subject to the conditions that (i) no payment or bankruptcy event of default exists and the obligations in respect of the senior notes have not otherwise been accelerated and (ii) two consecutive distributions pursuant to this provision shall not be permitted during the continuance of any single event of default. If these limits prevent us from satisfying our REIT distribution requirements, we could fail to qualify for taxation as a REIT. If these limits do not jeopardize our qualification for taxation as a REIT but do nevertheless prevent us from distributing 100% of our REIT taxable income, we will be subject to federal corporate income tax, and potentially a nondeductible excise tax, on the retained amounts.

We may be required to borrow funds, sell assets, or raise equity to satisfy our REIT distribution requirements or maintain the asset tests.

In order to meet the REIT distribution requirements and maintain our qualification and taxation as a REIT, we may need to borrow funds, sell assets or raise equity, even if the then-prevailing market conditions are not favorable for these borrowings, sales or offerings. Any insufficiency of our cash flows to cover our REIT distribution requirements could adversely impact our ability to raise short- and long-term debt, to sell assets, or to offer equity securities in order to fund distributions required to maintain our qualification and taxation as a REIT and to avoid U.S. federal income and excise taxes. Furthermore, the REIT distribution requirements may increase the financing we need to fund capital expenditures, future growth and expansion initiatives. This would increase our total leverage.

In addition, if we fail to comply with certain asset tests described under “Material United States Federal Income Tax Considerations,” at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification. As a result, we may be required to liquidate otherwise attractive investments. These actions may reduce our income and amounts available for distribution to our stockholders.

Our cash distributions are not guaranteed and may fluctuate.

A REIT generally is required to distribute at least 90% of its REIT taxable income to its stockholders. We may have available NOLs that could reduce or substantially eliminate our REIT taxable income, and thus we may not be required to distribute material amounts of cash to qualify for taxation as a REIT. We expect that, for the foreseeable future, we may utilize available NOLs to reduce our REIT taxable income.

Upon completion of the merger, the board of directors of Lamar REIT, in its sole discretion, will determine on a quarterly basis the amount of cash to be distributed to our stockholders based on a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, future acquisitions and divestitures, any stock repurchase program, and general market demand for our advertising space available for lease. Consequently, our distribution levels may fluctuate.

There are uncertainties relating to our distribution of non-REIT accumulated E&P.

To qualify for taxation as a REIT, we will be required to distribute to our stockholders all of our non-REIT accumulated E&P, as measured for federal income tax purposes, prior to the end of our first taxable year as a REIT, which we expect will be the taxable period ending December 31, 2014. Failure to make the distribution of non-REIT accumulated E&P before December 31, 2014 could result in our disqualification for taxation as a REIT. While we estimate that we will declare and pay the non-REIT accumulated E&P distribution in connection with regular quarterly distributions beginning in the second quarter of 2014 and no later than December 31, 2014, the determination of the timing and amount to be distributed in the distributions of non-REIT accumulated E&P

 

27

---

Table of Contents

is a complex factual and legal determination. We may have less than complete information at the time we undertake our analysis or may interpret the applicable law differently from the IRS. We currently believe and intend that our combined distributions made during 2014 will satisfy the requirements relating to the distribution of our non-REIT accumulated E&P. There are, however, substantial uncertainties relating to the computation of our non-REIT accumulated E&P, including the possibility that the IRS could, in auditing tax years through 2013, successfully assert that our taxable income should be increased, which would increase our non-REIT accumulated E&P. Moreover, although there are procedures available to cure a failure to distribute all of our non-REIT accumulated E&P, we cannot now determine whether we will be able to take advantage of them or the economic impact to us of doing so. If it is subsequently determined that we had undistributed non-REIT accumulated E&P as of the end of our first taxable year as a REIT or at the end of any subsequent taxable year, and we are not able to cure the failure to have distributed such E&P, we would fail to qualify as a REIT.

We may not realize the anticipated tax benefits from the REIT conversion effective January 1, 2014 because the timing of the merger and the REIT conversion is not certain.

We will complete the merger after the special meeting of stockholders, receipt of stockholder approval of the adoption of the merger agreement and the satisfaction or waiver of the other conditions to the merger. We anticipate that the REIT conversion will be effective January 1, 2014. However, the completion of the merger and the effective date of the REIT conversion could be delayed. In that event, the benefits attributable to our qualification and taxation as a REIT, including our ability to reduce our corporate level federal income tax through distributions to stockholders, would not commence January 1, 2014, and we would pay corporate level income taxes on our taxable income, to the extent NOLs are not available to reduce our taxable income, until such time as we became a REIT. Additionally, the board of directors of Lamar Advertising may decide not to elect REIT status, or to delay such election, if it determines in its sole discretion that it is not in the best interests of Lamar Advertising or its stockholders.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of Lamar REIT common stock. Thus, compliance with these tests will require us to refrain from certain activities discussed in “Material United States Federal Income Tax Considerations” and may hinder our ability to make certain attractive investments, including investments in the businesses to be conducted by our TRSs, and to that extent limit our opportunities. Furthermore, acquisition opportunities in domestic and international markets may be adversely affected if we need or require the target company to comply with some REIT requirements prior to closing.

Ownership limitations contained in the Lamar REIT charter may restrict stockholders from acquiring or transferring certain amounts of shares.

In order for us to qualify as a REIT, no more than 50% of the value of the outstanding shares of our stock may be owned, directly or indirectly or through application of certain attribution rules by five or fewer “individuals” (as defined in the Code) at any time during the last half of a taxable year (other than the first taxable year for which an election to be a REIT has been made). To preserve our REIT qualification, the Lamar REIT charter generally prohibits any person or entity from owning actually and by virtue of the applicable constructive ownership provisions more than 5% of the outstanding shares of Lamar REIT common stock. These ownership limitations could restrict stockholders from acquiring or transferring certain amounts of shares of our stock. In connection with the REIT conversion, the board of directors will establish a separate share ownership limitation for certain members of the Reilly family and their affiliates that allows them to own actually and by virtue of the applicable constructive ownership provisions no more than 19% of the outstanding shares of Lamar REIT common stock and, during the second half of any taxable year other than our first taxable year as a REIT, no more than 33% in value of the aggregate of the outstanding shares of all classes and series of our stock, in each case excluding any shares of our stock that are not treated as outstanding for federal income tax purposes.

 

28

---

Table of Contents

Complying with REIT requirements may limit our ability to hedge effectively and increase the cost of our hedging, and may cause us to incur tax liabilities.

The REIT provisions of the Code limit our ability to hedge liabilities. Generally, income from hedging transactions that we enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets and income from certain currency hedging transactions related to our non-U.S. operations do not constitute “gross income” for purposes of the REIT gross income tests, provided certain requirements are satisfied. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of the REIT gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to tax on income or gains resulting from hedges entered into by them or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in any of our TRSs generally will not provide any tax benefit, except for being carried forward for use against future taxable income in the applicable TRS.

The current market price of Lamar Advertising Class A common stock may not be indicative of the market price of Lamar REIT Class A common stock following the REIT conversion and the distribution of non-REIT accumulated E&P.

Lamar Advertising’s current share price may not be indicative of how the market will value Lamar REIT Class A common stock following the REIT conversion because of the change in our organization from a taxable “C” corporation to a REIT and the change in our distribution policy. The Lamar Advertising Class A common stock price does not necessarily take into account these effects, and the stock price after the REIT conversion and the distribution of non-REIT accumulated E&P could be lower than the current price. Furthermore, one of the factors that may influence the price of Lamar REIT Class A common stock will be the yield from distributions on Lamar REIT Class A common stock compared to yields on other financial instruments. If, for example, an increase in market interest rates results in higher yields on other financial instruments, the market price of Lamar REIT Class A common stock could be adversely affected. The market price of the Lamar REIT Class A common stock will also be affected by general market conditions (as the price of the Lamar Advertising Class A common stock currently is) and will be potentially affected by the economic and market perception of REIT securities.

We have no experience operating as a REIT, which may adversely affect our financial condition, results of operations, cash flow, per share trading price of Lamar REIT common stock and ability to satisfy debt service obligations.

Lamar REIT was formed on May 16, 2014 and has no operating history as a REIT. In addition, our senior management team has no experience operating a REIT. We cannot assure you that our past experience will be sufficient to operate our company successfully as a REIT. Failure to maintain REIT status could adversely affect our financial condition, results of operations, cash flow, per share trading price of Lamar REIT Class A common stock and ability to satisfy debt service obligations.

The Lamar REIT charter, the Lamar REIT bylaws and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of Lamar REIT stock.

Provisions of the Lamar REIT charter, the Lamar REIT bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of Lamar REIT without the approval of the board of directors. These provisions:

 

•

impose restrictions on ownership and transfer of Lamar REIT common stock that are intended to facilitate our compliance with certain REIT rules relating to share ownership;

 

•

limit who may call a special meeting of stockholders;

 

29

---

Table of Contents

•

establish advance notice and informational requirements and time limitations on any director nomination or proposal that a stockholder wishes to make at a meeting of stockholders;

 

•

do not permit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect directors; and

 

•

provide the board of directors the ability to issue additional classes and shares of preferred stock and to set voting rights, preferences and other terms of the preferred stock without stockholder approval.

In addition, Section 203 of the DGCL generally limits our ability to engage in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock.

These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of Lamar REIT common stock.

Legislative or other actions affecting REITs could have a negative effect on us or our stockholders.

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Federal and state tax laws are constantly under review by persons involved in the legislative process, the IRS, the United States Department of the Treasury, and state taxing authorities. Changes to the tax laws, regulations and administrative interpretations, which may have retroactive application, could adversely affect us or our stockholders. We cannot predict with certainty whether, when, in what forms, or with what effective dates, the tax laws, regulations and administrative interpretations applicable to us or our stockholders may be changed. Accordingly, we cannot assure you that any such change will not significantly affect our ability to qualify for taxation as a REIT or the federal income tax consequences to you or us of such qualification.

On February 26, 2014, the Chairman of the Ways and Means Committee of the U.S. House of Representatives released draft proposals titled the Tax Reform Act of 2014 that include several provisions that, if enacted, would impact our ability to qualify as a REIT. The draft proposals would impose immediate corporate level tax on the built-in gain in the assets of every “C” corporation that elects to be treated as a REIT, effective for elections made after February 26, 2014. Further, the proposals would, effective December 31, 2016, exclude all tangible property with a depreciable class life of less than 27.5 years (such as our outdoor advertising structures and displays) from the definition of “real property” for purposes of the REIT asset and income tests. If any of these proposals or legislation containing similar provisions, with such effective dates, were to become law, it could eliminate our ability to qualify to be taxed as a REIT and/or subject us to significant amounts of U.S. federal income tax at the corporate level. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock.

Distributions payable by REITs generally do not qualify for reduced tax rates.

Certain distributions payable by corporations to individuals, trusts and estates that are U.S. stockholders, as defined in “Material United States Federal Income Tax Considerations,” are eligible for federal income tax at a reduced maximum rate of 20%. Distributions payable by REITs, in contrast, generally are not eligible for the reduced rates. The more favorable rates applicable to regular corporate distributions could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stock of non-REIT corporations that pay distributions, which could adversely affect the value of the stock of REITs, including Lamar REIT Class A common stock.

Your investment has various tax risks.

Although the provisions of the Code that will be generally relevant to an investment in shares of Lamar REIT Class A common stock are described in “Material United States Federal Income Tax Considerations,” we urge you to consult your tax advisor concerning the federal, state, local and foreign tax consequences to you with regard to an investment in shares of Lamar REIT Class A common stock.

 

30

---

Table of Contents

The ability of the board of directors of Lamar REIT to revoke our REIT election, without stockholder approval, may cause adverse consequences to our stockholders.

The Lamar REIT charter provides that the board of directors may revoke or otherwise terminate the REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to stockholders in computing our taxable income, and we will be subject to federal income tax at regular corporate rates and state and local taxes, which may have adverse consequences on our total return to our stockholders.

Risks Factors Related to Our Business

The Company’s substantial debt may adversely affect its business, financial condition and financial results.

The Company has borrowed substantially in the past and will continue to borrow in the future. At June 30, 2014, Lamar Advertising Company’s wholly owned subsidiary, Lamar Media, had $1.93 billion of total debt outstanding, consisting of $381.3 million in debt outstanding under its senior credit facility, $510.0 million in aggregate principal amount outstanding of its 5 3/8% Senior Notes due 2024, $1.04 billion in various series of senior subordinated notes, and $1.6 million of other secured indebtedness. Despite the level of debt presently outstanding, the terms of the indentures governing its notes and the terms of its senior credit facility allow Lamar Media to incur substantially more debt, including approximately $308.0 million available for borrowing as of June 30, 2014, under the revolving portion of its senior credit facility.

The Company’s substantial debt and its use of cash flow from operations to make principal and interest payments on its debt may, among other things:

 

•

make it more difficult for the Company to comply with the financial covenants in its senior credit facility, which could result in a default and an acceleration of all amounts outstanding under the facility;

 

•

limit the cash flow available to fund the Company’s working capital, capital expenditures, acquisitions or other general corporate requirements;

 

•

limit the Company’s ability to obtain additional financing to fund future working capital, capital expenditures or other general corporate requirements;

 

•

place the Company at a competitive disadvantage relative to those of its competitors that have less debt;

 

•

force the Company to seek and obtain alternate or additional sources of funding, which may be unavailable, or may be on less favorable terms, or may require the Company to obtain the consent of lenders under its senior credit facility or the holders of its other debt;

 

•

limit the Company’s flexibility in planning for, or reacting to, changes in its business and industry; and

 

•

increase the Company’s vulnerability to general adverse economic and industry conditions.

Any of these problems could adversely affect the Company’s business, financial condition and financial results.

Restrictions in the Company’s and Lamar Media’s debt agreements reduce operating flexibility and contain covenants and restrictions that create the potential for defaults, which could adversely affect the Company’s business, financial condition and financial results.

The terms of Lamar Media’s senior credit facility and the indentures relating to Lamar Media’s outstanding notes restrict the ability of the Company and Lamar Media to, among other things:

 

•

incur or repay debt;

 

•

dispose of assets;

 

31

---

Table of Contents

•

create liens;

 

•

make investments;

 

•

enter into affiliate transactions; and

 

•

pay dividends and make inter-company distributions.

At June 30, 2014, the terms of Lamar Media’s senior credit facility restrict it from exceeding a specified senior debt ratio and Lamar Media is also subject to certain other financial covenants relating to the incurrence of additional debt. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for a description of the specific financial ratio requirements under the senior credit facility.

The Company’s ability to comply with the financial covenants in the senior credit facility and the indentures governing Lamar Media’s outstanding notes (and to comply with similar covenants in any future agreements) depends on its operating performance, which in turn depends significantly on prevailing economic, financial and business conditions and other factors that are beyond the Company’s control. Therefore, despite its best efforts and execution of its strategic plan, the Company may be unable to comply with these financial covenants in the future.

Although we are currently in compliance with all financial covenants, the Company’s operating results were negatively impacted by the recent economic recession and there can be no assurance that the current economic environment will not further impact the Company’s results and, in turn, its ability to meet these requirements in the future. If Lamar Media fails to comply with its financial covenants, the lenders under the senior credit facility could accelerate all of the debt outstanding, which would create serious financial problems and could lead to a default under the indentures governing Lamar Media’s outstanding notes. Any of these events could adversely affect our business, financial condition and financial results.

In addition, these restrictions reduce the Company’s operating flexibility and could prevent the Company from exploiting investment, acquisition, marketing, or other time-sensitive business opportunities.

The Company’s revenues are sensitive to general economic conditions and other external events beyond the Company’s control.

The Company rents advertising space on outdoor structures to generate revenues. Advertising spending is particularly sensitive to changes in economic conditions.

Additionally, the occurrence of any of the following external events could depress the Company’s revenues:

 

•

a widespread reallocation of advertising expenditures to other available media by significant users of the Company’s displays; and

 

•

a decline in the amount spent on advertising in general or outdoor advertising in particular.

If the Company is unable to continue to grow through acquisitions, it could adversely affect our future financial performance. In addition, if we are unable to successfully integrate any completed acquisitions, our financial performance would also be adversely affected.

The Company has historically grown through acquisitions. During the six months ended June 30, 2014, we completed acquisitions for a total cash purchase price of approximately $9.2 million. We intend to continue to evaluate strategic acquisition opportunities as they arise.

 

32

---

Table of Contents

The future success of our acquisition strategy could be adversely affected by many factors, including the following:

 

•

the pool of suitable acquisition candidates is dwindling, and we may have a more difficult time negotiating acquisitions on favorable terms;

 

•

we may face increased competition for acquisition candidates from other outdoor advertising companies, some of which have greater financial resources than we do, which may result in higher prices for those businesses and assets;

 

•

we may not have access to the capital needed to finance potential acquisitions and may be unable to obtain any required consents from our current lenders to obtain alternate financing;

 

•

compliance with REIT requirements may hinder our ability to make certain investments and to that extent may limit our acquisition opportunities;

 

•

we may be unable to integrate acquired businesses and assets effectively with our existing operations and systems as a result of unforeseen difficulties that could divert significant time, attention and effort from management that could otherwise be directed at developing existing business;

 

•

we may be unable to retain key personnel of acquired businesses;

 

•

we may not realize the benefits and cost savings anticipated in our acquisitions; and

 

•

as the industry consolidates further, larger mergers and acquisitions may face substantial scrutiny under antitrust laws.

These obstacles to our opportunistic acquisition strategy may have an adverse effect on our future financial results.

The Company could suffer losses due to asset impairment charges for goodwill and other intangible assets.

The Company tested goodwill for impairment on December 31, 2013. Based on the Company’s review at December 31, 2013, no impairment charge was required. The Company continues to assess whether factors or indicators become apparent that would require an interim impairment test between our annual impairment test dates. For instance, if our market capitalization is below our equity book value for a period of time without recovery, we believe there is a strong presumption that would indicate a triggering event has occurred and it is more likely than not that the fair value of one or both of our reporting units are below their carrying amount. This would require us to test the reporting units for impairment of goodwill. If this presumption cannot be overcome a reporting unit could be impaired under ASC 350 “Goodwill and Other Intangible Assets” and a non-cash charge would be required. Any such charge could have a material adverse effect on the Company’s net earnings.

The Company faces competition from larger and more diversified outdoor advertisers and other forms of advertising that could hurt its performance.

While the Company enjoys a significant market share in many of its small and medium-sized markets, the Company faces competition from other outdoor advertisers and other media in all of its markets. Although the Company is one of the largest companies focusing exclusively on outdoor advertising in a relatively fragmented industry, it competes against larger companies with diversified operations, such as television, radio and other broadcast media. These diversified competitors have the advantage of cross-selling complementary advertising products to advertisers.

The Company also competes against an increasing variety of out-of-home advertising media, such as advertising displays in shopping centers, malls, airports, stadiums, movie theaters and supermarkets, and on taxis, trains and buses. To a lesser extent, the Company also faces competition from other forms of media, including radio, newspapers, direct mail advertising, telephone directories and the Internet. The industry competes for advertising revenue along the following dimensions: exposure (the number of “impressions” an advertisement makes),

 

33

---

Table of Contents

advertising rates (generally measured in cost-per-thousand impressions), ability to target specific demographic groups or geographies, effectiveness, quality of related services (such as advertising copy design and layout) and customer service. The Company may be unable to compete successfully along these dimensions in the future, and the competitive pressures that the Company faces could adversely affect its profitability or financial performance.

Federal, state and local regulation impact the Company’s operations, financial condition and financial results.

Outdoor advertising is subject to governmental regulation at the federal, state and local levels. Regulations generally restrict the size, spacing, lighting and other aspects of advertising structures and pose a significant barrier to entry and expansion in many markets.

Federal law, principally the Highway Beautification Act of 1965 (the “HBA”), regulates outdoor advertising on Federal — Aid Primary, Interstate and National Highway Systems roads. The HBA requires states, through the adoption of individual Federal/State Agreements, to “effectively control” outdoor advertising along these roads, and mandates a state compliance program and state standards regarding size, spacing and lighting. The HBA requires any state or political subdivision that compels the removal of a lawful billboard along a Federal — Aid Primary or Interstate highway to pay just compensation to the billboard owner.

All states have passed billboard control statutes and regulations at least as restrictive as the federal requirements, including laws requiring the removal of illegal signs at the owner’s expense (and without compensation from the state). Although the Company believes that the number of our billboards that may be subject to removal as illegal is immaterial, and no state in which we operate has banned billboards entirely, from time to time governments have required us to remove signs and billboards legally erected in accordance with federal, state and local permit requirements and laws. Municipal and county governments generally also have sign controls as part of their zoning laws and building codes. We contest laws and regulations that we believe unlawfully restrict our constitutional or other legal rights and may adversely impact the growth of our outdoor advertising business.

Using federal funding for transportation enhancement programs, state governments have purchased and removed billboards for beautification, and may do so again in the future. Under the power of eminent domain, state or municipal governments have laid claim to property and forced the removal of billboards. Under a concept called amortization by which a governmental body asserts that a billboard operator has earned compensation by continued operation over time, local governments have attempted to force removal of legal but nonconforming billboards (i.e., billboards that conformed to applicable zoning regulations when built but which do not conform to current zoning regulations). Although the legality of amortization is questionable, it has been upheld in some instances. Often, municipal and county governments also have sign controls as part of their zoning laws, with some local governments prohibiting construction of new billboards or allowing new construction only to replace existing structures. Although we have generally been able to obtain satisfactory compensation for those of our billboards purchased or removed as a result of governmental action, there is no assurance that this will continue to be the case in the future.

We have also introduced and intend to expand the deployment of digital billboards that display static digital advertising copy from various advertisers that change every 6 to 8 seconds. We have encountered some existing regulations that restrict or prohibit these types of digital displays but it has not yet materially impacted our digital deployment. Since digital billboards have only recently been developed and introduced into the market on a large scale, however, existing regulations that currently do not apply to them by their terms could be revised to impose greater restrictions. These regulations may impose greater restrictions on digital billboards due to alleged concerns over aesthetics or driver safety.

In January 2013, Scenic America, Inc., a nonprofit membership organization, filed a lawsuit against the U.S. Department of Transportation (USDOT) and the Federal Highway Administration (FHWA). The complaint

 

34

---

Table of Contents

alleged that (i) the FHWA exceeded its authority when the agency issued the 2007 Guidance to assist its division offices in evaluating state regulations that authorize the construction and operation of digital billboards that are in conformance with restrictions on “intermittent”, “flashing” or “moving” lights, which restrictions are contained in the individual Federal/State Agreements that implement the provisions of the HBA (the “2007 Guidance”), and in issuing the 2007 Guidance, the FHWA violated the Administrative Procedures Act (APA) by not first engaging in formal rulemaking, (ii) the 2007 Guidance violated the HBA because it adopted “a new lighting standard” without first amending the provisions of the Federal/State Agreements and (iii) the 2007 Guidance violates the HBA because digital billboards are themselves “inconsistent with customary use” of outdoor advertising, as that term is used in the HBA. As the principal remedy for these alleged violations, the complaint sought an injunction vacating the 2007 Guidance. On June 20, 2014, the U.S. District Court for the District of Columbia dismissed all challenges made by Scenic America to the 2007 Guidance finding that (i) the 2007 Guidance was an interpretive and not a substantive rule and, therefore, did not violate the APA, (ii) the 2007 Guidance did not infringe on the Federal/State Agreements and (iii) the 2007 Guidance is consistent with “customary use” and, therefore, did not violate the HBA. Scenic America filed a notice of appeal from the District Court’s judgment to the D.C. Circuit Court of Appeals on August 7, 2014.

On December 30, 2013, USDOT and FHWA published a Notice encouraging states to work with the FHWA to review their Federal/State Agreements, most of which were put in place in the late 1960s and early 1970s, to determine if amendments are advisable. FHWA encouraged each state to work with their FHWA division offices to amend its Federal/State Agreement so that it is consistent with the state’s current outdoor advertising objectives and address the evolving technology being used or that could be used in the future by the outdoor industry. The Notice details a multi-step process to achieve this goal. The Notice does not make any reference to the 2007 Guidance, nor does it recommend or require any specific substantive amendments to a state’s Federal/State Agreement. It is uncertain whether the FHWA Notice will have any impact on current federal, state or local regulation of outdoor advertising signs. To the extent that any Federal/State Agreements are amended in a manner that places new restrictions on outdoor advertising it could have a material adverse effect on our business, results of operations or financial condition.

Relatively few large scale studies have been conducted to date regarding driver safety issues, if any, related to digital billboards. On December 30, 2013, the results of a study conducted by USDOT and FHWA that looked at the effect of digital billboards and conventional billboards on driver visual behavior were issued. The conclusions of the report indicated that the presence of digital billboards did not appear to be related to a decrease in looking toward the road ahead and were generally within acceptable thresholds. The report cautioned, however, that it adds to the knowledge base but does not present definitive answers to the research questions investigated. Accordingly, the results of this or other studies may result in regulations at the federal or state level that impose greater restrictions on digital billboards. Any new restrictions on digital billboards could have a material adverse effect on both our existing inventory of digital billboards and our plans to expand our digital deployment, which could have a material adverse effect on our business, results of operations and financial condition.

The Company’s logo sign contracts are subject to state award and renewal.

In 2013, the Company generated approximately 5% of its revenues from state-awarded logo sign contracts. In bidding for these contracts, the Company generally competes against smaller, local logo sign providers. A logo sign provider incurs significant start-up costs upon being awarded a new contract. These contracts generally have a term of five to ten years, with additional renewal periods. Some states reserve the right to terminate a contract early, and most contracts require the state to pay compensation to the logo sign provider for early termination. At the end of the contract term, the logo sign provider transfers ownership of the logo sign structures to the state. Depending on the contract, the logo provider may or may not be entitled to compensation for the structures at the end of the contract term.

Of the Company’s 24 logo sign contracts in place at June 30, 2014, four are subject to renewal in 2014. The Company may be unable to renew its expiring contracts. The Company may also lose the bidding on new contracts.

 

35

---

Table of Contents

The Company is controlled by significant stockholders who have the power to determine the outcome of all matters submitted to the stockholders for approval and whose interest in the Company may be different than yours.

As of October 3, 2014, members of the Reilly family, including Kevin P. Reilly, Jr., the Company’s Chairman and President, and Sean E. Reilly, the Company’s Chief Executive Officer, and their affiliates owned in the aggregate approximately 16% of the Company’s outstanding common stock, assuming the conversion of all Class B common stock to Class A common stock. As of that date, their combined holdings represented approximately 65% of the voting power of Lamar Advertising’s outstanding capital stock, which would give the Reilly family and their affiliates the power to:

 

•

elect the Company’s entire board of directors;

 

•

control the Company’s management and policies; and

 

•

determine the outcome of any corporate transaction or other matter requiring stockholder approval, including charter amendments, mergers, consolidations and asset sales.

The Reilly family may have interests that are different than yours in making these decisions.

If the Company’s contingency plans relating to hurricanes fail, the resulting losses could hurt the Company’s business.

The Company has determined that it is uneconomical to insure against losses resulting from hurricanes and other natural disasters. Although the Company has developed contingency plans designed to mitigate the threat posed by hurricanes to advertising structures (e.g., removing advertising faces at the onset of a storm, when possible, which better permits the structures to withstand high winds during the storm), these plans could fail and significant losses could result.

 

36

---

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus and the documents incorporated by reference contain statements about future events and expectations, or forward-looking statements, all of which are inherently uncertain. We have based those forward-looking statements on our current expectations and projections about future results. When we use words such as “anticipates,” “intends,” “plans,” “believes,” “estimates,” “expects,” or similar expressions, we identify forward-looking statements. Examples of forward-looking statements include statements we make regarding our ability to qualify or to remain qualified as a REIT, our expected date of conversion to a REIT, the amount and timing of our distribution of non-REIT accumulated E&P, future prospects of growth in the outdoor advertising industry, the level of future expenditures by companies in this industry and other trends in this industry, the effects of consolidation among companies in our industry, our ability to maintain or increase our market share, our future operating results, our future distributions to our stockholders, our future capital expenditure levels, our future financing transactions and our plans to fund our future liquidity needs. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, those described in the section entitled “Risk Factors” beginning on page 24 or incorporated by reference to this proxy statement/prospectus and other risks that are described in Lamar Advertising’s filings with the SEC.

You should keep in mind that any forward-looking statement we make in this proxy statement/prospectus or elsewhere speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other important factors, including those set forth under the caption “Risk Factors,” may cause actual results to differ materially from those indicated by our forward-looking statements. We have no duty to, and do not intend to, update or revise the forward-looking statements we make in this proxy statement/prospectus, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that the future events or circumstances described in any forward-looking statement we make in this proxy statement/prospectus or elsewhere might not occur.

 

37

---

Table of Contents

VOTING AND PROXIES

This proxy statement/prospectus is furnished in connection with the solicitation of proxies by the board of directors of Lamar Advertising for use at the special meeting of stockholders to be held on November 17, 2014, or any adjournments or postponements thereof.

Date, Time and Place of the Special Meeting

The special meeting will be held on November 17, 2014 at 9:00 a.m., local time, at the offices of Lamar Advertising Company, 5321 Corporate Boulevard, Baton Rouge, Louisiana, 70808.

Purpose of the Special Meeting

The purposes of the special meeting are:

 

•

To consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of August 27, 2014, by and between Lamar Advertising and Lamar REIT, which is part of the reorganization of Lamar Advertising’s operations through which Lamar Advertising intends to qualify as a REIT for U.S. federal income tax purposes; and

 

•

To consider and vote upon a proposal to permit Lamar Advertising’s board of directors to adjourn the special meeting if necessary for further solicitation of proxies if there are not sufficient votes at the originally scheduled time of the special meeting to approve the foregoing proposal.

Stockholder Record Date for the Special Meeting

Lamar Advertising’s board of directors has fixed the close of business on October 3, 2014 as the record date for determining which Lamar Advertising stockholders are entitled to notice of, and to vote those shares by proxy or at the special meeting and at any adjournment of the special meeting. On the record date, there were 80,828,878 shares of Class A common stock outstanding and entitled to vote and 163 holders of record, 14,610,365 shares of Class B common stock outstanding and entitled to vote and 8 holders of record and 5,719.49 shares of Series AA preferred stock outstanding and entitled to vote and 3 holders of record.

During the ten-day period before the special meeting, Lamar Advertising will keep a list of stockholders entitled to vote at the special meeting available for inspection during normal business hours at Lamar Advertising’s offices in Baton Rouge, Louisiana, for any purpose germane to the special meeting. The list of stockholders will also be provided and kept at the location of the special meeting for the duration of the special meeting, and may be inspected by any stockholder who is present.

Quorum

A quorum is necessary to hold the special meeting. The presence at the special meeting, in person or by proxy, of the holders of one-third of the shares of the Class A common stock, Class B common stock and Series AA preferred stock issued and outstanding on the record date will constitute a quorum. For the purposes of determining the presence of a quorum, abstentions will be included in determining the number of shares present and entitled to vote at the special meeting; however, because brokers, banks or other nominees are not entitled to vote on any of the proposals absent specific instructions from the beneficial owner (as more fully described below), shares held by brokers, banks, or other nominees for which instructions have not been provided will not be included in the number of shares present and entitled to vote at the special meeting for the purposes of establishing a quorum. At the special meeting, each share of Class A common stock is entitled to one vote, each share of Class B common stock is entitled to ten votes, and each share of Series AA preferred stock is entitled to one vote on all matters properly submitted to the Lamar Advertising stockholders.

 

38

---

Table of Contents

Vote Required for Each Proposal

Proposal Number One: The affirmative vote of the holders of a majority of the votes represented by the outstanding shares of Class A common stock, Class B common stock and Series AA preferred stock entitled to vote, voting together as a single class, is required for the adoption of the merger agreement.

Proposal Number Two: The affirmative vote of a majority of the votes represented by the shares of Class A common stock, Class B common stock and Series AA preferred stock, voting together as a single class, that are present or represented by proxy at the special meeting, is required to permit Lamar Advertising’s board of directors to adjourn the special meeting, if necessary, to solicit further proxies.

The board of directors of Lamar Advertising unanimously recommends that the Lamar Advertising stockholders vote “FOR” each of the proposals.

Proxies

If you are a holder of Class A common stock, Class B common stock or Series AA preferred stock on the record date, you may vote by completing, signing and promptly returning the proxy card in the self-addressed stamped envelope provided. If you are a holder of Class A common stock. All shares of Class A common stock, Class B common stock or Series AA preferred stock represented by properly executed proxy cards received before or at the Lamar Advertising special meeting will, unless the proxies are revoked, be voted in accordance with the instructions indicated on those proxy cards. If no instructions are indicated on a properly executed proxy card, the shares will be voted “FOR” each of the proposals. You are urged to indicate how to vote your shares, whether you vote by proxy card.

If a properly executed proxy card is returned and the stockholder has abstained from voting on one or more of the proposals, the Class A common stock, Class B common stock or Series AA preferred stock represented by the proxy will be considered present at the special meeting for purposes of determining a quorum, but will not be considered to have been voted on the abstained proposals. For the proposal to adopt the merger agreement, abstentions have the same effect as a vote against the merger. For the proposal to adjourn the meeting to solicit additional proxies, abstentions have the same effect as a vote against such proposal.

If your shares are held in an account at a broker, bank or other nominee, you must instruct them on how to vote your shares. If an executed proxy card is returned by a broker, bank or other nominee holding shares that indicates that the broker, bank or other nominee does not have discretionary authority to vote on the proposals, the shares will not be considered present at the meeting for purposes of determining the presence of a quorum and will not be considered to have been voted on the proposals. Under applicable rules and regulations of the NASDAQ Global Select Market, brokers, banks or other nominees have the discretion to vote on routine matters, but do not have the discretion to vote on non-routine matters. Each of the proposals is a non-routine matter. Accordingly, your broker, bank or other nominee will vote your shares only if you provide instructions on how to vote by following the information provided to you by your broker, bank or other nominee. If you do not provide voting instructions, your shares will be considered “broker non-votes” because the broker, bank or other nominee will not have discretionary authority to vote your shares. Therefore, your failure to provide voting instructions to the broker, bank, or other nominee will have the same effect as a vote against adoption of the merger agreement.

Revoking Your Proxy

You can change your vote at any time before your proxy is voted at the special meeting. To revoke your proxy, you must either (1) notify the secretary of Lamar Advertising in writing, (2) mail a new proxy card dated after the date of the proxy you wish to revoke, or (3) attend the special meeting and vote your shares in person. Merely attending the special meeting will not constitute revocation of your proxy. If your shares are held through a broker, bank or other nominee, you should contact your broker, bank or other nominee to change your vote.

 

39

---

Table of Contents

Adjournment or Postponement

Although it is not currently expected, the special meeting may be adjourned to solicit additional proxies if there are not sufficient votes to adopt the merger agreement. In that event, Lamar Advertising may ask its stockholders to vote upon the proposal to consider the adjournment of the special meeting to solicit additional proxies, but not the proposal to adopt the merger agreement. If Lamar Advertising stockholders approve this proposal, we could adjourn the meeting and use the time to solicit additional proxies.

Additionally, at any time prior to convening the special meeting, we may seek to postpone the meeting if a quorum is not present at the meeting or as otherwise permitted by the Lamar Advertising charter, the Lamar Advertising bylaws or applicable law.

Solicitation of Proxies

Lamar Advertising will bear all expenses incurred in connection with the printing and mailing of this proxy statement/prospectus. Lamar Advertising will also request banks, brokers and other nominees holding shares of Class A common stock beneficially owned by others to send this proxy statement/prospectus to, and obtain proxies from, the beneficial owners and will, upon request, reimburse the holders for their reasonable expenses in so doing. Solicitation of proxies by mail may be supplemented by telephone, other electronic means and personal solicitation by officers or employees of Lamar Advertising. No additional compensation will be paid to officers or employees for those solicitation efforts.

Lamar Advertising has hired Alliance Advisors, LLC to assist in obtaining proxies from its stockholders on a timely basis. Lamar Advertising will pay Alliance Advisors, LLC a fee of $3,000, plus reasonable out-of-pocket expenses and disbursements, for these services.

Other Matters

Lamar Advertising is not aware of any business to be acted on at the special meeting, except as described in this proxy statement/prospectus. If any other matters are properly presented at the special meeting, or any adjournment or postponement of the special meeting, the persons appointed as proxies or their substitutes will have discretion to vote or act on the matter according to their best judgment and applicable law unless the proxy indicates otherwise.

 

40

---

Table of Contents

BACKGROUND OF THE REIT CONVERSION AND THE MERGER

As part of an ongoing strategic review of our business, the board of directors of Lamar Advertising and senior management regularly consider available tax planning strategies. We historically have had significant deferred tax assets related to our NOLs in federal and state taxing jurisdictions. As we expected to exhaust our available NOLs over the course of the next few years, senior management believed that an analysis of the feasibility of Lamar Advertising converting to a REIT for federal and, where applicable, state income tax purposes should be undertaken and presented to the board of directors. In June 2012, senior management began consulting with KPMG LLP and Goodwin Procter LLP regarding the tax implications of a possible REIT conversion.

During the second half of 2012, during regularly scheduled meetings of the board of directors, the feasibility of converting to a REIT was discussed. At these meetings, senior management reported on the rationale for a possible REIT conversion, the requirements to qualify as a REIT, including the REIT income and asset tests, distribution requirements and the requirement to distribute our non-REIT accumulated earnings and profits. As a result of these discussions, we engaged KPMG LLP in August 2012 to further evaluate and advise us regarding the tax implications of a possible REIT conversion. That evaluation was to include, among other things, undertaking an analysis regarding the amount of our non-REIT accumulated earnings and profits that we would need to distribute in connection with a REIT conversion and analyzing our ability to satisfy the REIT income and asset tests currently and in the future under a variety of possible scenarios. Also, during this period, the board of directors determined that it would be advisable to request that KPMG LLP and Goodwin Procter LLP prepare a private letter ruling request to the IRS with respect to a number of REIT qualification matters. In November 2012, we submitted the private letter ruling request to the IRS. This private letter ruling request is more fully described in the section entitled “Material United States Federal Income Tax Considerations.”

In February 2013, we engaged J.P. Morgan Securities LLC to advise us with respect to the benefits and considerations of a possible REIT conversion. Throughout 2013, senior management met and spoke regularly with representatives of J.P. Morgan Securities LLC to review considerations around a possible REIT conversion, including valuation perspectives, balance sheet considerations, ability to grow and continued access to capital markets.

On February 28, 2013, at a regularly scheduled meeting of the board of directors, senior management provided the board of directors with an overview of the analysis completed to date by senior management and our advisors. Representatives of J.P. Morgan Securities LLC, Goodwin Procter LLP and Edwards Wildman Palmer LLP were present at the meeting. Representatives of J.P. Morgan Securities LLC reviewed with the board of directors the advantages and disadvantages regarding a possible REIT conversion, including the potential impact on stockholder value attributable to the REIT conversion. Representatives of J.P. Morgan Securities LLC also reviewed the impact of the possible REIT conversion on our continued ability to grow through strategic acquisitions, and on our ability to continue to access the capital markets as a REIT. In addition, representatives of J.P. Morgan Securities LLC reviewed the requirements to qualify as a REIT (including the REIT income and asset tests, distribution requirements and the distribution of non-REIT accumulated earnings and profits) and whether compliance with the REIT requirements would offset the expected advantages of the possible REIT conversion from a financial perspective. The board of directors also reviewed with senior management and our advisors the process for the determination and alternatives for payment of any required non-REIT accumulated earnings and profits distribution, as well as the timing and mechanics of distribution requirements and the utilization of NOLs to offset distribution requirements. Goodwin Procter LLP outlined the general structure of the proposed REIT conversion, indicating that the primary purpose of the merger was to facilitate compliance with REIT ownership limitations. Goodwin Procter LLP also reviewed the board’s fiduciary duties under Delaware corporate law and the complexity of complying with the REIT requirements.

In April 2013, senior management estimated the value of Lamar Advertising’s Class B common stock as of December 31, 2012 using applicable approaches, techniques, models and assumptions. This valuation was completed to assist the board of directors in determining the restrictions on ownership and transfer of Lamar

 

41

---

Table of Contents

REIT stock that are intended to facilitate compliance with certain REIT rules related to share ownership. Senior management’s valuation included, among other things, consultation with an independent third-party valuation advisor.

During the remainder of 2013, we, along with our advisors, continued to discuss issues related to our private letter ruling request with the IRS. In the course of these discussions, the IRS indicated to us and our advisors that it had decided to study the current legal standards it uses to define “real estate” for purposes of the REIT provisions of the Code and would suspend issuing private letter rulings until this internal IRS study was complete.

On May 23, 2013, at a regularly scheduled meeting of the board of directors, senior management provided an overview of discussions to date with the IRS concerning our private letter ruling request. Senior management noted its understanding that the IRS’s internal review is intended to determine if any changes or refinements should be made to its current legal standards. The board of directors was informed that, based on these discussions with the IRS and consultation with our advisors, senior management had no reason to conclude that we would not be in a position to complete the previously announced plan to convert to a REIT no earlier than January 1, 2014, subject to final board approval.

On September 26, 2013, at a regularly scheduled meeting of the board of directors, senior management provided an update to the board of directors on the status of the private letter ruling request and indicated that that process remained ongoing and there were no material updates on the status of the IRS internal review.

On November 14, 2013, we were advised by the IRS that it would resume issuing private letter rulings regarding the REIT provisions of the Code. We were also informed that the IRS was actively working on our private letter ruling request.

On November 19, 2013, in the course of our ongoing discussions with the IRS, we were informed that the IRS would no longer issue private letter rulings addressing whether outdoor advertising displays qualify as real property under the REIT rules because of the availability of the election under Code § 1033(g)(3) to treat outdoor advertising displays as real property for all purposes under Chapter 1 of the Code, which includes the REIT provisions. As a result, we amended our ruling request and represented to the IRS that we intend to make the election under Code §1033(g)(3) to treat our outdoor advertising displays as real property.

On December 12, 2013, at a regularly scheduled meeting of the board of directors, senior management reviewed the REIT distribution requirements, dividend policy and our current and expected future capital structure with respect to outstanding debt obligations. Senior management also reviewed the evaluation of our non-REIT accumulated earnings and profits and projected distribution requirements. Representatives of J.P. Morgan Securities LLC, Goodwin Procter LLP and Edwards Wildman Palmer LLP were present at the meeting. The structuring considerations relating to our assets and the use of TRSs to hold our transit advertising business, advertising services business, our foreign operations in Canada and Puerto Rico and certain miscellaneous investments following the REIT conversion were detailed. The board of directors also considered and reviewed potential concerns raised by the REIT conversion, including any limitations on our ability to buy non-qualifying assets or expand non-real estate activities, investor pressures against pursuing growth opportunities that are not immediately accretive and the impact of potential future legislative tax changes on REITs. Following this discussion, the board of directors unanimously approved an internal corporate restructuring that would transfer most of our transit advertising business, our advertising services business and our foreign operations in Canada and Puerto Rico to our TRSs to facilitate our compliance with the REIT income and asset test requirements for the 2014 taxable year.

On February 26, 2014, at a regularly scheduled meeting of the board of directors, senior management provided an update on the status of our private letter ruling request. Senior management also provided an update on the internal corporate restructuring that was completed as of December 31, 2013.

 

42

---

Table of Contents

In April 2014, we received our private letter ruling from the IRS, confirming, among other matters, that our income from renting space on outdoor advertising displays qualifies as rents from real property for REIT purposes, as described further in the section entitled “Material United States Federal Income Tax Considerations.”

On May 21, 2014, at a regularly scheduled meeting of the board of directors, after discussion and review of the benefits, detriments and procedural requirements specified above in connection with the proposed REIT conversion with senior management, the board of directors unanimously approved the commencement of the steps necessary for Lamar Advertising to qualify, no earlier than January 1, 2014, as a REIT for tax purposes and directed senior management to proceed with the proposed REIT conversion, subject to final board approval.

On August 26, 2014, at a special meeting of the board of directors of Lamar Advertising and Lamar REIT, the board of directors met with senior management to continue their review of the proposed REIT conversion. Representatives of Goodwin Procter LLP and Edwards Wildman Palmer LLP were also present at the meeting. The board of directors reviewed the merger agreement, the proposed Lamar REIT charter and the Lamar REIT bylaws and discussed the terms and conditions thereof. The board of directors also reviewed and discussed with management the restrictions on ownership and transfer included in the Lamar REIT charter. The board of directors reviewed the approaches, techniques, models and assumptions that were used by management in order to estimate the value of the Class B common stock. Management’s valuation of the Class B common stock, which included an update as of March 31, 2014, included, among other things, consultation with an independent third-party valuation advisor. Following these discussions, the board of directors unanimously approved the Lamar REIT charter, the Lamar REIT bylaws and the merger agreement, and after determining that it is in the best interests of Lamar Advertising and its stockholders, unanimously recommended that Lamar Advertising stockholders vote “for” the adoption of the merger agreement.

 

43

---

Table of Contents

REASONS FOR THE MERGER AND REIT CONVERSION

The board of directors of Lamar Advertising has unanimously determined that the merger, which we believe is an important element of the REIT conversion, and the related transactions are fair to, and in the best interests of, Lamar Advertising and its stockholders. In reaching this determination, the board of directors consulted with management, as well as J.P. Morgan Securities LLC, KPMG LLP and its legal advisors. The factors considered by the board of directors in reaching its determination included, but were not limited to, the following:

 

•

To increase stockholder value: As a REIT, we believe we will be able to increase the value of Lamar REIT common stock by reducing corporate level taxes on most of our domestic income, primarily the income we receive from leasing our outdoor advertising structures, which in turn may increase the amount of future distributions to stockholders;

 

•

To establish regular distributions to stockholders: We believe our stockholders will benefit from establishing regular cash distributions, resulting in a yield-oriented stock;

 

•

To expand our base of potential stockholders: By becoming a company that makes regular distributions to its stockholders, our stockholder base may expand to include investors attracted by yield, which may improve the liquidity of the Lamar REIT common stock and provide a broader stockholder base; and

 

•

To comply with REIT qualification rules: The merger will facilitate our compliance with certain REIT rules by merging Lamar Advertising with and into Lamar REIT, the latter of which will adopt an amended and restated certificate of incorporation which implements share ownership and transfer restrictions necessary to facilitate our compliance with the REIT rules related to share ownership.

The board of directors of Lamar Advertising weighed the advantages of the REIT conversion against disadvantages and potential risks that include, but are not limited to, the fact that as a REIT we will be unable to retain earnings as we will be required each year to distribute to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding any net capital gain) and that we will need to comply with highly technical REIT qualification provisions, which may hinder our ability to make certain attractive investments, including investments in the businesses to be conducted by our TRSs. In addition, the board of directors of Lamar Advertising considered the potential risks discussed in “Risk Factors — Risks Related to the REIT Conversion and the Merger.”

The foregoing discussion does not include all of the information and factors considered by the board of directors. The board of directors did not quantify or otherwise assign relative weights to the particular factors considered, but conducted an overall analysis of the information presented to and considered by it in reaching its determination.

 

44

---

Table of Contents

TERMS OF THE MERGER

The following is a summary of the material terms of the merger agreement. For a complete description of all of the terms of the merger, you should refer to the copy of the merger agreement that is attached to this proxy statement/prospectus as Annex A and incorporated herein by reference. You should read carefully the merger agreement in its entirety as it is the legal document that governs the merger.

Structure and Completion of the Merger

Lamar REIT is a newly formed, wholly owned subsidiary of Lamar Advertising. Lamar REIT currently holds a small amount of cash as its only asset. The merger agreement provides that Lamar Advertising will merge with and into Lamar REIT, at which time the separate corporate existence of Lamar Advertising will cease and Lamar REIT will be the surviving entity of the merger. Upon the effectiveness of the merger, the outstanding shares of Class A common stock of Lamar Advertising will be converted into the right to receive the same number of shares of Lamar REIT Class A common stock, the outstanding shares of Class B common stock of Lamar Advertising will be converted into the right to receive the same number of shares of Lamar REIT Class B common stock and the outstanding shares of Series AA preferred stock of Lamar Advertising will be converted into the right to receive the same number of shares of Lamar REIT Series AA preferred stock. The respective powers, preferences, rights, qualifications, limitations and restrictions, including voting rights, relating to the Lamar REIT Class A common stock, Lamar REIT Class B common stock and Lamar REIT Series AA preferred stock received in the merger will be identical to the respective powers, preferences, rights, qualifications, limitations and restrictions relating to the Class A common stock, Class B common stock and Series AA preferred stock immediately prior to the merger. In addition, upon the effectiveness of the merger, Lamar REIT will change its name to “Lamar Advertising Company” and will succeed to and continue to operate, directly or indirectly, the existing business of Lamar Advertising.

The board of directors of Lamar Advertising and the board of directors of Lamar REIT have approved the merger agreement, subject to stockholder approval. The merger will become effective at the time the certificate of merger is submitted for filing and accepted by the Secretary of State of the State of Delaware in accordance with the DGCL or at such later time as specified in the certificate of merger. We currently anticipate that the merger will be completed following the special meeting of stockholders, receipt of stockholder approval of the adoption of the merger agreement and the satisfaction or waiver of the other conditions to the merger as described in the section entitled “Conditions to Completion of the Merger.” However, the board of directors of Lamar Advertising reserves the right to cancel or defer the merger even if its stockholders vote to adopt the merger agreement and the other conditions to the completion of the merger are satisfied or waived, if it determines that the merger is no longer in the best interests of Lamar Advertising and its stockholders.

Exchange of Stock Certificates

Surrender of Certificates. American Stock Transfer and Trust Company will act as exchange agent for the merger. As soon as reasonably practicable following completion of the merger, the exchange agent will mail to each registered holder of Class A common stock a letter of transmittal containing instructions for surrendering each holder’s certificate. Holders who properly submit a letter of transmittal and surrender their Class A common stock certificates to the exchange agent will receive a certificate representing the same number of shares of Lamar REIT Class A common stock as reflected in the surrendered certificates representing shares of Class A common stock. The surrendered certificates will thereafter be cancelled. Upon the effectiveness of the merger, each certificate representing shares of Class A common stock will be deemed for all purposes to evidence a right to receive the same number of shares of Lamar REIT Class A common stock, as applicable, until such certificate is exchanged for a certificate representing an equal number of shares of Lamar REIT Class A common stock.

If you currently hold shares of Lamar Advertising common stock in uncertificated form, you will receive a notice of the completion of the merger and your shares of Lamar REIT common stock received in connection with the merger will continue to exist in uncertificated form.

 

45

---

Table of Contents

If you currently hold shares of Class B common stock or Series AA preferred stock, as soon as reasonably practicable following completion of the merger, Lamar REIT will send you a letter of transmittal explaining how to exchange your certificates representing shares of Class B common stock or Series AA preferred stock for certificates representing shares of Lamar REIT Class B common stock or Series AA preferred stock. Holders who properly submit a letter of transmittal and surrender their Class B common stock or Series AA preferred stock certificates to Lamar REIT will receive a certificate representing the same number of shares of Lamar REIT Class B common stock or Series AA preferred stock, respectively. The surrendered certificates will thereafter be cancelled. Upon the effectiveness of the merger, each certificate representing shares of Class B common stock or Series AA preferred stock will be deemed for all purposes to evidence a right to receive the same number of shares of Lamar REIT Class B common stock or Series AA preferred stock until such certificate is exchanged for a certificate representing an equal number of shares of Lamar REIT Class B common stock or Series AA preferred stock.

Lost Certificates. If any Lamar Advertising certificate is lost, stolen or destroyed, the owner of the certificate must provide an appropriate affidavit of that fact to the exchange agent and, if required by Lamar REIT, post a reasonable bond as indemnity against any claim that may be made against Lamar REIT with respect to such lost certificate.

Stock Transfer Books. At the completion of the merger, Lamar Advertising will close its stock transfer books, and no subsequent transfers of capital stock will be recorded on such books.

Other Effects of the Merger

We expect the following to occur in connection with the merger:

 

•

Organizational Documents of Lamar REIT. The certificate of incorporation and bylaws of Lamar REIT will be amended prior to the merger and the certificate of incorporation, as so amended, will be the Lamar REIT charter and bylaws following the completion of the merger. Copies of the form of the Lamar REIT charter and Lamar REIT bylaws are set forth in Annex B-1 and Annex B-2, respectively, of this proxy statement/prospectus. See also the section entitled “Description of Lamar REIT Capital Stock.”

 

•

Directors and Officers. The directors and officers of Lamar Advertising serving as directors and officers of Lamar Advertising immediately prior to the effective time of the merger will be the directors and officers of Lamar REIT immediately after the merger.

 

•

Stock Incentive Plans, Employee Stock Purchase Plan and Deferred Compensation Plan. Lamar REIT will assume Lamar Advertising’s Amended and Restated 1996 Equity Incentive Plan and the 2009 Employee Stock Purchase Plan, which we refer to collectively as the Plans, and each, a Plan, and all rights of participants to acquire shares of Class A common stock under any Plan will be converted into rights to acquire shares of Lamar REIT Class A common stock in accordance with the terms of the Plans. Lamar REIT will also assume Lamar Advertising’s Deferred Compensation Plan.

 

•

Distributions. Lamar Advertising’s obligations with respect to any distributions to the stockholders of Lamar Advertising that have been declared by Lamar Advertising but not paid prior to the completion of the merger will be assumed by Lamar REIT.

 

•

Listing of Lamar REIT Class A common stock. We expect that the Lamar REIT Class A common stock will trade on the NASDAQ under our current symbol “LAMR” following the completion of the merger.

 

46

---

Table of Contents

Conditions to Completion of the Merger

The board of directors of Lamar Advertising has the right to cancel or defer the merger even if stockholders of Lamar Advertising vote to adopt the merger agreement and the other conditions to the completion of the merger are satisfied or waived, if it determines that the merger is no longer in the best interests of Lamar Advertising and its stockholders. The respective obligations of Lamar Advertising and Lamar REIT to complete the merger require the satisfaction or, where permitted, waiver, of the following conditions:

 

•

adoption of the merger agreement by the requisite vote of the stockholders of Lamar Advertising and Lamar REIT;

 

•

the board of directors of Lamar Advertising shall not have determined that the transactions constituting the REIT conversion that impact Lamar Advertising REIT’s qualification as a REIT for federal income tax purposes have not occurred or are not reasonably likely to occur;

 

•

Lamar REIT will have amended and restated its certificate of incorporation to read in substantially the form attached hereto as Annex B-1;

 

•

Lamar REIT will have amended its bylaws to read substantially in the form attached hereto as Annex B-2;

 

•

receipt by Lamar Advertising from its tax counsel of an opinion to the effect that the merger qualifies as a reorganization within the meaning of Section 368(a)(1)(F) of the Code and that each of Lamar Advertising and Lamar REIT is a party to a reorganization within the meaning of Section 368(b) of the Code;

 

•

approval for listing on the NASDAQ of Lamar REIT Class A common stock, subject to official notice of issuance;

 

•

the effectiveness of the Registration Statement, of which this proxy statement/prospectus is a part, without the issuance of a stop order or initiation of any proceeding seeking a stop order by the SEC;

 

•

the determination by the board of directors of Lamar Advertising, in its sole discretion, that no legislation or proposed legislation with a reasonable possibility of being enacted would have the effect of substantially (a) impairing the ability of Lamar REIT to qualify as a REIT, (b) increasing the federal tax liabilities of Lamar Advertising or of Lamar REIT resulting from the REIT conversion or (c) reducing the expected benefits to Lamar REIT resulting from the REIT conversion; and

 

•

receipt of all governmental approvals and third party consents to the merger, except for approvals or consents as would not reasonably be expected to materially and adversely affect the business, financial condition or results of operations of Lamar REIT and its subsidiaries taken as a whole.

Termination of the Merger Agreement

The board of directors of Lamar Advertising has the right to terminate the merger agreement and abandon the merger at any time prior to its completion, before or after approval of the merger agreement by the stockholders of Lamar Advertising, in its sole discretion.

We have no current intention of abandoning the merger subsequent to the special meeting if stockholder approval is obtained and the other conditions to the merger are satisfied or waived. However, the board of directors of Lamar Advertising reserves the right to cancel or defer the merger or the REIT conversion even if stockholders of Lamar Advertising vote to adopt the merger agreement, which is an important element of the REIT conversion, and the other conditions to the completion of the merger are satisfied or waived, if it determines that the merger or the REIT conversion is no longer in the best interests of Lamar Advertising and its stockholders.

 

47

---

Table of Contents

Regulatory Approvals

We are not aware of any federal, state, local or foreign regulatory requirements that must be complied with or approvals that must be obtained prior to completion of the merger pursuant to the merger agreement and the transaction contemplated thereby, other than compliance with applicable federal and state securities laws and the filing and acceptance of a certificate of merger as required under the DGCL.

Absence of Dissenters’ Rights for Holders of Lamar Advertising Class A Common Stock

Pursuant to Section 262(b)(1) of the DGCL, the holders of Lamar Advertising Class A common stock will not be entitled to dissenters’ rights of appraisal as a result of the merger.

Dissenters’ Rights for Holders of Lamar Advertising Class B common stock and Lamar Advertising Series AA preferred stock

Holders of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who do not vote for the adoption of the merger agreement and who are otherwise eligible and who otherwise comply with the applicable statutory procedures of Section 262 of the DGCL will have the right to obtain an appraisal of the value of their shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock in connection with the merger. This means that such holders of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock are entitled to obtain a judicial determination of the fair value of their Lamar Advertising Class B common stock or of their Lamar Advertising Series AA preferred stock (exclusive of any element of value arising from the accomplishment or expectation of the merger) determined by the Court of Chancery of the State of Delaware (the “Court of Chancery”) and entitled to receive payment based upon that valuation, together with interest, if any, to be paid upon the amount determined to be a fair value, in lieu of any consideration to be received under the merger agreement.

The following is intended as a brief summary of the material provisions of the Delaware statutory procedures required to be followed by a holder of Lamar Advertising Class B common stock or a holder of Lamar Advertising Series AA preferred stock in order to properly demand and perfect appraisal rights. This summary, however, is not a complete statement of law pertaining to appraisal rights under Delaware law and is qualified in its entirety by the full text of Section 262 of the DGCL, which is attached hereto as Annex C. The preservation and exercise of appraisal rights requires strict and timely adherence to the applicable provisions of the DGCL. Failure to follow the requirements of Section 262 of the DGCL for demanding and perfecting appraisal rights may result in the loss of such rights.

If you, as a holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock, wish to consider exercising your appraisal rights, you should carefully review the text of Section 262 of the DGCL contained in Annex C hereto and should consult your legal advisor since failure to timely and properly comply with the requirements of Section 262 of the DGCL will result in the loss of your appraisal rights under the DGCL. All demands for appraisal must be received prior to the vote on the merger agreement and should be addressed to Lamar Advertising Company, 5321 Corporate Boulevard, Baton Rouge, Louisiana 70808, Attention: Secretary, and should be executed by, or on behalf of, the record holder of the shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock. Holders of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who desire to exercise their appraisal rights must not vote in favor of adoption of the merger agreement and must continuously hold their shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock through the effective date of the merger.

Under Section 262 of the DGCL, where a merger agreement relating to a proposed merger is to be submitted for adoption at a meeting of stockholders, as in the case of the special meeting, the corporation, not less than 20 days prior to such meeting, must notify each of its stockholders who was a stockholder on the record date for notice of such meeting with respect to shares for which appraisal rights are available, that appraisal rights are so available,

 

48

---

Table of Contents

and must include in each such notice a copy of Section 262 of the DGCL. This proxy statement/prospectus constitutes such notice to the holders of Lamar Advertising Class B common stock and Lamar Advertising Series AA preferred stock and Section 262 of the DGCL is attached to this proxy statement/prospectus as Annex C.

If you, as a holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock, wish to exercise appraisal rights you must not vote for the adoption of the merger agreement and must deliver to Lamar Advertising, before the vote on the proposal to adopt the merger agreement, a written demand for appraisal of your shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock. If you sign and return a proxy card that does not contain voting instructions you will effectively waive your appraisal rights because such shares represented by the proxy will, unless the proxy is revoked, be voted for the adoption of the merger agreement. Therefore, a holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who submits a proxy and who wishes to exercise appraisal rights must submit a proxy containing instructions to vote against the adoption of the merger agreement or abstain from voting on the adoption of the merger agreement. However, neither voting against the adoption of the merger agreement, nor abstaining from voting or failing to vote on the proposal to adopt the merger agreement, will in and of itself constitute a written demand for appraisal satisfying the requirements of Section 262 of the DGCL.

A demand for appraisal will be sufficient if it reasonably informs Lamar Advertising of the identity of the holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock and that such holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock intends thereby to demand appraisal of such holder’s shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock. This written demand for appraisal must be separate from any proxy or vote abstaining from or voting against the adoption of the merger agreement. If you wish to exercise appraisal rights, you must be the record holder of such shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock on the date the written demand for appraisal is made and you must continue to hold such shares of record through the effective date of the merger. Accordingly, a holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who is the record holder of shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock on the date the written demand for appraisal is made, but who thereafter transfers such shares prior to the effective date of the merger, will lose any right to appraisal in respect of such shares.

Only a holder of record of shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock on the record date for the special meeting is entitled to assert appraisal rights for such shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock registered in that holder’s name. To be effective, a demand for appraisal by a holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock must be made by, or on behalf of, such holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock of record. Beneficial owners who do not also hold their Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock of record may not directly make appraisal demands to Lamar Advertising. The beneficial holder must, in such cases, have the owner of record, such as a broker, bank or other nominee, submit the required demand in respect of those shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock. If shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for appraisal should be made by or for the fiduciary; and if the shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute the demand for appraisal for a holder of record of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock; however, the agent must identify the record owner or owners of such Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock and expressly disclose the fact that, in executing the demand, he or she is acting as agent for the record owner. A record owner, such as a broker, who holds shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock as a nominee for others, may exercise his

 

49

---

Table of Contents

or her right of appraisal with respect to the shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock held for one or more beneficial owners, while not exercising this right for other beneficial owners. In that case, the written demand should state the number of shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock as to which appraisal is sought. Where no number of shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock is expressly mentioned, the demand will be presumed to cover all shares of Lamar Advertising Class B common stock and Lamar Advertising Series AA preferred stock held in the name of the record owner.

If any a holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who demands appraisal under the DGCL fails to perfect or has effectively withdrawn or lost its right of appraisal, each share of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock held by such holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock will be deemed to have been converted into and to have become, as of the effective time of the merger, the right to receive the merger consideration. A holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock may withdraw his or her demand for appraisal and agree to accept the merger consideration by delivering to us a written withdrawal of his or her demand for appraisal and acceptance of the merger consideration within 60 days after the effective date of the merger (or thereafter with the consent of the surviving entity). Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery will be dismissed as to any holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock without the approval of the Court of Chancery, and such approval may be conditioned upon such terms as the Court of Chancery deems just; provided, however, that any holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who has not commenced an appraisal action or joined that proceeding as a named party may withdraw his or her demand for appraisal and agree to accept the merger consideration offered within 60 days after the effective date.

Within 10 days after the effective date of the merger, the surviving entity will notify each holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who properly asserted appraisal rights under Section 262 of the DGCL and has not voted for the adoption of the merger agreement of the effective date of the merger. Within 120 days after the effective date of the merger, but not thereafter, either the surviving entity, or any holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who has complied with the requirements of Section 262 of the DGCL and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the fair value of the shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock held by all holders of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock entitled to appraisal. A person who is the beneficial owner of shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock held in a voting trust or by a nominee on behalf of such person may, in such person’s own name, file the petition described in the previous sentence. Upon the filing of the petition by a holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock, service of a copy of such petition shall be made upon the surviving entity. The surviving entity of the merger does not have an obligation to file such a petition in the event there are dissenting holders of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock. Accordingly, the failure of a holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock to file such a petition within the period specified could nullify the holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock’s previously written demand for appraisal. Lamar Advertising has no present intent to cause an appraisal petition to be filed, and holders of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock seeking to exercise appraisal rights should not assume that the surviving entity will file such a petition or that it will initiate any negotiations with respect to the fair value of such shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock. Accordingly, holders of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who desire to have their shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock appraised should initiate any petitions necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262 of the DGCL.

 

50

---

Table of Contents

The costs of the appraisal action may be determined by the Court of Chancery and made payable by the parties as the Court of Chancery deems equitable in the circumstances. The Court of Chancery also may order that all or a portion of the expenses incurred by any stockholder in connection with an appraisal, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all of the shares entitled to appraisal.

If a petition for appraisal is duly filed by a holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock and a copy of the petition is delivered to the surviving entity of the merger, such surviving entity will then be obligated, within 20 days after receiving service of a copy of the petition, to provide the Court of Chancery with a duly verified list containing the names and addresses of all holders of Lamar Advertising Class B common stock and Lamar Advertising Series AA preferred stock who have demanded payment for their shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock and with whom agreements as to the value of their shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock have not been reached by the surviving entity. After notice to dissenting holders of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who demanded payment of their shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock, the Court of Chancery is empowered to conduct a hearing upon the petition, and to determine those holders of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who have complied with Section 262 of the DGCL and who have become entitled to the appraisal rights provided thereby. The Court of Chancery may require the holders of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who have demanded appraisal for their shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock fails to comply with that direction, the Court of Chancery may dismiss the proceedings as to that holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock.

Within 120 days after the effective date, any holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock (including any beneficial owner of shares entitled to appraisal rights) that has complied with the requirements for exercise of appraisal rights will be entitled, upon written request, to receive from the surviving entity a statement setting forth the aggregate number of shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock not voted in favor of adoption of the merger agreement and with respect to which demands for appraisal have been received and the aggregate number of holders of those shares. These statements must be mailed to the holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock within 10 days after a written request by such holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock for the information has been received by the surviving entity, or within 10 days after expiration of the period for delivery of demands for appraisal under Section 262 of the DGCL, whichever is later.

After determination of the holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock entitled to appraisal of their shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock (unless the Court of Chancery, in its discretion, proceeds to trial upon the appraisal prior to the final determination of the holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock entitled to an appraisal), the Court of Chancery will appraise the shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger, together with interest, if any. Unless the Court of Chancery in its discretion determines otherwise for good cause shown, interest from the effective date through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment. When the value is determined, the Court of Chancery will direct the payment of such value, with interest thereon, if any, to the holder of Lamar Advertising Class B common stock or Lamar Advertising Series

 

51

---

Table of Contents

AA preferred stock entitled to receive the same, upon surrender by such holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock of their certificates representing such shares.

Any holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock who has duly demanded and perfected an appraisal in compliance with Section 262 of the DGCL will not, after the effective date of the merger, be entitled to vote his or her shares for any purpose or be entitled to the payment of dividends or other distributions thereon, except dividends or other distributions payable to holders of record of shares of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock as of a date prior to the effective date of the merger.

If you desire to exercise appraisal rights as a holder of Lamar Advertising Class B common stock or Lamar Advertising Series AA preferred stock, you must not vote for the adoption of the merger agreement and you must strictly comply with the procedures set forth in Section 262 of the DGCL. Failure to take any required step in connection with the exercise of appraisal rights will result in the termination or waiver of such rights.

Restrictions on Sales of Lamar REIT Common Stock and Series AA Preferred Stock Issued Pursuant to the Merger

The shares of Lamar REIT common stock to be issued in connection with the merger will, subject to the restrictions on the transfer and ownership of Lamar REIT common stock set forth in the Lamar REIT charter, be freely transferable under the Securities Act, except for shares issued to any stockholder who may be deemed to be an “affiliate” of Lamar Advertising for purposes of Rule 144 under the Securities Act. Persons who may be deemed to be affiliates include individuals or entities that control, are controlled by, or are under the common control with, Lamar Advertising and may include the executive officers, directors and significant stockholders of Lamar Advertising.

The shares of Lamar REIT Series AA preferred stock to be issued in connection with the merger will be issued pursuant to an exemption from registration under the Securities Act of 1933, as amended. These shares are not being registered pursuant to this registration statement and will not be so registered. Accordingly, shares of Lamar REIT Series AA preferred stock issued in the merger will be “restricted securities” under Rule 144 of the Securities Act. The certificate(s) representing shares of Lamar REIT Series AA preferred stock will bear appropriate legends to that effect, and any holder of shares of Lamar REIT Series AA preferred stock must hold the shares indefinitely unless their disposition is registered with the SEC and qualified by applicable state authorities or exemptions from such registration and qualification are available.

Accounting Treatment of the Merger

For accounting purposes, the merger of Lamar Advertising with and into Lamar REIT will be treated as a transfer of assets and exchange of shares between entities under common control. The accounting basis used to initially record the assets and liabilities in Lamar REIT is the carryover basis of Lamar Advertising. Stockholder’s equity of Lamar REIT will be that carried over from Lamar Advertising, after giving effect to the distribution of non-REIT accumulated E&P.

 

52

---

Table of Contents

OTHER RESTRUCTURING TRANSACTIONS

During the course of 2013 and the early part of 2014, we completed an internal corporate restructuring to transfer certain of our assets and activities to newly formed, wholly owned TRSs, resulting in a structure that is intended to be in compliance with certain REIT qualification requirements for the 2014 taxable year. Following this restructuring, we now hold and operate certain of our assets that cannot be held and operated directly by a REIT through TRSs. The assets held in our TRSs primarily consist of our transit advertising business, advertising services business and our foreign operations in Canada and Puerto Rico. Our TRS assets and operations will continue to be subject, as applicable, to U.S. federal and state corporate income taxes. Furthermore, our assets and operations outside the United States will continue to be subject to foreign taxes in the jurisdictions in which those assets and operations are located. Net income from our TRSs will either be retained by our TRSs and used to fund their operations, or distributed to us, where it will be reinvested by us in our business or be available for distribution to our stockholders.

DIVIDEND AND DISTRIBUTION POLICY

On June 30, 2014 the Company paid a cash dividend to its common stockholders of approximately $79.0 million, or $0.83 per share of common stock, in anticipation of commencing to operate as a REIT effective January 1, 2014. On August 26, 2014, Lamar Advertising’s board of directors declared a cash dividend of $0.83 per share of common stock, payable on September 30, 2014 to holders of record of Lamar Advertising Class A common stock and Class B common stock on September 22, 2014. We expect to continue to declare regular quarterly distributions to holders of Lamar REIT common stock on an ongoing basis, the amount of which will be determined, and is subject to adjustment, by the board of directors. Any such dividends will be paid on all shares of common stock outstanding at the time of such payment. To qualify as a REIT, we must distribute to our stockholders an amount at least equal to 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gain). Generally, we expect to distribute all or substantially all of our REIT taxable income so as to not be subject to the income or excise tax on undistributed REIT taxable income. We may utilize available federal NOLs to reduce our REIT taxable income, and thus we may not be required to distribute material amounts of cash to qualify for taxation as a REIT or we may be able to reduce our required distributions. The federal NOLs expire beginning in 2020 through 2032. See the section entitled “Material United States Federal Income Tax Considerations.”

We expect that distributions will be declared quarterly. The amount, timing and frequency of distributions, however, will be at the sole discretion of the board of directors and will be declared based upon various factors, many of which are beyond our control, including:

 

•

our financial condition and operating cash flows;

 

•

our retention of cash to pursue acquisitions;

 

•

our operating and other expenses;

 

•

debt service requirements;

 

•

capital expenditure requirements;

 

•

the amount required to maintain REIT status and reduce any income and excise taxes that we otherwise would be required to pay;

 

•

limitations on distributions in our existing and future debt instruments;

 

•

our ability to utilize NOLs to offset our distribution requirements;

 

53

---

Table of Contents

•

limitations on our ability to fund distributions using cash generated through our TRSs; and

 

•

other factors that the board of directors may deem relevant.

Lamar REIT Series AA preferred stock will be entitled to preferential dividends, in an annual aggregate amount of $364,904, before any dividends may be paid on Lamar REIT common stock.

We anticipate that distributions will generally be paid from cash from operations after debt service requirements and non-discretionary capital expenditures. To the extent that our cash available for distribution is insufficient to allow us to satisfy the REIT distribution requirements, we currently intend to borrow funds to make distributions consistent with this policy. Our ability to fund distributions through borrowings is subject to continued compliance with debt covenants, as well as the availability of borrowing capacity under our lending arrangements. If our operations do not generate sufficient cash flows and we are unable to borrow, we may be required to reduce our anticipated quarterly distributions. Our distribution policy enables us to review the alternative funding sources available to us for distributions from time to time. For information regarding risk factors that could materially adversely affect our actual results of operations, please see the section entitled “Risk Factors.”

DISTRIBUTION OF NON-REIT ACCUMULATED E&P

Lamar Advertising has historically been treated as a taxable “C” corporation for U.S. federal income tax purposes. As a “C” corporation, any taxable income in any given taxable year not distributed to our stockholders or otherwise reduced by offsetting net losses in later taxable years resulted in accumulated earnings and profits for U.S. federal income tax purposes. A REIT is not permitted to retain earnings and profits accumulated during years when the company or its predecessor was taxed as a regular “C” corporation. For Lamar REIT to elect REIT status for the taxable year that began on January 1, 2014, we must distribute to our stockholders on or before December 31, 2014 our previously undistributed accumulated earnings and profits attributable to the taxable periods ending prior to January 1, 2014. We currently estimate that, if we elect REIT status as of January 1, 2014, the aggregate amount of our non-REIT accumulated E&P will be approximately $40 million. The board of directors declared a quarterly cash dividend of $0.83 per share of common stock on August 26, 2014, which is payable on September 30, 2014 to holders of record of Class A common stock and Class B common stock on September 22, 2014. Lamar Advertising previously paid a dividend of $0.83 per share of common stock on June 30, 2014. We expect that the amounts declared and paid in connection with the June 30, 2014 dividend, the September 30, 2014 dividend and the other regular quarterly dividend we expect to pay in 2014, will be in an amount sufficient to enable us to distribute our non-REIT accumulated E&P no later than December 31, 2014. As a result, we do not expect to pay a one-time special distribution of our non-REIT accumulated E&P. However, if this distribution of our non-REIT accumulated E&P in connection with the payment of regular quarterly dividends in 2014 is not sufficient to fully distribute our non-REIT accumulated E&P, we will make one or more additional distributions to the holders of Lamar REIT common stock in cash prior to the end of 2014. The tax rules provide for potentially different taxation of dividends paid out of non-REIT accumulated E&P and dividends paid out of REIT earnings and profits and also provide for earnings and profits ordering rules that may not correspond to the dividend payment mechanic described above. Please see the section entitled “Material United States Federal Income Tax Considerations — Taxation of U.S. Stockholders — Distributions by Lamar REIT” for more information about the tax consequences of our distributions.

 

54

---

Table of Contents

OUR BUSINESS

General

Set forth below is a description of the business of Lamar Advertising. Lamar Advertising REIT Company, a wholly owned subsidiary of Lamar Advertising, was incorporated in Delaware on May 16, 2014 to succeed to and continue the business of Lamar Advertising, which is described below, upon completion of the merger of Lamar Advertising with and into Lamar REIT. Effective at the time of the merger, Lamar REIT will be renamed “Lamar Advertising Company” and will continue the business currently conducted by Lamar Advertising. Lamar REIT has no material assets or liabilities and has not conducted any activities other than those incident to its formation, the execution of the merger agreement and the preparation of this proxy statement/prospectus.

General

Lamar Advertising is one of the largest outdoor advertising companies in the United States based on number of displays and has operated under the Lamar name since 1902. We operate in a single operating and reporting segment, advertising. We rent advertising space on billboards, buses, shelters, benches and logo plates. As of June 30, 2014, we owned and operated approximately 145,000 billboard advertising displays in 44 states, Canada and Puerto Rico, approximately 130,000 logo advertising displays in 23 states and the province of Ontario, Canada, and operated over 40,000 transit advertising displays in 16 states, Canada and Puerto Rico. We offer our customers a fully integrated service, satisfying all aspects of their billboard display requirements from ad copy production to placement and maintenance.

Our Business

We operate three types of outdoor advertising displays: billboards, logo signs and transit advertising displays.

Billboards. We rent most of our advertising space on two types of billboards: bulletins and posters.

 

•

Bulletins are generally large, illuminated advertising structures that are located on major highways and target vehicular traffic.

 

•

Posters are generally smaller advertising structures that are located on major traffic arteries and city streets and target vehicular and pedestrian traffic.

In addition to these traditional billboards, we also rent space on digital billboards, which are generally located on major traffic arteries and city streets. As of June 30, 2014, we owned and operated over 1,900 digital billboard advertising displays in 41 states, Canada and Puerto Rico.

Logo Signs. We rent advertising space on logo signs located near highway exits.

 

•

Logo signs generally advertise nearby gas, food, camping, lodging and other attractions.

We are the largest provider of logo signs in the United States. As of June 30, 2014, we operated 23 of the 26 privatized state logo sign contracts, constituting approximately 130,000 logo sign advertising displays in those 23 states and Canada.

Transit Advertising Displays. We also rent advertising space on the exterior and interior of public transportation vehicles, transit shelters and benches in over 60 markets. As of June 30, 2014, we operated over 40,000 transit advertising displays in 16 states, Canada and Puerto Rico.

 

55

---

Table of Contents

Operating Strategies

We strive to be a leading provider of outdoor advertising services in each of the markets that we serve, and our operating strategies for achieving that goal include:

Continuing to Provide High Quality Local Sales and Service. We seek to identify and closely monitor the needs of our customers and to provide them with a full complement of high quality advertising services. Local advertising constituted approximately 78% of our net revenues for the year ended December 31, 2013, which management believes is higher than the industry average. We believe that the experience of our regional, territory and local managers has contributed greatly to our success. For example, our regional managers have been with us for an average of 31 years. In an effort to provide high quality sales and service at the local level, we employed approximately 825 local account executives as of December 31, 2013. Local account executives are typically supported by additional local staff and have the ability to draw upon the resources of our central office, as well as our offices in other markets, in the event business opportunities or customers’ needs support such an allocation of resources.

Continuing a Centralized Control and Decentralized Management Structure. Our management believes that, for our particular business, centralized control and a decentralized organization provide for greater economies of scale and are more responsive to local market demands. Therefore, we maintain centralized accounting and financial control over our local operations, but our local managers are responsible for the day-to-day operations in each local market and are compensated according to that market’s financial performance.

Continuing to Focus on Internal Growth. Within our existing markets, we seek to increase our revenue and improve cash flow by employing highly-targeted local marketing efforts to improve our display occupancy rates and by increasing advertising rates where and when demand can absorb rate increases. Our local offices spearhead this effort and respond to local customer demands quickly.

In addition, we routinely invest in upgrading our existing displays and constructing new displays. During the last ten years we invested approximately $1.2 billion in capitalized expenditures, which include improvements to our existing displays and in constructing new displays. Our regular improvement and expansion of our advertising display inventory allows us to provide high quality service to our current advertisers and to attract new advertisers.

Continuing to Pursue Other Outdoor Advertising Opportunities. We plan to renew existing logo sign contracts and pursue additional logo sign contracts. Logo sign opportunities arise periodically, both from states initiating new logo sign programs and states converting from government-owned and operated programs to privately-owned and operated programs. Furthermore, we plan to pursue additional tourist oriented directional sign programs in both the United States and Canada and also other motorist information signing programs as opportunities present themselves. In addition, in an effort to maintain market share, we continue to pursue attractive transit advertising opportunities as they become available.

Reinvesting in Capital Expenditures Including Digital Technology. We have historically invested in capital expenditures, however, during 2009 and 2010, we significantly reduced our capital expenditures to position the Company to manage through the economic recession. As a result of the economic recovery, the Company began to reinvest in capital expenditures beginning in 2011. We spent approximately $106 million in total capital expenditures in fiscal 2013, of which $50.2 million was spent on digital technology. We expect our 2014 capitalized expenditures to closely approximate our spending in 2013.

Company Operations

Billboard Advertising

We rent most of our advertising space on two types of billboard advertising displays: bulletins and posters. As of June 30, 2014, we owned and operated approximately 145,000 billboard advertising displays in 44 states, Canada and Puerto Rico. In 2013, we derived approximately 72% of our billboard advertising net revenues from bulletin sales and 28% from poster sales.

 

56

---

Table of Contents

Bulletins are large advertising structures (the most common size is fourteen feet high by forty-eight feet wide, or 672 square feet) consisting of panels on which advertising copy is displayed. We wrap advertising copy printed with computer-generated graphics on a single sheet of vinyl around the structure. To attract more attention, some of the panels may extend beyond the linear edges of the display face and may include three-dimensional embellishments. Because of their greater impact and higher cost, bulletins are usually located on major highways and target vehicular traffic. At June 30, 2014, we operated approximately 69,000 bulletin displays.

We generally rent individually-selected bulletin space to advertisers for the duration of the contract (usually one to twelve months). We also rent space on bulletins as part of a rotary plan under which we rotate the advertising copy from one bulletin location to another within a particular market at stated intervals (usually every sixty to ninety days) to achieve greater reach within that market.

Posters are smaller advertising structures (the most common size is eleven feet high by twenty-three feet wide, or 250 square feet; we also operate junior posters, which are five feet high by eleven feet wide, or 55 square feet). Poster panels utilize a single flexible sheet of polyethylene material that inserts into the face of the panel. Posters are concentrated on major traffic arteries and target vehicular traffic, and junior posters are concentrated on city streets and target hard-to-reach pedestrian traffic and nearby residents. At June 30, 2014, we operated approximately 76,000 poster displays.

In some cases, we rent poster space for thirty- and sixty-day periods in packages called “showings,” which comprise a given number of displays in a specified market area. We place and spread out the displays making up a showing in well-traveled areas to reach a wide audience in the particular market.

In addition to the traditional displays described above, we also rent space on digital billboards. Digital billboards are large electronic light emitting diode (LED) displays (the most common sizes are fourteen feet high by forty-eight feet wide, or 672 square feet; ten and a half feet high by thirty six feet wide, or 378 square feet; and ten feet high by twenty-one feet wide, or 210 square feet) that are generally located on major traffic arteries and city streets. Digital billboards are capable of generating over one billion colors and vary in brightness based on ambient conditions. They display completely digital advertising copy from various advertisers in a slide show fashion, rotating each advertisement approximately every 6 to 8 seconds. At June 30, 2014, we operated over 1,900 digital billboards in various markets, which represents approximately 16% of billboard advertising net revenue.

We own the physical structures on which the advertising copy is displayed. We build the structures on locations we either own or lease. In each local office, one employee typically performs site leasing activities for the markets served by that office.

In the majority of our markets, our local production staffs perform the full range of activities required to create and install billboard advertising displays. Production work includes creating the advertising copy design and layout, coordinating its printing and installing the designs on the displays. We provide our production services to local advertisers and to advertisers that are not represented by advertising agencies, as most national advertisers represented by advertising agencies use preprinted designs that require only our installation. Our talented design staff uses state-of-the-art technology to prepare creative, eye-catching displays for our customers. We can also help with the strategic placement of advertisements throughout an advertiser’s market by using software that allows us to analyze the target audience and its demographics. Our artists also assist in developing marketing presentations, demonstrations and strategies to attract new customers.

In marketing billboard displays to advertisers, we compete with other forms of out-of-home advertising and other media. When selecting the media and provider through which to advertise, advertisers consider a number of factors and advertising providers, which are described in the section entitled — “Competition” below.

 

57

---

Table of Contents

Logo Sign Advertising

We entered the logo sign advertising business in 1988 and have become the largest provider of logo sign services in the United States, operating 23 of the 26 privatized state logo contracts as of June 30, 2014. We erect logo signs, which generally advertise nearby gas, food, camping, lodging and other attractions, and directional signs, which direct vehicle traffic to nearby services and tourist attractions, near highway exits. As of June 30, 2014, we operated over 42,000 logo sign structures containing approximately 130,000 logo advertising displays in the United States and Canada.

We operate the logo sign contracts in the province of Ontario, Canada and in the following states:

 

Colorado		Louisiana		Montana		Oklahoma
Delaware		Maine		Nebraska		South Carolina
Florida		Michigan		Nevada		Utah
Georgia		Minnesota		New Jersey		Virginia
Kansas		Mississippi		New Mexico		Wisconsin
Kentucky		Missouri(1)		Ohio

 

(1)	The logo sign contract in Missouri is operated by a 66 2⁄3% owned partnership.

We also operate the tourist oriented directional signing (“TODS”) programs for the states of Colorado, Kansas, Kentucky, Louisiana, Michigan, Missouri, Montana, Nebraska, Nevada, New Jersey, Ohio, South Carolina, Virginia and the province of Ontario, Canada.

Our logo and TODS operations are decentralized. Generally, each office is staffed with an experienced local general manager, local sales and office staff and a local signing sub-contractor. This decentralization allows the management staff of Interstate Logos, L.L.C. (the subsidiary that operates all of the logo and directional sign-related businesses) to travel extensively to the various operations and serve in a technical and management advisory capacity and monitor regulatory and contract compliance. We also run a silk screening operation in Baton Rouge, Louisiana and a display construction company in Atlanta, Georgia.

State logo sign contracts represent the exclusive right to erect and operate logo signs within a state for a period of time. The terms of the contracts vary, but generally range from five to ten years, with additional renewal terms. Each logo sign contract generally allows the state to terminate the contract prior to its expiration and, in most cases, with compensation for the termination to be paid to the company. When a logo sign contract expires, we transfer ownership of the advertising structures to the state. Depending on the contract, we may or may not be entitled to compensation at that time. Of our 24 logo sign contracts in place, in the United States and Canada, at June 30, 2014, four are subject to renewal in 2014.

States usually award new logo sign contracts and renew expiring logo sign contracts through an open proposal process. In bidding for new and renewal contracts, we compete against three other national logo sign providers, as well as local companies based in the state soliciting proposals.

In marketing logo signs to advertisers, we compete with other forms of out-of-home advertising and other media. When selecting the media and provider through which to advertise, advertisers consider a number of factors and advertising providers, which are described in the section entitled — “Competition” below.

Transit Advertising

We entered into the transit advertising business in 1993 as a way to complement our existing business and maintain market share in certain markets. Transit contracts are generally with the local municipalities and allow us the exclusive right to rent advertising space to customers on buses, benches or shelters. The terms of the contracts vary but generally range between 5-15 years, many with renewable options for contract extension. We provide transit advertising displays on bus shelters, benches and buses in over 60 transit markets, and our

 

58

---

Table of Contents

production staff provides a full range of creative and installation services to our transit advertising customers. As of June 30, 2014, we operated over 40,000 transit advertising displays in 16 states, Canada and Puerto Rico.

Municipalities usually award new transit advertising contracts and renew expiring transit advertising contracts through an open bidding process. In bidding for new and renewal contracts, we compete against national outdoor advertising providers and local, on-premise sign providers and sign construction companies. Transit advertising operators incur start-up costs to build and install the advertising structures (such as transit shelters) upon being awarded contracts.

In marketing transit advertising displays to advertisers, we compete with other forms of out-of-home advertising and other media. When selecting the media and provider through which to advertise, advertisers consider a number of factors and advertising providers, which are described in the section entitled — “Competition” below.

Competition

Although the outdoor advertising industry has encountered a wave of consolidation, the industry remains fragmented. The industry is comprised of several large outdoor advertising and media companies with operations in multiple markets, as well as smaller, local companies operating a limited number of structures in one or a few local markets.

Although we primarily focus on small to mid-size markets where we can attain a strong market share, in each of our markets, we compete against other providers of outdoor advertising and other types of media, including:

 

•

Larger outdoor advertising providers, such as (i) Clear Channel Outdoor Holdings, Inc., which operates billboards, street furniture displays, transit displays and other out-of-home advertising displays in North America and worldwide and (ii) CBS Outdoor Americas Inc., which operates traditional outdoor, street furniture and transit advertising properties in North America and worldwide. Clear Channel Outdoor and CBS Outdoor each have corporate relationships with large media conglomerates and may have greater total resources, product offerings and opportunities for cross-selling than we do.

 

•

Broadcast and cable television, radio, print media, direct mail marketing, the internet, social media and applications used in conjunction with wireless devices.

 

•

An increasing variety of out-of-home advertising media, such as advertising displays in shopping centers, malls, airports, stadiums, movie theaters and supermarkets and advertising displays on taxis, trains and buses.

In selecting the form of media through which to advertise, advertisers evaluate their ability to target audiences having a specific demographic profile, lifestyle, brand or media consumption or purchasing behavior or audiences located in, or traveling through, a particular geography. Advertisers also compare the relative costs of available media, evaluating the number of impressions (potential viewings), exposure (the opportunity for advertising to be seen) and circulation (traffic volume in a market), as well as potential effectiveness, quality of related services (such as advertising copy design and layout) and customer service. In competing with other media, we believe that outdoor advertising is relatively more cost-efficient than other media, allowing advertisers to reach broader audiences and target specific geographic areas or demographic groups within markets.

We believe that our strong emphasis on sales and customer service and our position as a major provider of advertising services in each of our primary markets enables us to compete effectively with the other outdoor advertising companies, as well as with other media, within those markets.

Geographic Diversification

Our advertising displays are geographically diversified across the United States, Canada and Puerto Rico. The following table sets forth information regarding the geographic diversification of our advertising displays, which are listed in order of contributions to total revenue. Markets with less than 1% of total displays are grouped in the category “all other United States and Puerto Rico”.

 

59

---

Table of Contents

		Percentage of Revenues for the year ended, December 31, 2013																				Number of Displays for the year ended, December 31, 2013
Market		Static Billboard Displays				Digital Billboard Displays				Transit Displays				Logo Displays				Total Displays				Static Billboard Displays				Digital Billboard Displays				Transit Displays				Logo Displays				Total Displays				Percentage of Total Displays
New York, NY			3.5	%			0.2	%			0.0	%			0.0	%			2.8	%			1,222				9				—				—				1,231				0.4	%
Pittsburg, PA			2.6	%			4.1	%			2.9	%			0.0	%			2.7	%			3,279				49				838				—				4,166				1.4	%
Gary, IN			2.1	%			4.4	%			0.0	%			0.0	%			2.2	%			1,909				86				—				—				1,995				0.7	%
Las Vegas, NV			1.8	%			2.2	%			0.0	%			0.0	%			1.7	%			901				28				—				—				929				0.3	%
Oklahoma City, OK			1.9	%			1.7	%			0.0	%			0.0	%			1.7	%			2,803				24				—				—				2,827				0.9	%
San Bernardino, CA			1.7	%			1.5	%			1.6	%			0.0	%			1.6	%			1,039				11				1,151				—				2,201				0.7	%
Cincinnati, OH			1.2	%			3.6	%			0.0	%			0.0	%			1.4	%			1,266				30				—				—				1,296				0.4	%
Vancouver, Canada			0.4	%			0.0	%			24.4	%			0.0	%			1.4	%			—				—				5,748				—				5,748				1.9	%
Hartford, CT			1.5	%			2.1	%			0.2	%			0.0	%			1.4	%			1,005				20				56				—				1,081				0.4	%
Richmond, VA			1.4	%			1.8	%			0.0	%			0.0	%			1.3	%			1,403				28				—				—				1,431				0.5	%
Knoxville, TN			1.6	%			0.6	%			0.0	%			0.0	%			1.3	%			2,151				11				—				—				2,162				0.7	%
Dallas, TX			1.5	%			0.6	%			0.0	%			0.0	%			1.2	%			1,194				10				—				—				1,204				0.4	%
Birmingham, AL			1.3	%			1.5	%			0.0	%			0.0	%			1.2	%			1,647				21				—				—				1,668				0.6	%
Baton Rouge, LA			1.3	%			1.7	%			0.0	%			0.0	%			1.2	%			1,596				35				—				—				1,631				0.5	%
Nashville, TN			1.3	%			1.4	%			0.0	%			0.0	%			1.2	%			1,710				23				—				—				1,733				0.6	%
Atlanta, GA			1.1	%			2.1	%			0.0	%			0.0	%			1.2	%			813				36				—				—				849				0.3	%
Buffalo, NY			1.2	%			1.1	%			2.5	%			0.0	%			1.2	%			1,010				17				1,871				—				2,898				1.0	%
Austin, TX			1.4	%			0.4	%			0.0	%			0.0	%			1.1	%			960				3				—				—				963				0.3	%
Gulfport, MS			1.1	%			1.0	%			0.0	%			0.0	%			1.0	%			1,017				13				—				—				1,030				0.3	%
Tulsa, OK			1.0	%			1.5	%			0.0	%			0.0	%			1.0	%			1,721				19				—				—				1,740				0.6	%
Kansas City, MO			0.9	%			1.9	%			0.0	%			0.0	%			1.0	%			794				21				—				—				815				0.3	%
Jackson, MS			0.8	%			2.5	%			0.0	%			0.0	%			1.0	%			1,119				48				—				—				1,167				0.4	%
All US Logo Programs			0.0	%			0.0	%			0.0	%			91.0	%			5.4	%			—				—				—				115,737				115,737				38.2	%
All Other United States and Puerto Rico			67.2	%			62.2	%			54.6	%			0.0	%			61.4	%			112,688				1,339				23,694				—				137,721				45.4	%
All Other Canada			0.1	%			0.1	%			13.8	%			9.0	%			1.4	%			164				2				4,621				4,228				9,015				3.0	%
Total			100.0	%			100.0	%			100.0	%			100.0	%			100.0	%			143,411				1,883				37,979				119,965				303,238				100.0	%
Total Revenue (in millions)		$	919.4			$	184.1			$	75.0			$	67.3			$	1,245.8

Taxable REIT Subsidiaries

During the course of 2013 and the early part of 2014, we completed an internal corporate restructuring resulting in a structure that is intended to be in compliance with certain REIT qualification requirements for the 2014 taxable year. Following this restructuring, we now hold and operate certain of our assets that cannot be held and operated directly by a REIT through taxable REIT subsidiaries, or TRSs. A TRS is a subsidiary of a REIT that pays corporate taxes on its taxable income. The assets held in our TRSs primarily consist of our transit advertising business, advertising services business and our foreign operations in Canada and Puerto Rico. Our TRS assets and operations will continue to be subject, as applicable, to U.S. federal and state corporate income taxes. Furthermore, our assets and operations outside the United States will continue to be subject to foreign taxes in the jurisdictions in which those assets and operations are located. Net income from our TRSs will either be retained by our TRSs and used to fund their operations, or distributed to us, where it will be reinvested by us in our business or be available for distribution to Lamar Advertising’s stockholders. As of December 31, 2013, we estimate that annual revenue generated by our TRSs in the aggregate would have been approximately $200 million.

 

60

---

Table of Contents

Customers

Our customer base is also diverse. The table below sets forth the ten industries from which we derived most of our billboard advertising revenues for the year ended December 31, 2013, as well as the percentage of billboard advertising revenues attributable to the advertisers in those industries. The individual advertisers in these industries accounted for approximately 72% of our billboard advertising net revenues in the year ended December 31, 2013. No individual advertiser accounted for more than 1.0% of our billboard advertising net revenues in that period.

 

Categories		Percentage of Net Billboard Advertising Revenues
Restaurants			13	%
Retailers			11	%
Health Care			10	%
Service			9	%
Amusement–Entertainment/Sports			7	%
Automotive			7	%
Gaming			5	%
Financial — Banks, Credit Unions			4	%
Telecommunications			3	%
Hotels and Motels			3	%
			72	%

Regulation

Outdoor advertising is subject to governmental regulation at the federal, state and local levels. Regulations generally restrict the size, spacing, lighting and other aspects of advertising structures and pose a significant barrier to entry and expansion in many markets.

Federal law, principally the Highway Beautification Act of 1965 (the “HBA”), regulates outdoor advertising on Federal — Aid Primary, Interstate and National Highway Systems roads. The HBA requires states, through the adoption of individual Federal/State Agreements, to “effectively control” outdoor advertising along these roads, and mandates a state compliance program and state standards regarding size, spacing and lighting. The HBA requires any state or political subdivision that compels the removal of a lawful billboard along a Federal — Aid Primary or Interstate highway to pay just compensation to the billboard owner.

All states have passed billboard control statutes and regulations at least as restrictive as the federal requirements, including laws requiring the removal of illegal signs at the owner’s expense (and without compensation from the state). Although we believe that the number of our billboards that may be subject to removal as illegal is immaterial, and no state in which we operate has banned billboards entirely, from time to time governments have required us to remove signs and billboards legally erected in accordance with federal, state and local permit requirements and laws. Municipal and county governments generally also have sign controls as part of their zoning laws and building codes. We contest laws and regulations that we believe unlawfully restrict our constitutional or other legal rights and may adversely impact the growth of our outdoor advertising business.

Using federal funding for transportation enhancement programs, state governments have purchased and removed billboards for beautification, and may do so again in the future. Under the power of eminent domain, state or municipal governments have laid claim to property and forced the removal of billboards. Under a concept called amortization by which a governmental body asserts that a billboard operator has earned compensation by continued operation over time, local governments have attempted to force removal of legal but nonconforming billboards (i.e., billboards that conformed to applicable zoning regulations when built but which do not conform to current zoning regulations). Although the legality of amortization is questionable, it has been upheld in some

 

61

---

Table of Contents

instances. Often, municipal and county governments also have sign controls as part of their zoning laws, with some local governments prohibiting construction of new billboards or allowing new construction only to replace existing structures. Although we have generally been able to obtain satisfactory compensation for those of our billboards purchased or removed as a result of governmental action, there is no assurance that this will continue to be the case in the future.

We have also introduced and intend to expand the deployment of digital billboards that display static digital advertising copy from various advertisers that change every 6 to 8 seconds. We have encountered some existing regulations that restrict or prohibit these types of digital displays but it has not yet materially impacted our digital deployment. Since digital billboards have only recently been developed and introduced into the market on a large scale, however, existing regulations that currently do not apply to them by their terms could be revised to impose greater restrictions. These regulations may impose greater restrictions on digital billboards due to alleged concerns over aesthetics or driver safety.

In January 2013, Scenic America, Inc., a nonprofit membership organization, filed a lawsuit against the U.S. Department of Transportation (USDOT) and the Federal Highway Administration (FHWA). The complaint alleged that (i) the FHWA exceeded its authority when the agency issued the 2007 Guidance to assist its division offices in evaluating state regulations that authorize the construction and operation of digital billboards that are in conformance with restrictions on “intermittent”, “flashing” or “moving” lights, which restrictions are contained in the individual Federal/State Agreements that implement the provisions of the HBA and in issuing the 2007 Guidance, the FHWA violated the Administrative Procedures Act (APA) by not first engaging in formal rulemaking, (ii) the 2007 Guidance violated the HBA because it adopted “a new lighting standard” without first amending the provisions of the Federal/State Agreements and (iii) the 2007 Guidance violates the HBA (the “2007 Guidance”) because digital billboards are themselves “inconsistent with customary use” of outdoor advertising, as that term is used in the HBA. As the principal remedy for these alleged violations, the complaint sought an injunction vacating the 2007 Guidance. On June 20, 2014, the U.S. District Court for the District of Columbia dismissed all challenges made by Scenic America to the 2007 Guidance finding that (i) the 2007 Guidance was an interpretive and not a substantive rule and, therefore, did not violate the APA, (ii) the 2007 Guidance did not infringe on the Federal/State Agreements and (iii) the 2007 Guidance is consistent with “customary use” and, therefore, did not violate the HBA. Scenic America filed a notice of appeal from the District Court’s judgment to the D.C. Circuit Court of Appeals on August 7, 2014.

On December 30, 2013, USDOT and FHWA published a Notice encouraging states to work with the FHWA to review their Federal/State Agreements, most of which were put in place in the late 1960s and early 1970s, to determine if amendments are advisable. FHWA encouraged each state to work with their FHWA division offices to amend its Federal/State Agreement so that it is consistent with the state’s current outdoor advertising objectives and address the evolving technology being used or that could be used in the future by the outdoor industry. The Notice details a multi-step process to achieve this goal. The Notice does not make any reference to the 2007 Guidance, nor does it recommend or require any specific substantive amendments to a state’s Federal/State Agreement. It is uncertain whether the FHWA Notice will have any impact on current federal, state or local regulation of outdoor advertising signs or on the above referenced Scenic America law suit. To the extent that any Federal/State Agreements are amended in a manner that places new restrictions on outdoor advertising it could have a material adverse effect on our business, results of operations or financial condition.

Relatively few large scale studies have been conducted to date regarding driver safety issues, if any, related to digital billboards. On December 30, 2013, the results of a study conducted by USDOT and FHWA that looked at the effect of digital billboards and conventional billboards on driver visual behavior were issued. The conclusions of the report indicated that the presence of digital billboards did not appear to be related to a decrease in looking toward the road ahead and were generally within acceptable thresholds. The report cautioned, however, that it adds to the knowledge base but does not present definitive answers to the research questions investigated. Accordingly, the results of this or other studies may result in regulations at the federal or state level that impose greater restrictions on digital billboards. Any new restrictions on digital billboards could have a material adverse

 

62

---

Table of Contents

effect on both our existing inventory of digital billboards and our plans to expand our digital deployment, which could have a material adverse effect on our business, results of operations and financial condition.

Legal Proceedings

From time to time, we are involved in litigation in the ordinary course of business, including disputes involving advertising contracts, site leases, employment claims and construction matters. We are also involved in routine administrative and judicial proceedings regarding billboard permits, fees and compensation for condemnations. We are not a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on us.

Properties

Our management headquarters is located in Baton Rouge, Louisiana. We also own 120 local operating facilities with front office administration and sales office space connected to back-shop poster and bulletin production space. In addition, we lease an additional 124 operating facilities at an aggregate lease expense for 2013 of approximately $7.1 million.

We own approximately 6,900 parcels of property beneath our advertising displays. As of December 31, 2013, we leased approximately 75,900 outdoor sites, accounting for an annualized lease expense of approximately $208.9 million. This amount represented approximately 19% of billboard advertising net revenues for that period. These leases are for varying terms ranging from month-to-month to a term of over ten years, and many provide us with renewal options. Our lease agreements generally permit us to use the land for the construction, repair and relocation of outdoor advertising displays, including all rights necessary to access and maintain the site. Approximately 61% of our leases will expire or be subject to renewal in the next 5 years, 14% will expire or be subject to renewal in 6 to 10 years and 25% thereafter. There is no significant concentration of displays under any one lease or subject to negotiation with any one landlord. An important part of our management activity is to manage our lease portfolio and negotiate suitable lease renewals and extensions.

The following table illustrates the number of leased and owned sites by state as of December 31, 2013, which is sorted from greatest to least in number and percentage of leased sites. States in which we lease less than 2% of our portfolio are grouped in the category “all other states”.

 

State		# of billboard leased sites				% of total				# of owned billboard sites				% of total
Pennsylvania			6,499				8.7	%			1,170				16.8	%
Texas			6,399				8.6	%			633				9.1	%
California			5,182				6.9	%			129				1.9	%
Ohio			3,804				5.1	%			358				5.2	%
Louisiana			3,624				4.8	%			448				6.4	%
Alabama			3,499				4.7	%			447				6.4	%
Tennessee			3,144				4.2	%			267				3.8	%
Florida			3,111				4.2	%			382				5.5	%
North Carolina			2,969				4.0	%			133				1.9	%
New York			2,575				3.4	%			186				2.7	%
Missouri			2,520				3.4	%			225				3.2	%
Mississippi			2,270				3.0	%			300				4.3	%
Georgia			2,249				3.0	%			178				2.6	%
Wisconsin			2,248				3.0	%			266				3.8	%
Indiana			2,210				3.0	%			237				3.4	%
Michigan			2,044				2.7	%			187				2.7	%
Oklahoma			2,031				2.7	%			109				1.6	%
Virginia			1,872				2.5	%			120				1.7	%
All Other States			17,605				22.1	%			1,175				16.9	%
			75,855				100.0	%			6,950				100.0	%

 

63

---

Table of Contents

Contract Expirations

We derive revenues primarily from renting advertising space to customers on our advertising displays. Our contracts with customers generally cover periods ranging from one week to one year and are generally billed every four weeks. Since contract terms are short-term in nature, we do not consider revenues by year of contract expiration to be meaningful.

Employees

We employed approximately 3,000 people as of December 31, 2013. Approximately 200 employees were engaged in overall management and general administration at our management headquarters in Baton Rouge, Louisiana, and the remainder, including approximately 825 local account executives, were employed in our operating offices.

Fifteen of our local offices employ billposters and construction personnel who are covered by collective bargaining agreements. We believe that our relationship with our employees, including our 117 unionized employees, is good, and we have never experienced a strike or work stoppage.

Inflation

In the last three years, inflation has not had a significant impact on us.

Seasonality

Our revenues and operating results are subject to seasonality. Typically, we experience our strongest financial performance in the summer and fall, and our weakest financial performance in the first quarter of the calendar year, partly because retailers cut back their advertising spending immediately following the holiday shopping season. We expect this trend to continue in the future. Because a significant portion of our expenses is fixed, a reduction in revenues in any quarter is likely to result in a period-to-period decline in operating performance and net earnings.

 

64

---

Table of Contents

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The following is a discussion of our anticipated policies with respect to distributions, investments, financing, lending and certain other activities of Lamar REIT. Upon completion of the REIT conversion, these policies will be determined and periodically thereafter amended, in a manner consistent with legal and contractual requirements, by the board of directors of Lamar REIT without notice to, or a vote of, the stockholders of Lamar REIT.

Dividend Policy

If the merger, which is an important element of the REIT conversion, is approved by our stockholders, we intend to continue to pay regular quarterly distributions. For a discussion of our dividend and distribution policy, see the section entitled “Dividend and Distribution Policy.”

Investment Policy

Investments in Real Estate or Interests in Real Estate

Immediately following the REIT conversion, we will hold and operate substantially all of our domestic billboard advertising display business and logo sign advertising business directly and indirectly through non-TRS subsidiaries, and we will hold substantially all of our domestic transit advertising business and our advertising services business, as currently structured and operated, and our operations in Canada and Puerto Rico through TRSs. Our investment objective is to seek the highest risk adjusted returns on invested capital for our stockholders by simultaneously increasing recurring free cash flow per share and our return on invested capital. To achieve this, we expect we would continue to deploy our capital through our annual capital expenditure program and strategic acquisitions, subject to available funds and market conditions.

 

•

Annual capital expenditures program. We will continue to reinvest in our existing assets and expand our existing outdoor advertising display portfolio. This includes capital expenditures associated with maintenance and capitalized costs associated with the construction of new billboard displays, the entrance into and renewal of logo sign and transit contracts, and the purchase of real estate and operating equipment.

 

•

Acquisitions. We will seek to pursue strategic acquisitions of outdoor advertising businesses and assets. This includes acquisitions in our existing markets and in new markets where we can meet our return on investment criteria. When evaluating investments in new markets, our return on investment criteria reflects the additional risks inherent to the particular geographic area.

Subject to certain asset tests that we must satisfy to qualify as a REIT, there are currently no limitations on (a) the percentage of our assets that may be invested in any one property, venture or type of security, (b) the number of properties in which we may invest, or (c) the concentration of investments in a single geographic region. The board of directors may establish limitations, and other policies, as it deems appropriate from time to time. Please see the section entitled “Material United States Federal Income Tax Considerations — Taxation of Lamar REIT as a REIT — Asset Tests Applicable to REITs” for more information about the asset tests we must satisfy to qualify as a REIT.

Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers

Generally speaking, we do not expect to engage in any significant investment activities with other entities, although we may consider joint venture investments with other investors. We may also invest in the securities of other issuers in connection with acquisitions of indirect interests in properties (normally general or limited partnership interests in special purpose partnerships owning properties). We may in the future acquire some, all

 

65

---

Table of Contents

or substantially all of the securities or assets of other REITs or similar entities where that investment would be consistent with our investment policies and the REIT qualification requirements. There are no limitations on the amount or percentage of our total assets that may be invested in any one issuer, other than those imposed by the gross income and asset tests that we must satisfy to qualify as a REIT. However, we do not currently anticipate investing in other issuers of securities for the purpose of exercising control or acquiring any investments primarily for sale in the ordinary course of business or holding any investments with a view to making short-term profits from their sale, but we may engage in these activities in the future.

We do not intend that our investments in securities will require us to register as an “investment company” under the Investment Company Act of 1940, as amended, and we intend to divest securities before any registration would be required. We do not intend to engage in trading, underwriting, agency distribution or sales of securities of other issuers.

Investments in Other Securities

Other than as described above, we do not intend to invest in any additional securities such as bonds, preferred stock or common stock.

Investments in Mortgages

We have not invested in, nor do we have any present intention to invest in, real estate mortgages, although we are not prohibited from doing so.

Dispositions

Subject to REIT qualification rules, we may dispose of some of our assets if, based upon management’s periodic review of our business, the board of directors determines that such action would be in the best interests of us and our stockholders.

Financing Policy

Our financing policies will largely depend on the nature and timeline of our investment opportunities and the prevailing economic and market conditions. If the board of directors determines that additional funding is desirable, we may raise funds through the following means:

 

•

debt financings, including but not limited to, accessing U.S. debt capital markets and drawing from the revolving portion of our senior credit facility;

 

•

equity offerings of securities; and

 

•

any combination of the above methods.

We intend to retain the maximum possible cash flow to fund our investments, subject to provisions in the Code requiring distribution of REIT taxable income to maintain our REIT status, and to minimize our income and excise tax liabilities. Further, as of June 30, 2014, we had approximately $342.4 million of total liquidity, which is comprised of approximately $34.4 million in cash and cash equivalents and approximately $308.0 million of availability under the revolving portion of our wholly owned subsidiary Lamar Media Corp.’s senior credit facility. We intend to utilize our cash on hand and availability under the revolving portion of Lamar Media’s senior credit facility to fund future discretionary investments.

We expect our primary source of external funding will continue to be the debt capital markets. Currently Lamar Media has outstanding $500 million 5 7/8% Senior Subordinated Notes issued in February 2012, $535 million 5% Senior Subordinated Notes issued in October 2012 and $510 million 5 3/8% Senior Notes issued in January 2014.

 

66

---

Table of Contents

We do not have a formal policy limiting the amount of indebtedness that we may incur, but we are subject to certain restrictions in our indentures and senior credit facility with regard to permitted indebtedness. In the future, we may seek to extend, expand, reduce or renew our senior credit facility, obtain new credit facilities or lines of credit, or issue new unsecured or secured debt that may contain limitations on indebtedness. We will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of indebtedness, including overall prudence, the purchase price of assets to be acquired with debt financing, the estimated market value of our assets upon refinancing, our ability to generate cash flow to cover our expected debt service and restrictions under our existing debt arrangements. For additional information, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Equity Capital Policies

Subject to applicable law and the requirements for listed companies on the NASDAQ, the board of directors may also authorize, without the approval of our stockholders, the obtaining of additional capital through the issuance of equity securities. Pursuant to the Lamar REIT charter, we will have authority to issue up to 362.5 million shares of Lamar REIT Class A common stock, 37.5 million shares of Lamar REIT Class B common stock and 100 million shares of undesignated preferred stock, of which 5,720 shares are designated Series AA preferred stock. Under Delaware law, the affirmative vote of the holders of a majority of the outstanding shares of any class of common stock is required to approve any amendment to the certificate of incorporation that would increase or decrease the par value of that class, or modify or change the powers, preferences or special rights of the shares of any class so as to affect that class adversely. The Lamar REIT charter, however, will allow for amendments to increase or decrease the number of authorized shares of Lamar REIT Class A common stock or Lamar REIT Class B common stock without a separate vote of either class.

Existing stockholders will have no preemptive right to additional shares issued in any offering, and any offering might cause a dilution of investment. We may in the future seek to offer equity securities as a source of discretionary investment funding when (a) it is a requirement of a seller, (b) the size of a strategic transaction would increase our leverage beyond what the board of directors or management believes to be appropriate, or (c) it is otherwise determined appropriate by the board of directors.

The board of directors may authorize the issuance of shares of preferred stock with terms and conditions that could have the effect of delaying, deterring or preventing a transaction or a change in control in us that might involve a premium price for holders of our shares of common stock or otherwise might be in their best interests. Additionally, shares of preferred stock could have distribution, voting, liquidation and other rights and preferences that are senior to those of our shares of common stock.

We may, under certain circumstances, purchase shares of common stock in the open market or in private transactions with our stockholders, if those purchases are approved by the board of directors or a committee thereof. The board of directors has no present intention of causing us to repurchase any shares, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualifying as a REIT.

Lending Policy

We expect that we will continue to make loans to our operating subsidiaries to the extent to which they require additional financing to fund growth through their discretionary capital programs and acquisitions.

Reports to Stockholders

We make available to our stockholders our annual reports, including our audited financial statements. We are subject to the information reporting provisions of the Exchange Act, which require us to file annual and periodic reports, proxy statements and other information, including audited financial statements, with the SEC.

 

67

---

Table of Contents

Other Activities

At all times, we intend to operate and to invest so as to comply with the Code requirements related to REIT qualification unless, due to changing circumstances or changes to the Code or Treasury regulations, the board of directors determines that it is no longer in the best interests of Lamar REIT and its stockholders to qualify as a REIT.

 

68

---

Table of Contents

PRO FORMA FINANCIAL INFORMATION

The following tables present selected financial data from the unaudited pro forma consolidated statement of operations for the year ended December 31, 2013, from the condensed consolidated statement of operations for the six months ended June 30, 2014 and from the unaudited pro forma condensed consolidated balance sheet as of June 30, 2014 giving effect to the restructuring transactions and REIT conversion described in the section entitled “Structure of the Transaction.” The unaudited pro forma balance sheet is presented as if the REIT conversion had occurred on June 30, 2014. The unaudited pro forma statements of operations present the effects of the REIT conversion as though it had occurred on January 1, 2013. The unaudited pro forma consolidated financial data are based on the estimates and assumptions set forth in the notes to such statements, which are preliminary and have been made solely for the purposes of developing such pro forma information. The unaudited pro forma consolidated financial data are not necessarily indicative of the financial position or operating results that would have been achieved had the REIT conversion been completed as of the dates indicated, nor are they necessarily indicative of future financial position or operating results. This information should be read in conjunction with the historical financial statements and related notes included in, or incorporated by reference into, this proxy statement/prospectus.

The unaudited pro forma condensed consolidated statement of operations and condensed consolidated balance sheet do not reflect the following:

 

•

One-time transaction costs yet to be incurred related to the REIT conversion, currently estimated to be approximately $2 million; and

 

•

The potential immaterial effect of lower cash balances these transactions have on interest income, higher borrowing costs or foregone investment opportunities.

In addition, the amounts of quarterly distributions are not reflected in the unaudited pro forma condensed consolidated balance sheet, as it is presented as if the REIT conversion had occurred on June 30, 2014.

To qualify as a REIT, at least 90% of our taxable income, determined without regard to the dividends paid deduction and by excluding any net capital gain, is required to be distributed to stockholders. As of December 31, 2013, we had NOLs that can be carried forward and utilized to potentially reduce the amount of future required distributions.

The pro forma financial results assume that 100% of taxable income has been distributed and that all relevant REIT qualification tests, as dictated by the Code and IRS rules and interpretations, were met for the entire year.

For accounting purposes, the merger of Lamar Advertising with and into Lamar REIT will be treated as a transfer of assets and exchange of shares between entities under common control. The accounting basis used to initially record the assets and liabilities in Lamar REIT is the carryover basis of Lamar Advertising. Stockholder’s equity of Lamar REIT will be that carried over from Lamar Advertising, after giving effect to the E&P distribution.

 

69

---

Table of Contents

LAMAR ADVERTISING COMPANY AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

FOR THE YEAR ENDED DECEMBER 31, 2013

(In thousands, except share and per share data)

 

		Actual				Adjustments								Pro Forma
Statement of Operations
Net revenues		$	1,245,842			$	—							$	1,245,842
Operating expenses (income):
Direct advertising expenses (exclusive of depreciation and amortization)			436,844				—								436,844
General and administrative expenses (exclusive of depreciation and amortization)			231,574				—								231,574
Corporate expenses (exclusive of depreciation and amortization)			57,212				(2,100	)			(F	)			55,112
Depreciation and amortization			300,579				—								300,579
Gain on disposition of assets			(3,804	)			—								(3,804	)
			1,022,405				(2,100	)							1,020,305
Operating income			223,437				2,100								225,537
Other expense (income):							—
Loss on extinguishment of debt			14,345				—								14,345
Interest income			(165	)			—								(165	)
Interest expense			146,277				—								146,277
			160,457				—								160,457
Income before income tax expense (benefit)			62,980				2,100								65,080
Income tax expense (benefit)			22,841				(110,807	)			(B	)			(87,966	)
Net income			40,139				112,907								153,046
Preferred stock dividends			365				—								365
Net income applicable to common stock		$	39,774			$	112,907							$	152,681
Earnings per share:
Basic earnings per share		$	0.42											$	1.62
Diluted earnings per share		$	0.42											$	1.62
Cash dividends declared per share of common stock		$	—			$	0.42				(A	)		$	0.42
Weighted average common shares outstanding			94,387,230				—								94,387,230
Incremental common shares from dilutive stock options			358,285				(358,285	)			(C	)			—
Weighted average common shares assuming dilution			94,745,515				(358,285	)							94,387,230
Statement of Comprehensive Income (Loss)
Net income		$	40,139			$	112,907							$	153,046
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			(2,111	)			—								(2,111	)
Comprehensive income		$	38,028			$	112,907							$	150,935

See accompanying notes to unaudited pro forma consolidated financial statements

 

70

---

Table of Contents

LAMAR ADVERTISING COMPANY AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

FOR THE SIX MONTHS ENDED JUNE 30, 2014

(In thousands, except share and per share data)

 

		Actual				Adjustments								Pro Forma
Statement of Operations
Net revenues		$	615,366			$	—							$	615,366
Operating expenses (income):
Direct advertising expenses (exclusive of depreciation and amortization)			225,785				—								225,785
General and administrative expenses (exclusive of depreciation and amortization)			113,731				—								113,731
Corporate expenses (exclusive of depreciation and amortization)			32,319				(1,492	)			(F	)			30,827
Depreciation and amortization			140,575				—								140,575
Gain on disposition of assets			(1,226	)			—								(1,226	)
			511,184				(1,492	)							509,692
Operating income			104,182				1,492								105,674
Other expense (income):
Loss on extinguishment of debt			26,023				—								26,023
Other-than-temporary impairment of investment			4,069				—								4,069
Interest income			(88	)			—								(88	)
Interest expense			56,354				—								56,354
			86,358				—								86,358
Income (loss) before income tax expense (benefit)			17,824				1,492								19,316
Income tax expense (benefit)			7,239				(6,552	)			(B	)			687
Net income			10,585				8,044								18,629
Preferred stock dividends			182				—								182
Net income applicable to common stock		$	10,403			$	8,044							$	18,447
Earnings per share:
Basic and diluted earnings per share		$	0.11											$	0.19
Cash dividends declared per share common stock		$	0.83											$	0.83
Weighted average common shares used in computing earnings per share:
Weighted average common shares outstanding			95,041,097				—								95,041,097
Incremental common shares from dilutive stock options			423,180				(423,180	)			(C	)			—
Weighted average common shares assuming dilution			95,464,277				—								95,041,097
Statement of Comprehensive Loss
Net income		$	10,585			$	8,044							$	18,629
Other comprehensive income:
Foreign currency translation adjustments			285				9								294
Comprehensive income		$	10,870			$	8,053							$	18,923

See accompanying notes to unaudited pro forma condensed consolidated financial statements

 

71

---

Table of Contents

LAMAR ADVERTISING COMPANY AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AS OF JUNE 30, 2014

(In thousands, except share and per share data)

 

		Actual				Adjustments								Pro Forma
ASSETS
Current assets:
Cash and cash equivalents		$	34,417			$	(26,408	)			(A	)(F)		$	8,009
Receivables, net of allowance for doubtful accounts of $8,113			184,405				—								184,405
Prepaid expenses			62,800				—								62,800
Deferred income tax assets			9,973				(9,616	)			(B	)			357
Other current assets			40,566				—								40,566
Total current assets			332,161				(36,024	)							296,137
Property, plant and equipment			3,077,518				—								3,077,518
Less accumulated depreciation and amortization			(1,981,276	)			—								(1,981,276	)
Net property, plant and equipment			1,096,242				—								1,096,242
Goodwill			1,503,664				—								1,503,664
Intangible assets			371,908				—								371,908
Deferred financing costs, net of accumulated amortization of $12,448			34,680				—								34,680
Other assets			37,815				12,955				(B	)			50,770
Total assets		$	3,376,470			$	(23,069	)						$	3,353,401
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable		$	18,119			$	—							$	18,119
Current maturities of long-term debt			15,636				—								15,636
Accrued expenses			97,130				2,502				(B	)			99,632
Deferred income			104,357				—								104,357
Total current liabilities			235,242				2,502								237,744
Long-term debt			1,912,231				10,000				(A	)			1,922,231
Deferred income tax liabilities			117,337				(117,337	)			(B	)			—
Asset retirement obligation			202,773				—								202,773
Other liabilities			23,232				—								23,232
Total liabilities			2,490,815				(104,835	)							2,385,980
Stockholders’ equity:
Series AA preferred stock, par value $.001, $63.80 cumulative dividends, authorized 5,720 shares; 5,720 shares issued and outstanding			—				—								—
Class A preferred stock, par value $638, $63.80 cumulative dividends, 10,000 shares authorized; 0 shares issued and outstanding			—				—								—
Class A common stock, par value $.001, 175,000,000 shares authorized, 97,938,299 actual; 80,667,369 issued and outstanding and pro forma 80,667,369 outstanding			98				(17	)			(D	)			81
Class B common stock, par value $.001, 37,500,000 shares authorized, 14,610,365 shares issued and outstanding			15				—								15
Additional paid-in capital			2,494,395				(895,995	)			(B	)(D)			1,598,400
Accumulated comprehensive income			4,152				9				(B	)			4,161
Accumulated deficit			(716,187	)			80,951				(E	)			(635,236	)
Cost of shares held in treasury, actual 17,270,930 shares and pro forma 0 shares			(896,818	)			896,818				(D	)			—
Stockholders’ equity			885,655				81,766								967,421
Total liabilities and stockholders’ equity		$	3,376,470			$	(23,069	)						$	3,353,401

See accompanying notes to unaudited pro forma condensed consolidated financial statements

 

72

---

Table of Contents

LAMAR ADVERTISING COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

(A) Non-REIT Earnings and Profits Distribution

In conjunction with the proposed REIT conversion, we will be required to distribute any non-REIT accumulated earnings and profits (E&P) pursuant to the Code. In order to determine the amount of accumulated E&P the Company followed the guidelines provided by Revenue Procedure 75-17 and utilized the Earning and Profits Computation Practice Guide issued by the AICPA Corporations & Shareholders Technical Resource Panel. We estimate that, as of January 1, 2014, the aggregate amount of accumulated E&P that we would be required to distribute is approximately $40 million, which will be distributed in the form of dividends to stockholders using available cash and borrowings under Lamar Media’s senior credit facility no later than December 31, 2014.

(B) Income Taxes and Deferred Taxes

As a result of the assumed REIT election for the taxable year beginning January 1, 2013, income taxes would no longer be payable on certain of our activities. The following activities were considered to be part of the non-taxable activities of a REIT and hence no tax liability was assumed:

 

•

Operating income from tenant leases;

 

•

Sales of qualified REIT assets;

 

•

General and administrative costs associated with the above activities;

 

•

Interest costs associated with debt held by the Company; and

 

•

An allocation of corporate administrative costs.

The following activities were considered to be part of a taxable REIT subsidiary (“TRS”). The income from these activities was assumed to be taxed at an average rate of approximately 40% for our operations in the U.S. and Puerto Rico and approximately 26% for our operations in Canada:

 

•

Operating income from transit and production services and other non-qualifying activities;

 

•

Operating income from tenant leases generated by the Company’s international operations;

 

•

General and administrative costs associated with the above activities;

 

•

Interest costs associated with debt held by the TRSs; and

 

•

An allocation of corporate administrative costs.

The result reduces income tax expense by approximately $110.8 million and $6.6 million for the year ended December 31, 2013 and the six months ended June 30, 2014, respectively.

Below is a summary of pro forma adjustments by financial statement category related to the tax adjustments:

 

		Year Ended December 31, 2013				Six Months Ended June 30, 2014				As of June 30, 2014 Total
Deferred income tax assets, current		$	9,856			$	(240	)		$	9,616
Other assets, long term			(10,366	)			(2,589	)			(12,955	)
Deferred income tax liability			(119,150	)			1,813				(117,337	)
Net deferred tax liability			(119,660	)			(1,016	)			(120,676	)
Accrued expenses			8,853				(6,351	)			2,502
Additional paid in capital			—				806				806
Accumulated comprehensive income			—				9				9
Total income tax expense adjustment		$	(110,807	)		$	(6,552	)		$	(117,359	)

 

73

---

Table of Contents

The REIT conversion would create a one-time reversal through our statements of operations and comprehensive income (loss) of tax assets and liabilities for assets and liabilities no longer subject to income taxes at the REIT level. The pro forma results include the reversal of net deferred assets and liabilities of approximately $119.7 million for the year ended December 31, 2013 and $1.0 million for the six months ended June 30, 2014. However, the actual reversal upon REIT election could vary depending on the assets within the TRSs at the time of the actual REIT conversion.

The following table sets forth the estimated net deferred tax reduction for assets and liabilities being reversed by type.

 

		As of December 31, 2013				As of June 30, 2014				Total
Allowances, accruals and other items not currently deductible		$	25,647			$	(1,010	)		$	24,637
Current deferred liabilities			9,857				(251	)			9,606
Net operating loss carry-forwards			127,720				(21,256	)			106,464
Accrued asset retirement obligations			70,096				1,242				71,338
Depreciation and amortization			(356,412	)			10,696				(345,716	)
Other			5,755				9,513				15,268
Less: Valuation allowance			(2,323	)			50				(2,273	)
Net deferred tax liabilities written off		$	(119,660	)		$	(1,016	)		$	(120,676	)

(C) Effect of REIT Conversion on Share Dilution

As a result of the REIT election, potential excess tax benefits will no longer be included in the calculation of assumed proceeds under the treasury stock method when determining dilutive common shares. For the year ended December 31, 2013 and the six months ended June 30, 2014, the exclusion of the potential excess tax benefits decreased dilutive common shares by 358,285 and 423,180 shares, respectively.

(D) Effect of Merger on Treasury Stock and Additional Paid in Capital

As required by the merger agreement, upon completion of the merger between Lamar Advertising and Lamar Advertising REIT, each share of Lamar Advertising Class A common stock held in Lamar Advertising’s treasury will cease to be outstanding and will return to unissued status, with a corresponding adjustment to additional paid-in capital and common stock.

(E) Pro forma adjustments affecting Accumulated Deficit are as follows:

 

Write off of net deferred tax liabilities and adjustments related to tax expense as reflected in the December 31, 2013 pro forma income statement		$	110,807
Write off of the remaining net deferred tax liabilities existing at June 30, 2014 and adjustments related to the tax expense for the six month period			6,552
One time REIT conversion transaction costs			3,592
E & P distribution in the form of dividends			(40,000	)
		$	80,951

(F) One-time REIT conversion transaction costs

The Company removed any one-time transaction costs incurred in its historical financial statements related to its expected REIT conversion. The pro-forma statements of operations and comprehensive income were adjusted by $2,100 for the period ended December 31, 2013 and $1,492 for the period ended June 30, 2014.

 

74

---

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholder

Lamar Advertising REIT Company:

We have audited the accompanying balance sheet of Lamar Advertising REIT Company as of June 25, 2014. This balance sheet is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion.

In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Lamar Advertising REIT Company as of June 25, 2014, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Baton Rouge, Louisiana

June 27, 2014

 

75

---

Table of Contents

LAMAR ADVERTISING REIT COMPANY

BALANCE SHEET

 

		As of June 25, 2014
Assets:
Cash		$	100
Total Assets		$	100
Liabilities and stockholder’s equity:
Liabilities		$	—
Stockholder’s equity:
Common stock, $0.001 par value per share, 100,000 shares authorized, 100,000 shares issued and outstanding			100
Total stockholder’s equity			100
Total liabilities and stockholder’s equity		$	100

See accompanying note to the balance sheet

 

76

---

Table of Contents

LAMAR ADVERTISING REIT COMPANY

NOTE TO THE BALANCE SHEET

 

1.	Organization

Lamar Advertising REIT Company (“Lamar REIT”) was incorporated on May 16, 2014, under the laws of the State of Delaware and was authorized to issue 100,000 shares of $0.001 par value common stock. Lamar REIT, a wholly owned subsidiary of Lamar Advertising Company, was created to effect the merger described below.

Prior to the merger, Lamar REIT will conduct no business other than incident to the merger. In the merger, Lamar Advertising Company will merge with and into Lamar REIT. Upon effectiveness of the merger, shares of Lamar Advertising Company will be cancelled and the outstanding shares of capital stock will be converted into the right to receive the same number of shares of Lamar REIT capital stock. Lamar REIT will, by virtue of the merger, directly or indirectly own all of the assets and business formerly owned by Lamar Advertising Company.

Also effective at the time of the merger, Lamar REIT will change its name to “Lamar Advertising Company” and its certificate of incorporation will be amended and restated. The amended and restated certificate is substantially the same as the Lamar Advertising Company charter, except for the addition of restrictions on ownership and transfer of Lamar REIT capital stock to facilitate compliance with the rules applicable to REITs. The members of the board of directors and management of Lamar Advertising Company immediately prior to the merger will hold the same positions with Lamar REIT immediately after the merger.

 

77

---

Table of Contents

SELECTED FINANCIAL DATA

The following tables present a summary of historical consolidated financial data as of the dates and for the periods indicated for Lamar Advertising, which is deemed to be the predecessor of Lamar REIT for accounting purposes.

The selected statement of operations data presented below for the six months ended June 30, 2013 and 2014 have been derived from Lamar Advertising’s unaudited consolidated financial statements and related notes thereto incorporated by reference into this proxy statement/prospectus. The selected statement of operations data presented below for the fiscal years ended December 31, 2011, 2012 and 2013 and the selected balance sheet data as of December 31, 2012 and 2013 have been derived from Lamar Advertising’s audited consolidated financial statements and related notes thereto incorporated by reference into this proxy statement/prospectus. The statement of operations data presented below for the fiscal years ended December 31, 2009 and 2010 and the selected balance sheet data as of December 31, 2009, 2010 and 2011 have been derived from Lamar Advertising’s audited consolidated financial statements and related notes thereto, which are not incorporated by reference into this proxy statement/prospectus. The information in the following table may not be comparable to the operations of Lamar REIT on a going-forward basis following the REIT conversion and thus may not be indicative of Lamar REIT’s future performance.

The following information does not provide all of the information contained in Lamar Advertising’s financial statements, including the related notes. It is important for you to read the following summary of selected financial data together with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with Lamar Advertising’s consolidated financial statements and accompanying notes incorporated by reference into this proxy statement/prospectus.

 

		Year Ended December 31,																				Six Months Ended June 30,
		2009				2010				2011				2012				2013				2013				2014
		(Dollars in thousands)
Statement of operations data:
Net revenues		$	1,055,147			$	1,094,146			$	1,130,714			$	1,179,736			$	1,245,842			$	604,349			$	615,366
Operating expenses:
Direct advertising expenses			397,725				398,467				409,052				418,538				436,844				217,242				225,785
General and administrative expenses			229,423				246,513				248,970				264,406				288,786				149,733				146,050
Depreciation and amortization			336,725				312,703				299,639				296,083				300,579				146,309				140,575
Gain on disposition of assets			(5,424	)			(4,900	)			(10,548	)			(13,817	)			(3,804	)			(1,307	)			(1,226	)
Total operating expenses			958,449				952,783				947,113				965,210				1,022,405				511,977				511,184
Operating income			96,698				141,363				183,601				214,526				223,437				92,372				104,182
Interest expense, net			196,520				185,681				170,524				156,762				146,112				74,508				56,266
Gain on disposition of investment			(1,445	)			—				—				—				—				—				—
Other-than-temporary impairment of investment			—				—				—				—				—				—				4,069
Loss (gain) on debt extinguishment			(3,320	)			17,398				677				41,632				14,345				—				26,023
Income (loss) before income taxes			(95,057	)			(61,716	)			12,400				16,132				62,980				17,864				17,824
Income tax expense (benefit)			(36,459	)			(22,746	)			5,542				8,242				22,841				5,005				7,239
Net income (loss)		$	(58,598	)		$	(38,970	)		$	6,858			$	7,890			$	40,139			$	12,859			$	10,585

 

78

---

Table of Contents

		As of December 31,																				As of June 30,
		2009				2010				2011				2012				2013				2013				2014
		(Dollars in thousands)
Balance sheet data:
Cash and cash equivalents		$	112,253			$	91,679			$	33,503			$	58,911			$	33,212			$	118,880			$	34,417
Working capital			86,660				140,116				76,795				82,127				36,705				(183,464	)			96,919
Total assets			3,943,541				3,648,961				3,427,353				3,514,030				3,401,618				3,558,521				3,376,470
Total debt (including current maturities)			2,674,912				2,409,140				2,158,528				2,160,854				1,938,802				2,148,918				1,927,867
Total long-term obligations			2,841,184				2,670,730				2,419,802				2,433,297				2,223,319				2,080,002				2,255,573
Stockholder’s equity			821,081				808,938				827,721				861,625				932,946				893,663				885,655

 

79

---

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Set forth below is a discussion and analysis of the financial condition and results of operations of Lamar Advertising. After the merger, Lamar REIT will succeed to and continue the business of Lamar Advertising. Due to the impact of taxes and anticipated distributions commencing after the effective date of the REIT conversion, we do not believe that the historical results of operations of Lamar Advertising will be fully comparable to the results from operations following the REIT conversion and the merger. Information concerning significant financial effects of the REIT conversion is contained in the section entitled “Pro Forma Financial Information.” This pro forma information reflects adjustments to our historical balance sheet and statements of operations for the period presented as if Lamar Advertising had operated as a REIT. The adjustments are not necessarily indicative of the financial condition or operating results that would have been achieved had the REIT conversion been completed as of the date of the financial statements, but illustrates its estimated effect.

The discussion and analysis of our financial condition and results of operations that follow are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ significantly from these estimates under different assumptions or conditions. This discussion should be read in conjunction with Lamar Advertising’s consolidated financial statements included in its Annual Report on Form 10-K for the period ended December 31, 2013 and the accompanying notes thereto, and the information set forth in the section entitled “Critical Accounting Estimates” and the Quarterly Report on Form 10-Q for the period ended June 30, 2014.

Overview

The Company’s net revenues are derived primarily from the rental of advertising space on outdoor advertising displays owned and operated by the Company. Revenue growth is based on many factors that include the Company’s ability to increase occupancy of its existing advertising displays; raise advertising rates; and acquire new advertising displays, and its operating results are therefore affected by general economic conditions, as well as trends in the advertising industry. Advertising spending is particularly sensitive to changes in general economic conditions, which affect the rates that the Company is able to charge for advertising on its displays and its ability to maximize advertising sales or occupancy on its displays.

Historically, the Company made strategic acquisitions of outdoor advertising assets to increase the number of outdoor advertising displays it operates in existing and new markets. The Company continues to evaluate and pursue strategic acquisition opportunities as they arise. The Company has financed its historical acquisitions and intends to finance any future acquisition activity from available cash, borrowings under its senior credit facility or the issuance of debt or equity securities. See “Liquidity and Capital Resources” below. During the years ended December 31, 2011, 2012 and 2013, and for the six months ended June 30, 2014, the Company completed acquisitions for a total cash purchase price of approximately $23.5 million, $206.1 million, $92.2 million and $9.2 million, respectively.

The Company’s business requires expenditures for maintenance and capitalized costs associated with the construction of new billboard displays, the entrance into and renewal of logo sign and transit contracts, and the purchase of real estate and operating equipment.

 

80

---

Table of Contents

The following table presents a breakdown of capitalized expenditures for the years ended December 31, 2011, 2012 and 2013, and the six months ended June 30, 2013 and 2014:

 

		Year Ended December 31,												Six Months Ended June 30,
		2011				2012				2013				2013				2014
		(In thousands)
Total capital expenditures:
Billboard — Traditional		$	34,425			$	29,061			$	21,295			$	12,476			$	11,202
Billboard — Digital			41,250				42,134				50,233				23,603				27,858
Logos			10,141				8,704				11,182				4,107				3,870
Transit			817				259				168				28				268
Land and buildings			4,501				12,797				9,471				5,608				5,702
Operating equipment			15,936				12,615				13,301				6,899				5,355
Total capital expenditures		$	107,070			$	105,570			$	105,650			$	52,721			$	54,255

Non-GAAP Financial Measures

Our management reviews our performance by focusing on several key performance indicators not prepared in conformity with Generally Accepted Accounting Principles in the United States (“GAAP”). We believe these non-GAAP performance indicators are meaningful supplemental measures of our operating performance and should not be considered in isolation of, or as a substitute for, their most directly comparable GAAP financial measures.

Included in our analysis of our results of operations are discussions regarding earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), Funds From Operations (“FFO”), as defined by the National Association of Real Estate Investment Trusts, Adjusted Funds From Operations (“AFFO”) and acquisition-adjusted net revenue. We are introducing FFO and AFFO, two widely recognized metrics of operating performance for REITs, for the six month periods ending June 30, 2013 and 2014 due to the Company’s preparation for potential election of REIT status for the taxable year beginning January 1, 2014.

We define Adjusted EBITDA as net income before income tax expense (benefit), interest expense (income), gain (loss) on extinguishment of debt and investments, stock-based compensation, depreciation and amortization and gain or loss on disposition of assets.

FFO is defined as net income before gains or losses from the sale or disposal of real estate assets and investments and real estate related depreciation and amortization and including adjustments to eliminate non-controlling interest.

We define AFFO as FFO before (i) straight-line revenue and expense; (ii) stock-based compensation expense; (iii) non-cash tax expense (benefit); (iv) non-real estate related depreciation and amortization; (v) amortization of deferred financing and debt issuance costs, (vi) loss on extinguishment of debt; (vii) non-recurring infrequent or unusual losses (gains); (viii) less maintenance capital expenditures; and an adjustment for non-controlling interest.

Acquisition-adjusted net revenue adjusts our net revenue for the prior period by adding to it the net revenue generated by the acquired assets before our acquisition of these assets for the same time frame that those assets were owned in the current period. In calculating acquisition-adjusted revenue, therefore, we include revenue generated by assets that we did not own in the prior period but acquired in the current period. We refer to the amount of pre-acquisition revenue generated by the acquired assets during the prior period that corresponds with the current period in which we owned the assets (to the extent within the period presented) as “acquisition net revenue.” In addition, we also adjust the prior period to subtract revenue generated by assets that have been divested since the prior period and, therefore, no revenue derived from those assets is reflected in the current period.

 

81

---

Table of Contents

Adjusted EBITDA, FFO, AFFO and acquisition-adjusted net revenue are not intended to replace net income or any other performance measures determined in accordance with GAAP. Neither FFO nor AFFO represent cash flows from operating activities in accordance with GAAP and, therefore, these measures should not be considered indicative of cash flows from operating activities as a measure of liquidity or of funds available to fund our cash needs, including our ability to make cash distributions. Rather, Adjusted EBITDA, FFO, AFFO and acquisition-adjusted net revenue are presented as we believe each is a useful indicator of our current operating performance. We believe that these metrics are useful to an investor in evaluating our operating performance because (1) each is a key measure used by our management team for purposes of decision making and for evaluating our core operating results; (2) Adjusted EBITDA is widely used in the industry to measure operating performance as depreciation and amortization may vary significantly among companies depending upon accounting methods and useful lives, particularly where acquisitions and non-operating factors are involved; (3) acquisition-adjusted net revenue is a supplement to net revenue to enable investors to compare period over period results on a more consistent basis without the effects of acquisitions and divestures, which reflects our core performance and organic growth (if any) during the period in which the assets were owned and managed by us; (4) Adjusted EBITDA, FFO and AFFO each provides investors with a meaningful measure for evaluating our period-to-period operating performance by eliminating items that are not operational in nature; and (5) each provides investors with a measure for comparing our results of operations to those of other companies.

Our measurement of Adjusted EBITDA, FFO, AFFO and acquisition-adjusted net revenue may not, however, be fully comparable to similarly titled measures used by other companies. Reconciliations of Adjusted EBITDA, FFO, AFFO and acquisition-adjusted net revenue to net income, the most directly comparable GAAP measure, have been included herein.

Results of Operations

Six Months ended June 30, 2014 compared to Six Months ended June 30, 2013

Net revenues increased $11.1 million or 1.8% to $615.4 million for the six months ended June 30, 2014 from $604.3 million for the same period in 2013. This increase was attributable primarily to an increase in billboard net revenues of $9.4 million, which represents an increase of 1.7% over the prior period, which reflects higher pricing and occupancy rates and growth attributable to the addition of 158 additional digital billboards, an increase in logo sign revenue of $1.3 million, which represents an increase of 3.9% over the prior period, and a $0.4 million increase in transit revenue, which represents an increase of 1.2% over the prior period.

For the six months ended June 30, 2014, there was a $3.7 million increase in net revenues as compared to acquisition-adjusted net revenue for the six months ended June 30, 2013, which represents an increase of 0.6%. See “Reconciliations” below. The $3.7 million increase in revenue primarily consists of a $3.0 million increase in billboard revenue, a $0.5 million net decrease in transit revenue and a $1.2 million increase in logo revenue over the acquisition-adjusted net revenue for the comparable period in 2013.

Total operating expenses, exclusive of depreciation and amortization and gain on sale of assets, increased $4.9 million for the six months ended June 30, 2014 over the same period in 2013. The $4.9 million increase over the prior year is comprised of a $6.7 million decrease in stock-based compensation expense offset by an increase in direct and general and administrative operating expenses related to the operations of our outdoor advertising assets of $10.4 million and corporate expense increases of $1.2 million of which $0.5 million was directly related to the Company’s conversion to real estate investment trust status.

Depreciation and amortization expense decreased $5.7 million, or 3.9% for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013.

Due to the above factors, operating income increased by $11.8 million, or 12.8%, to $104.2 million for the six months ended June 30, 2014 compared to $92.4 million for the same period in 2013.

 

82

---

Table of Contents

During the six months ended June 30, 2014, the Company recognized a loss on debt extinguishment of $26.0 million related to the redemption of Lamar Media’s 7 7/8% Senior Subordinated Notes due 2018 and the amendment of its senior credit facility. Approximately $10.3 million was a non-cash expense attributable to the write off of unamortized debt issuance fees associated with the then-existing senior credit facility and the 7 7/8% Senior Subordinated Notes.

Interest expense decreased $18.2 million from $74.6 million for the six months ended June 30, 2013, to $56.4 million for the six months ended June 30, 2014, primarily resulting from the Company’s refinancing transactions during 2013 and 2014.

The increase in operating income and decrease in interest expense, offset by the increases in other-than-temporary impairment of investment and loss on debt extinguishment resulted in net income before taxes remaining relatively constant. Income tax expense increased $2.2 million, primarily resulting from an increase in the effective tax rate which was largely due to changes in tax rates in Puerto Rico. For the six months ended June 30, 2014, the Company’s net income decreased to $10.6 million as compared to $12.9 million for the same period in 2013.

Reconciliations:

Because acquisitions occurring after December 31, 2012 (the “acquired assets”) have contributed to our net revenue results for the periods presented, we provide 2013 acquisition-adjusted net revenue, which adjusts our 2013 net revenue for the six months ended June 30, 2013 by adding to or subtracting from it the net revenue generated by the acquired or divested assets prior to our acquisition or divestiture of these assets for the same time frame that those assets were owned in the six months ended June 30, 2014.

Reconciliations of 2013 reported net revenue to 2013 acquisition-adjusted net revenue for the six months ended June 30, as well as a comparison of 2013 acquisition-adjusted net revenue to 2014 reported net revenue for the six months ended June 30, are provided below:

Reconciliation and Comparison of Reported Net Revenue to Acquisition-Adjusted Net Revenue

 

		Six Months Ended June 30,
		2013				2014
		(in thousands)
Reported net revenue		$	604,349			$	615,366
Acquisition net revenue			7,360				—
Adjusted totals		$	611,709			$	615,366

 

83

---

Table of Contents

Net Income/Adjusted EBITDA

(in thousands)

 

		Six Months Ended June 30,								Amount of Increase (Decrease)				Percent Increase (Decrease)
		2014				2013
Net income		$	10,585			$	12,859			$	(2,274	)			(17.7	)%
Income tax expense (benefit)			7,239				5,005				2,234
Loss on other than temporary impairment of investment			4,069				—				4,069
Loss on debt extinguishment			26,023				—				26,023
Interest expense (income)			56,266				74,508				(18,242	)
Gain on disposition of assets			(1,226	)			(1,307	)			81
Depreciation and amortization			140,575				146,309				(5,734	)
Stock-based compensation expense			10,513				17,195				(6,682	)
Adjusted EBITDA		$	254,044			$	254,569			$	(525	)			(0.2	)%

Adjusted EBITDA for the six months ended June 30, 2014 decreased 0.2% to $254.0 million. Adjusted EBITDA decline was primarily attributable to the increase in our gross margin (net revenue less direct advertising expense) of $2.5 million, and was partially offset by an increase in general administrative and corporate expenses of $3.0 million, excluding the impact of stock-based compensation expense.

Net Income/FFO/AFFO

(in thousands)

 

		Six Months Ended June 30,								Amount of Increase (Decrease)				Percent Increase (Decrease)
		2014				2013
Net income		$	10,585			$	12,859			$	(2,274	)			(17.7	)%
Depreciation and amortization related to real estate			132,071				138,070				(5,999	)
Gain from sale or disposal of real estate			(595	)			(1,276	)			681
Adjustments for unconsolidated affiliates and non-controlling interest			299				544				(245	)
FFO		$	142,360			$	150,197			$	(7,837	)			(5.2	)%
Straight line expense			(228	)			(321	)			93
Stock-based compensation expense			10,513				17,195				(6,682	)
Non-cash portion of tax provision			3,025				3,620				(595	)
Non-real estate related depreciation and amortization			8,504				8,239				265
Amortization of deferred financing costs			2,451				7,092				(4,641	)
Loss on other than temporary impairment of investment			4,069				—				4,069
Loss on extinguishment of debt			26,023				—				26,023
Capital expenditures – maintenance			(34,697	)			(35,567	)			870
Adjustments for unconsolidated affiliates and non-controlling interest			(299	)			(544	)			245
AFFO		$	161,721			$	149,911			$	11,810				7.9	%

FFO for the six months ended June 30, 2014 was $142.4 million as compared to FFO of $150.2 million for the same period in 2013. AFFO for the six months ended June 30, 2014 increased 7.9% to $161.7 million as compared to $149.9 million for the same period in 2013. AFFO growth was primarily attributable to the increase in our operating margin (net revenue less direct advertising expense) and decrease in interest expense, partially offset by increases in general and administrative expenses and corporate expenses.

 

84

---

Table of Contents

Results of Operations

The following table presents certain items in the Consolidated Statements of Operations as a percentage of net revenues for the years ended December 31, 2011, 2012 and 2013:

 

		Year Ended December 31,
		2011				2012				2013
Net revenues			100.0	%			100.0	%			100.0	%
Operating expenses:
Direct advertising expenses			36.2				35.5				35.1
General and administrative expenses			17.9				17.9				18.6
Corporate expenses			4.1				4.5				4.6
Depreciation and amortization			26.5				25.1				24.1
Operating income			16.2				18.2				17.9
Loss on extinguishment of debt			—				3.5				1.2
Interest expense			15.1				13.3				11.7
Net income (loss)			0.6				0.7				3.2

Year ended December 31, 2013 compared to Year ended December 31, 2012

Net revenues increased $66.1 million or 5.6% to $1.25 billion for the year ended December 31, 2013 from $1.18 billion for the same period in 2012. This increase was attributable primarily to an increase in billboard net revenues of $52.1 million or 5.0% over the prior period, which reflects an increase in advertising rate of 1%, occupancy rate remaining relatively constant and growth attributable to the addition of 100 additional digital billboard displays, an increase in logo sign revenue of $6.0 million, which represents an increase of 9.5% over the prior period, and an $8.0 million increase in transit revenue, which represents an increase of 11.8% over the prior period.

For the year ended December 31, 2013, there was a $26.9 million increase in net revenues as compared to acquisition-adjusted net revenue for the year ended December 31, 2012. The $26.9 million increase in revenue primarily consists of a $19.4 million increase in billboard revenue, a $3.6 million increase in logo revenue and a $4.0 million increase in transit revenue over the acquisition-adjusted net revenue for the comparable period in 2012. This increase in revenue represents an increase of 2.2% over the comparable period in 2012. See “Reconciliations” below.

Operating expenses, exclusive of depreciation and amortization and gain on sale of assets, increased $42.7 million or 6.2% to $725.6 million for the year ended December 31, 2013, which includes a $10.5 million increase in non-cash compensation. Excluding stock-based compensation, operating expenses related to the operations of our outdoor advertising assets increased $28.3 million and corporate expenses increased $3.9 million, of which $2.1 million is related to the Company’s evaluation of an election to real estate investment trust status.

Depreciation and amortization expense increased $4.5 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012, primarily due to the Company’s capital expenditures.

During the year ended December 31, 2013, gain on disposition of assets decreased $10.0 million over the comparable period ended December 31, 2012, primarily due to a gain of $9.8 million related to two asset swap transactions, which occurred in 2012.

Due to the above factors, operating income increased $8.9 million to $223.4 million for the year ended December 31, 2013 compared to $214.5 million for the same period in 2012.

During the year ended December 31, 2013, the Company recognized a $14.3 million loss on debt extinguishment related to the early extinguishment of Lamar Media’s 9 ³⁄₄% Senior Notes due 2014. Approximately $4.0 million of the loss is a non-cash expense attributable to the write off of unamortized debt issuance fees and unamortized discounts associated with the retired debt.

 

85

---

Table of Contents

Interest expense decreased approximately $10.8 million from $157.1 million for the year ended December 31, 2012 to $146.3 million for the year ended December 31, 2013, due to the reduction in total debt outstanding as well as a decrease in interest rates resulting from the Company’s 2012 refinancing transactions.

The increase in operating income, decrease in interest expense and decrease in loss on extinguishment of debt over the comparable period in 2012 resulted in a $46.8 million increase in net income before income taxes. The Company recorded income tax expense of $22.8 million for the year ended December 31, 2013. The effective tax rate for the year ended December 31, 2013 was 36.3%, which is lower than the statutory rates primarily due to an increase in the corporate income tax rate in Puerto Rico from 30% to 39%, which resulted in a change to the carrying value of net operating loss carryforwards during the period.

As a result of the above factors, the Company recognized net income for the year ended December 31, 2013 of $40.1 million, as compared to net income of $7.9 million for the same period in 2012.

Reconciliations:

Because acquisitions occurring after December 31, 2011 (the “acquired assets”) have contributed to our net revenue results for the periods presented, we provide 2012 acquisition-adjusted net revenue, which adjusts our 2012 net revenue for the year ended December 31, 2012 by adding to or subtracting from it the net revenue generated by the acquired or divested assets prior to our acquisition or divestiture of these assets for the same time frame that those assets were owned in the year ended December 31, 2013.

Reconciliations of 2012 reported net revenue to 2012 acquisition-adjusted net revenue for the year ended December 31, 2012 as well as a comparison of 2012 acquisition-adjusted net revenue to 2013 reported net revenue for the year ended December 31, 2013, are provided below:

Reconciliation and Comparison of Reported Net Revenue to Acquisition-Adjusted Net Revenue

 

		Year ended December 31,
		2012				2013
		(in thousands)
Reported net revenue		$	1,179,736			$	1,245,842
Acquisition net revenue			39,174				—
Adjusted totals		$	1,218,910			$	1,245,842

Key Performance Indicators

Net Income/Adjusted EBITDA

(in thousands)

 

		Year Ended December 31,								Amount of Increase (Decrease)				Percent Increase (Decrease)
		2013				2012
Net income		$	40,139			$	7,890			$	32,249				408.7	%
Income tax expense			22,841				8,242				14,599
Loss on debt extinguishment			14,345				41,632				(27,287	)
Interest expense			146,112				156,762				(10,650	)
Gain on disposition of assets			(3,804	)			(13,817	)			10,013
Depreciation and amortization			300,579				296,083				4,496
Stock-based compensation expense			24,936				14,466				10,470
Adjusted EBITDA		$	545,148			$	511,258			$	33,890				6.6	%

 

86

---

Table of Contents

Adjusted EBITDA for the year ended December 31, 2013, increased 6.6% to $545.1 million. Adjusted EBITDA increase was primarily attributable to the increase in our gross margin (net revenues less direct advertising expense) of 6.3% offset by increases in general and administrative and corporate expense over the same period in 2012.

Year ended December 31, 2012 compared to Year ended December 31, 2011

Net revenues increased $49.0 million or 4.3% to $1.18 billion for the year ended December 31, 2012 from $1.13 billion for the same period in 2011. This increase was attributable primarily to an increase in billboard net revenues of $38.7 million or 3.8% over the prior period, which reflects growth attributable to the addition of approximately 200 additional digital billboard displays, an increase in logo sign revenue of $3.7 million, which represents an increase of 6.5% over the prior period, and a $6.6 million increase in transit revenue, which represents an increase of 10.9% over the prior period.

For the year ended December 31, 2012, there was a $34.8 million increase in net revenues as compared to acquisition-adjusted net revenue for the year ended December 31, 2011. The $34.8 million increase in revenue primarily consists of a $27.6 million increase in billboard revenue, a $2.2 million increase in logo revenue and a $5.0 million increase in transit revenue over the acquisition-adjusted net revenue for the comparable period in 2011. This increase in revenue represents an increase of 3.0% over the comparable period in 2011. See “Reconciliations” below.

Operating expenses, exclusive of depreciation and amortization and gain on sale of assets, increased $24.9 million or 3.8% to $682.9 million for the year ended December 31, 2012 from $658.0 million for the same period in 2011. There was an $18.3 million increase in operating expenses related to the operations of our outdoor advertising assets and a $6.6 million increase in corporate expenses.

Depreciation and amortization expense decreased $3.6 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011, primarily due to a reduction in the number of non-performing structures that were dismantled during the period as compared to the year ended December 31, 2012.

The Company recorded a gain on disposition of assets of $13.8 million for the year ended December 31, 2012, which includes a gain of $9.8 million related to two asset swap transactions during the year.

Due to the above factors, operating income increased $30.9 million to $214.5 million for the year ended December 31, 2012 compared to $183.6 million for the same period in 2011.

During the year ended December 31, 2012, the Company recognized a $41.6 million loss on debt extinguishment related to the early extinguishment of Lamar Media’s 6 ⁵⁄₈% Senior Subordinated Notes due 2015, 6 ⁵⁄₈% Senior Subordinated Notes due 2015 — Series B and 6 ⁵⁄₈% Senior Subordinated Notes due 2015 — Series C (collectively, the “6 ⁵⁄₈% Senior Subordinated Notes”) and the prepayment of $295 million of the Term B Loan under Lamar Media’s senior credit facility. Approximately $23.2 million of the loss is a non-cash expense attributable to the write off of unamortized debt issuance fees and unamortized discounts associated with the retired debt.

Interest expense decreased approximately $14.0 million from $171.1 million for the year ended December 31, 2011 to $157.1 million for the year ended December 31, 2012, due to the reduction in total debt outstanding as well as a decrease in interest rates resulting from the Company’s refinancing transactions.

The increase in operating income and decrease in interest expense offset by the loss on extinguishment of debt discussed above resulted in a $3.7 million increase in net income before income taxes. The Company recorded income tax expense of $8.2 million for the year ended December 31, 2012. The effective tax rate for the year

 

87

---

Table of Contents

ended December 31, 2012 was 51.1%, which is higher than the statutory rate due to permanent differences resulting from non-deductible expenses and amortization, primarily non-deductible compensation expense related to stock based compensation calculated in accordance with ASC718.

As a result of the above factors, the Company recognized net income for the year ended December 31, 2012 of $7.9 million, as compared to net income of $6.9 million for the same period in 2011.

Reconciliations:

Because acquisitions occurring after December 31, 2010 (the “acquired assets”) have contributed to our net revenue results for the periods presented, we provide 2011 acquisition-adjusted net revenue, which adjusts our 2011 net revenue for the year ended December 31, 2011 by adding to or subtracting from it the net revenue generated by the acquired or divested assets prior to our acquisition or divestiture of these assets for the same time frame that those assets were owned in the year ended December 31, 2012.

Reconciliations of 2011 reported net revenue to 2011 acquisition-adjusted net revenue for the year ended December 31, 2011 as well as a comparison of 2011 acquisition-adjusted net revenue to 2012 reported net revenue for the year ended December 31, 2012, are provided below:

Reconciliation and Comparison of Reported Net Revenue to Acquisition-Adjusted Net Revenue

 

		Year ended December 31,
		2011				2012
		(in thousands)
Reported net revenue		$	1,130,714			$	1,179,736
Acquisition net revenue			14,257				—
Adjusted totals		$	1,144,971			$	1,179,736

Key Performance Indicators

Net Income/Adjusted EBITDA

(in thousands)

 

		Year Ended December 31,								Amount of Increase (Decrease)				Percent Increase (Decrease)
		2012				2011
Net income		$	7,890			$	6,858			$	1,032				15.0	%
Income tax expense			8,242				5,542				2,700
Loss on debt extinguishment			41,632				677				40,955
Interest expense			156,762				170,524				(13,762	)
Gain on disposition of assets			(13,817	)			(10,548	)			(3,269	)
Depreciation and amortization			296,083				299,639				(3,556	)
Stock-based compensation expense			14,466				11,650				2,816
Adjusted EBITDA		$	511,258			$	484,342			$	26,916				5.6	%

Adjusted EBITDA for the year ended December 31, 2012, increased 5.6% to $511.3 million. Adjusted EBITDA increase was primarily attributable to the increase in our gross margin (net revenue less direct advertising expense) of 5.5% over the same period in 2011.

 

88

---

Table of Contents

Liquidity and Capital Resources

Overview

The Company has historically satisfied its working capital requirements with cash from operations and borrowings under the senior credit facility. The Company’s wholly owned subsidiary, Lamar Media Corp., is the borrower under the senior credit facility and maintains all corporate operating cash balances. Any cash requirements of the Company, therefore, must be funded by distributions from Lamar Media.

Sources of Cash

Total Liquidity. As of June 30, 2014 we had approximately $342.4 million of total liquidity, which is comprised of approximately $34.4 million in cash and cash equivalents and approximately $308.0 million of availability under the revolving portion of Lamar Media’s senior credit facility. We are currently in compliance with the maintenance covenant included in the senior credit facility and we would remain in compliance after giving effect to borrowing the full amount available to us under the revolving portion of the senior credit facility.

Cash Generated by Operations. For the six months ended June 30, 2014 and 2013 our cash provided by operating activities was $173.4 million and $152.0 million, respectively. While our net income was approximately $10.6 million for the six months ended June 30, 2014, we generated cash from operating activities of $173.4 million primarily due to adjustments needed to reconcile net income to cash provided by operating activities of $182.9 million, which primarily consisted of depreciation and amortization of $140.6 million, loss on extinguishment of debt and other-than-temporary-impairment of investments of $30.1 million and stock-based compensation of $10.5 million. In addition, there was an increase in working capital of $20.1 million. We expect to generate cash flows from operations during 2014 in excess of our cash needs for operations and capital expenditures as described herein.

Note Offerings. On January 10, 2014, Lamar Media completed an institutional private placement of $510 million aggregate principal amount of its 5 3/8% Senior Notes due 2024. The institutional private placement resulted in net proceeds to Lamar Media, after payment of fees and expenses, of approximately $502.3 million. Lamar Media used the proceeds of this offering to repay $502.1 million of indebtedness, including all outstanding term loans, outstanding under its senior credit facility.

Credit Facilities. On February 3, 2014, Lamar Media entered into the second restatement agreement with the Company, certain of Lamar Media’s subsidiaries as guarantors, the lenders named therein and JPMorgan Chase Bank, N.A., as administrative agent, under which the parties agreed to amend and restate Lamar Media’s existing senior credit facility on the terms set forth in the second amended and restated credit agreement included in the second restatement agreement. The senior credit agreement was entered into on April 28, 2010, amended and restated on February 9, 2012 and further amended and restated on February 3, 2014 and is referred to herein as the “senior credit facility”. Among other things, the second amendment and restatement of the credit agreement increased the revolving credit facility by $150 million and extended its maturity date to February 2, 2019. The senior credit facility currently consists of a $400 million revolving credit facility and a $500 million incremental facility. Lamar Media is the borrower under the senior credit facility and may also from time to time designate wholly-owned subsidiaries as subsidiary borrowers under the incremental loan facility. Incremental loans may be in the form of additional term loan tranches or increases in the revolving credit facility. Our lenders have no obligation to make additional loans to us, or any designated subsidiary borrower, under the incremental facility, but may enter into such commitments in their sole discretion.

On April 18, 2014, Lamar Media entered into Amendment No. 1 to the Second Amended and Restated Credit Agreement (the “Amendment”) with Lamar Advertising, certain of Lamar Media’s subsidiaries as Guarantors, JPMorgan Chase Bank, N.A. as Administrative Agent and the Lenders named therein under which the parties agreed to amend Lamar Media’s existing senior credit facility on the terms set forth in the Amendment. The Amendment created a new $300 million Term A Loan facility (the “Term A Loans”) and certain other

 

89

---

Table of Contents

amendments to the senior credit agreement. The Term A Loans are not incremental loans and do not reduce the existing $500 million Incremental Loan facility. Lamar Media borrowed all $300 million in Term A Loans on April 18, 2014. The net loan proceeds, together with borrowings under the revolving portion of the senior credit facility and cash on hand, were used to fund the redemption of all $400 million in aggregate principal amount of Lamar Media’s 7 ⁷⁄₈% Senior Subordinated Notes due 2018 on April 21, 2014.

The Term A Loans mature on February 2, 2019 and began amortizing on June 30, 2014 in quarterly installments paid on such date and on each September 30, December 31, March 31 and June 30 thereafter, as follows:

 

Principal Payment Date		Principal Amount
September 30, 2014-March 31, 2016		$	3,750,000
June 30, 2016- March 31, 2017		$	5,625,000
June 30, 2017-December 31, 2018		$	11,250,000
Term A Loan Maturity Date		$	168,750,000

The Term A Loans bear interest at rates based on the Adjusted LIBO Rate (“Eurodollar Term A Loans”) or the Adjusted Base Rate (“Base Rate Term A Loans”), at Lamar Media’s option. Eurodollar Term A Loans shall bear interest at a rate per annum equal to the Adjusted LIBO Rate plus 2.00% (or the Adjusted LIBO Rate plus 1.75% at any time the Total Debt Ratio is less than or equal to 3.00 to 1). Base Rate Term A Loans shall bear interest at a rate per annum equal to the Adjusted Base Rate plus 1.00% (or the Adjusted Base Rate plus 0.75% at any time the Total Debt Ratio is less than or equal to 3.00 to 1). The guarantees, covenants, events of default and other terms of the Second Amended and Restated Credit Agreement apply to the Term A Loans.

As of June 30, 2014, Lamar Media had approximately $308.0 million of availability under the revolving credit facility included in the senior credit facility and approximately $7.0 million in letters of credit outstanding. As of June 30, 2014, Lamar Media had $296.3 million outstanding in Term A Loans and approximately $85.0 million outstanding under the revolving credit facility.

Factors Affecting Sources of Liquidity

Internally Generated Funds. The key factors affecting internally generated cash flow are general economic conditions, specific economic conditions in the markets where the Company conducts its business and overall spending on advertising by advertisers.

Credit Facilities and Other Debt Securities. Lamar must comply with certain covenants and restrictions related to the senior credit facility and its outstanding debt securities.

Restrictions Under Debt Securities. Lamar must comply with certain covenants and restrictions related to its outstanding debt securities. Currently Lamar Media has outstanding $500 million 5 ⁷⁄₈% Senior Subordinated Notes issued in February 2012 ( the “5 ⁷⁄₈% Senior Subordinated Notes”), $535 million 5% Senior Subordinated Notes issued in October 2012 (the “5% Senior Subordinated Notes”) and $510 million 5 ³⁄₈% Senior Notes issued in January 2014 (the “5 ³⁄₈% Senior Notes”).

The indentures relating to Lamar Media’s outstanding notes restrict its ability to incur additional indebtedness but permit the incurrence of indebtedness (including indebtedness under the senior credit facility), (i) if no default or event of default would result from such incurrence and (ii) if after giving effect to any such incurrence, the leverage ratio (defined as the sum of (x) total consolidated debt plus (y) the aggregate liquidation preference of any preferred stock of Lamar Media’s restricted subsidiaries to trailing four fiscal quarter EBITDA (as defined in the indentures)) would be less than 7.0 to 1. At June 30, 2014, and as of the date hereof, Lamar Media is not in default under the indentures of any of its outstanding notes and, therefore, would be permitted to incur additional indebtedness subject to the foregoing provision.

 

90

---

Table of Contents

In addition to debt incurred under the provisions described in the preceding paragraph, the indentures relating to Lamar Media’s outstanding notes permit Lamar Media to incur indebtedness pursuant to the following baskets:

 

•

up to $1.5 billion of indebtedness under the senior credit facility;

 

•

indebtedness outstanding on the date of the indentures or debt incurred to refinance outstanding debt;

 

•

inter-company debt between Lamar Media and its restricted subsidiaries or between restricted subsidiaries;

 

•

certain purchase money indebtedness and capitalized lease obligations to acquire or lease property in the ordinary course of business that cannot exceed the greater of $50 million or 5% of Lamar Media’s net tangible assets; and

 

•

additional debt not to exceed $75 million.

Restrictions under Senior Credit Facility. Lamar Media is required to comply with certain covenants and restrictions under the senior credit facility. If the Company fails to comply with these tests, the lenders under the senior credit facility will be entitled to exercise certain remedies, including the termination of the lending commitments and the acceleration of the debt payments under the senior credit facility. At June 30, 2014, and currently, we were in compliance with all such tests under the senior credit facility.

Lamar Media must maintain a senior debt ratio, defined as total consolidated debt (other than subordinated indebtedness) of the Company and its restricted subsidiaries, minus the lesser of (x) $100 million and (y) the aggregate amount of unrestricted cash and cash equivalents of the Company and its restricted subsidiaries to EBITDA, as defined below, for the period of four consecutive fiscal quarters then ended, of less than or equal to 3.5 to 1.0.

Lamar Media is also restricted from incurring additional indebtedness under certain circumstances unless, after giving to the incurrence of such indebtedness, it is in compliance with the senior debt ratio covenant and its total debt ratio, defined as (a) total consolidated debt of the Company and its restricted subsidiaries as of any date minus the lesser of (i) $100 million and (ii) the aggregate amount of unrestricted cash and cash equivalents of the Company and its restricted subsidiaries to (b) EBITDA, as defined below, for the most recent four fiscal quarters then ended is less than 6.0 to 1.0.

Under the senior credit facility “EBITDA” means, for any period, operating income for the Company and its restricted subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP) for such period (calculated before (i) taxes, (ii) interest expense, (iii) depreciation, (iv) amortization, (v) any other non-cash income or charges accrued for such period, (vi) charges and expenses in connection with the credit facility transactions, (vii) costs and expenses of the Company associated with the REIT conversion, provided that the aggregate amount of costs and expenses that may be added back pursuant to this clause (vii) shall not exceed $10 million in the aggregate and (viii) the amount of cost savings, operating expense reductions and other operating improvements or synergies projected by the Lamar Media in good faith to be realized as a result of any acquisition, investment, merger, amalgamation or disposition within 12 months of any such acquisition, investment, merger, amalgamation or disposition, net of the amount of actual benefits realized during such period from such action: provided, (a) the aggregate amount for all such cost savings, operating expense reductions and other operating improvements or synergies shall not exceed an amount equal to 15% of EBITDA for the applicable four quarter period and (b) any such adjustment to EBITDA may only take into account cost savings, operating expense reductions and other operating improvements synergies that are (I) directly attributable to such acquisition, investment, merger, amalgamation or disposition, (II) expected to have a continuing impact on the Lamar Media and its restricted subsidiaries and (III) factually supportable, in each case all as certified by the chief financial officer of the Lamar Media on behalf of the Lamar Media, and (ix) any loss or gain relating to amounts paid or earned in cash prior to the stated settlement date of any swap agreement that has been reflected in operating income for such period) and (except to the extent received or paid in cash by the Company and its

 

91

---

Table of Contents

restricted subsidiaries income or loss attributable to equity in affiliates for such period), excluding any extraordinary and unusual gains or losses during such period and excluding the proceeds of any casualty events whereby insurance or other proceeds are received and certain dispositions. For purposes of calculating EBITDA, the effect on such calculation of any adjustments required under Statement of Financial Accounting Standards No. 141R is excluded.

Excess Cash Flow Payments. The requirement to make certain mandatory prepayments on loans outstanding under the senior credit facility under certain circumstances was eliminated in conjunction with the second amendment and restatement of the senior credit agreement in February 2014.

The Company believes that its current level of cash on hand, availability under the senior credit facility and future cash flows from operations are sufficient to meet its operating needs through fiscal 2014. All debt obligations are reflected on the Company’s balance sheet.

Uses of Cash

Capital Expenditures. Capital expenditures excluding acquisitions were approximately $54.3 million for the six months ended June 30, 2014. We anticipate our 2014 total capital expenditures will be approximately $100 million.

Acquisitions. During the six months ended June 30, 2014, the Company financed its acquisition activity of $9.2 million with cash on hand.

Note Redemption. On April 21, 2014, Lamar Media redeemed in full all $400 million of its 7 ⁷⁄₈% Senior Subordinated Notes due 2018 at a redemption price equal to 103.938% of aggregate principal amount of outstanding notes, plus accrued and unpaid interest to, but not including the redemption date for a total redemption price of $416.3 million. Lamar Media used cash on hand and borrowings under its senior credit facility to fund the redemption.

Dividends. During the period ended June 30, 2014, the Company paid a cash distribution to its common stockholders of approximately $79.0 million, or $0.83 per share of common stock, in anticipation of commencing to operate as a REIT effective January 1, 2014. As a REIT, the Company must distribute to its stockholders by the end of 2014 all if its pre-REIT accumulated earnings and profits, if any. In addition, the Company must annually distribute to its stockholders an amount equal to at least 90% of its REIT taxable income (determined before the deduction for distributed earnings and excluding any net capital gain). The amount, timing and frequency of future distributions will be at the sole discretion of the board of directors and will be declared based upon various factors, a number of which may be beyond the Company’s control, including the Company’s financial condition and operating cash flows, the amount required to maintain its REIT status and reduce any income and excise taxes that the Company otherwise would be required to pay, limitations on distributions in our existing and future debt instruments, the Company’s ability to utilize net operating losses to offset, in whole or in part, the Company’s distribution requirements, limitations on its ability to fund distributions using cash generated through its TRSs and other factors that the board of directors may deem relevant.

 

92

---

Table of Contents

Debt Service and Contractual Obligations. As of December 31, 2013, we had outstanding debt of approximately $1.94 billion. In the future, our wholly owned subsidiary Lamar Media has principal reduction obligations and revolver commitment reductions under the senior credit facility. In addition, it has fixed commercial commitments. These commitments are detailed as follows:

 

						Payments Due by Period
Contractual Obligations		Total				Less Than 1 Year				1 - 3 Years				3 - 5 Years				After 5 Years
		(In millions)
Long-term debt		$	1,938.8			$	55.9			$	362.9			$	485.0			$	1,035.0
Interest obligations on long-term debt(1)			686.0				107.7				197.8				163.3				217.2
Billboard site and other operating leases			1,161.9				155.4				235.2				175.9				595.4
Total payments due		$	3,786.7			$	319.0			$	795.9			$	824.2			$	1,847.6

 

(1)	Interest rates on our variable rate instruments are assuming rates at the December 2013 levels.

 

						Amount of Expiration Per Period
Other Commercial Commitments		Total Amount Committed				Less Than 1 Year				1 - 3 Years				3 - 5 Years				After 5 Years
		(In millions)
Revolving bank facility(2)		$	250.0			$	—			$	250.0			$	—			$	—
Standby letters of credit(3)		$	7.0			$	5.6			$	1.4			$	—			$	—

 

(2)	Lamar Media had $150.0 million outstanding under the revolving facility at December 31, 2013.

(3)	The standby letters of credit are issued under Lamar Media’s revolving bank facility and reduce the availability of the facility by the same amount.

Cash Flows

The Company’s cash flows provided by operating activities increased by $18.8 million for the year ended December 31, 2013 primarily resulting from an increase in operating income of $8.9 million as described in “Results of Operations” and by a decrease in changes to operating net assets of $20.9 million, offset by an increase in non-cash compensation of $10.5 million over the comparable period in 2012.

Cash flows used in investing activities decreased $111.5 million from $303.4 million in 2012 to $191.9 million in 2013 primarily due to a decrease in acquisition activity of $113.8 million as compared to the same period in 2012.

Cash flows used in financing activities increased to $227.2 million for the year ended December 31, 2013, primarily due to the redemption of Lamar Media’s 9 ³⁄₄% Senior Notes.

Critical Accounting Estimates

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to long-lived asset recovery, intangible assets, goodwill impairment, deferred taxes, asset retirement obligations, stock-based compensation and allowance for doubtful accounts. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events and, where applicable, established valuation techniques. These estimates form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from our estimates. We believe that the following significant accounting policies and assumptions may involve a higher degree of judgment and complexity than others.

 

93

---

Table of Contents

Long-Lived Asset Recovery

Long-lived assets, consisting primarily of property, plant and equipment and intangibles comprise a significant portion of the Company’s total assets. Purchases of property, plant and equipment are recorded at purchase cost, while acquired property, plant and equipment is recorded at fair value determined primarily through estimates of replacement costs. Property, plant and equipment of $1.1 billion and intangible assets of $419.4 million are reviewed for impairment whenever events or changes in circumstances have indicated that their carrying amounts may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset or asset group to future undiscounted net cash flows expected to be generated by that asset or asset group before interest expense. These undiscounted cash flow projections are based on management’s assumptions surrounding future operating results and the anticipated future economic environment. If actual results differ from management’s assumptions, an impairment of these intangible assets may exist and a charge to income would be made in the period such impairment is determined. During the year ended December 31, 2013, there were no indications that an impairment test was necessary.

Intangible Assets

The Company has significant intangible assets recorded on its balance sheet. Intangible assets primarily represent site locations of $388.7 million and customer relationships of $29.1 million associated with the Company’s acquisitions. The fair values of intangible assets recorded are determined using discounted cash flow models that require management to make assumptions related to future operating results, including projecting net revenue growth discounted using current cost of capital rates, of each acquisition and the anticipated future economic environment. If actual results differ from management’s assumptions, an impairment of these intangibles may exist and a charge to income would be made in the period such impairment is determined. Historically no impairment charge has been required with respect to the Company’s intangible assets.

Goodwill Impairment

The Company has a significant amount of goodwill on its balance sheet and must perform an impairment test of goodwill annually or on a more frequent basis if events and circumstances indicate that the asset might be impaired. The first step of the impairment test requires management to determine the implied fair value of its reporting units and compare it to its book value (including goodwill). To the extent the book value of a reporting unit exceeds the fair value of the reporting unit, the Company would be required to perform the second step of the impairment test, as this is an indicator that the reporting unit may be impaired. Impairment testing involves various estimates and assumptions, which could vary, and an analysis of relevant market data and market capitalization.

We have identified two reporting units (Logo operations and Billboard operations) in accordance with Accounting Standards Codification (“ASC”) 350. No changes have been made to our reporting units from the prior period. The reporting units and their carrying amounts of goodwill as of December 31, 2012 and 2013 are as follows:

 

		Carrying Value of Goodwill
		(in thousands)
		December 31, 2012				December 31, 2013
Billboard operations		$	1,484,189			$	1,502,592
Logo operations			961				961

We believe there are numerous facts and circumstances that need to be considered when estimating the reasonableness of the reporting unit’s estimated fair value. In conducting our impairment test, we assessed the reasonableness of the reporting unit’s estimated fair value based on both market capitalization and discounted future cash flows. The discounted cash flow analysis incorporated various growth rate assumptions and discounting based on a present value factor.

 

94

---

Table of Contents

Consideration of Market Capitalization

The Company first considered its market capitalization as of its annual impairment testing date of December 31. The market capitalization of its Class A common stock as of December 31, 2013 was $4.9 billion compared to stockholders’ equity of $932.9 million as of that date, resulting in an excess of approximately $4.0 billion, which is substantially in excess of our book value. The Company considers market capitalization over book value a strong indicator that no impairment of goodwill exists as of the measurement date of December 31, 2013. The following table presents the market capitalization and aggregate book value of the reporting units as of December 31, 2013:

 

		Equity Book Value				Market Capitalization(1)
		(in thousands)
Aggregate Values as of December 31, 2013		$	932,946			$	4,905,601

 

(1)	Market capitalization was calculated using a 10-day average of the closing prices of the Class A common stock beginning 5 trading days prior to the measurement date.

Calculations of Fair Value using Discounted Cash Flow Analysis

We also estimate fair value using a discounted cash flow analysis that compares the estimated future cash flows of each reporting unit to the book value of the reporting unit. The discount rate and projected revenue and EBITDA (earnings before interest, tax, depreciation and amortization) growth rates are significant assumptions utilized in our calculation of the present value of cash flows used to estimate fair value of the reporting units. These assumptions could be adversely impacted by certain risks including deterioration in industry and economic conditions. See “Risk Factors—Risk Factors Related to Our Business” beginning on page 31. For additional information about goodwill, see Note 5 to the Consolidated Financial Statements, incorporated by reference herein.

Our discount rate assumption is based on our cost of capital, which we determine annually based on our estimated costs of debt and equity relative to our capital structure. As of December 31, 2013 our weighted average cost of capital (WACC) was approximately 9.5%.

In developing our revenue and EBITDA growth rates, we consider our historical performance and current market trends in the markets in which we operate. The five year projected Compound Annual Growth Rate (CAGR) used in our discounted cash flow analysis for billboard revenue and billboard EBITDA was 4.4% and 5.8%, respectively, and our logo operations revenue and EBITDA CAGR was 2.2% and 2.5%, respectively. The projected CAGR for revenue and EBITDA discussed above would have to deteriorate significantly, among other factors, before further testing of goodwill impairment would be necessary for our reporting units.

The fair values calculated as of December 31, 2013, using the discounted cash flow analysis described above for both reporting units were substantially in excess of their book values. Assumptions used in our impairment test, such as forecasted growth rates and our cost of capital, are based on the best available market information and are consistent with our internal forecast and operating plans. The following table presents the aggregate fair value of our reporting units and aggregate book value of the reporting units as of December 31, 2013:

 

		Equity Book Value				Fair Value(1)
		(in thousands)
Aggregate Values as of December 31, 2013		$	932,946			$	4,223,102

 

(1)	Fair Value is calculated using the discounted cash flow analysis described above.

Based upon the Company’s annual review as of December 31, 2013, using both the market capitalization approach and discounted cash flow analysis, there was no indication of a potential impairment and, therefore, the second step of the impairment test was not required and no impairment charge was necessary.

 

95

---

Table of Contents

Deferred Taxes

As of December 31, 2013, the Company had deferred tax assets of $252.3 million, a component of which is the Company’s operating loss carry forward, net of existing valuation allowances. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those jurisdictions during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income, and tax-planning strategies in making this assessment. In order to fully realize the deferred tax assets, the Company will need to generate future taxable income before the expiration of the carry forwards governed by the tax code. Based on the current level of pretax earnings for financial reporting purposes and projected decreases in future depreciation and amortization, we will generate the minimum amount of future taxable income to support the realization of the deferred tax assets. Additionally, the Company has a significant amount of deferred tax liabilities that will reverse during the same period and jurisdiction and is of the same character as the temporary differences giving rise to the deferred tax assets. As a result, management believes that it is more likely than not that we will realize the benefits of these deferred tax assets, net of the existing valuation allowances at December 31, 2013. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. Should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. For a more detailed description, see Note 11 of the Notes to the Consolidated Financial Statements incorporated by reference herein.

Asset Retirement Obligations

The Company had an asset retirement obligation of $200.8 million as of December 31, 2013. This liability relates to the Company’s obligation upon the termination or non-renewal of a lease to dismantle and remove its billboard structures from the leased land and to reclaim the site to its original condition. The Company records the present value of obligations associated with the retirement of tangible long-lived assets in the period in which they are incurred. The liability is capitalized as part of the related long-lived asset’s carrying amount. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset. In calculating the liability, the Company calculates the present value of the estimated cost to dismantle using an average cost to dismantle, adjusted for inflation and market risk.

This calculation includes 100% of the Company’s billboard structures on leased land (which currently consist of approximately 72,000 structures). The Company uses a 15-year retirement period based on historical operating experience in its core markets, including the actual time that billboard structures have been located on leased land in such markets and the actual length of the leases in the core markets, which includes the initial term of the lease, plus consideration of any renewal period. Historical third-party cost information is used to estimate the cost of dismantling of the structures and the reclamation of the site. The interest rate used to calculate the present value of such costs over the retirement period is based on the Company’s historical credit-adjusted risk free rate.

Stock-based Compensation

Stock-based compensation expense is based on the value of the portion of share-based payment awards that is ultimately expected to vest. Share-Based Payment Accounting requires the use of a valuation model to calculate the fair value of share-based awards. The Company has elected to use the Black-Scholes option-pricing model. The Black-Scholes option-pricing model incorporates various assumptions, including volatility, expected life and interest rates. The expected life is based on the observed and expected time to post-vesting exercise and forfeitures of stock options by our employees. Upon the adoption of Share-Based Payment Accounting, we used a combination of historical and implied volatility, or blended volatility, in deriving the expected volatility

 

96

---

Table of Contents

assumption as allowed under Share-Based Payment Accounting. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our stock options. The dividend yield assumption is based on our history and expectation of dividend payouts. Share-Based Payment Accounting requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on our historical experience. If factors change and we employ different assumptions in the application of Share-Based Payment Accounting in future periods, the compensation expense that we record under Share-Based Payment Accounting may differ significantly from what we have recorded in the current period. During 2013, we recorded $17.3 million as compensation expense related to stock options and employee stock purchases. We evaluate and adjust our assumptions on an annual basis. See Note 14 “Stock Compensation Plans” of the Notes to Consolidated Financial Statements incorporated by reference herein for further discussion.

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts based on the payment patterns of its customers. Management analyzes historical results, the economic environment, changes in the credit worthiness of its customers, and other relevant factors in determining the adequacy of the Company’s allowance. Bad debt expense was $6.0 million, $5.4 million and $7.6 million or approximately 0.5%, 0.5% and 0.7% of net revenue for the years ended December 31, 2013, 2012, and 2011, respectively. If the future economic environment declines, the inability of customers to pay may occur and the allowance for doubtful accounts may need to be increased, which will result in additional bad debt expense in future years.

Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to interest rate risk in connection with variable rate debt instruments issued by its wholly owned subsidiary Lamar Media. The information below summarizes the Company’s interest rate risk associated with its principal variable rate debt instruments outstanding at June 30, 2014, and should be read in conjunction with Note 8 of the notes to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the period ended December 13, 2013.

Loans under Lamar Media’s senior credit facility bear interest at variable rates equal to the JPMorgan Chase Prime Rate or LIBOR plus the applicable margin. Because the JPMorgan Chase Prime Rate or LIBOR may increase or decrease at any time, the Company is exposed to market risk as a result of the impact that changes in these base rates may have on the interest rate applicable to borrowings under the senior credit facility. Increases in the interest rates applicable to borrowings under the senior credit facility would result in increased interest expense and a reduction in the Company’s net income.

At June 30, 2014, there was approximately $381.3 million of aggregate indebtedness outstanding under the senior credit facility, or approximately 19.9% of the Company’s outstanding long-term debt on that date, bearing interest at variable rates. The aggregate interest expense for the six months ended June 30, 2014, with respect to borrowings under the senior credit facility was $3.0 million, and the weighted average interest rate applicable to borrowings under this credit facility during the six months ended June 30, 2014, was 2.5%. Assuming that the weighted average interest rate was 200-basis points higher (that is 4.5% rather than 2.5%), then the Company’s six months ended June 30, 2014, interest expense would have been approximately $1.7 million higher resulting in a $1.0 million decrease in the Company’s six months ended June 30, 2014, net income.

The Company attempted to mitigate the interest rate risk resulting from its variable interest rate long-term debt instruments by issuing fixed rate, long-term debt instruments and maintaining a balance over time between the amount of the Company’s variable rate and fixed rate indebtedness. In addition, the Company has the capability under the senior credit facility to fix the interest rates applicable to its borrowings at an amount equal to LIBOR plus the applicable margin for periods of up to twelve months (in certain cases with the consent of the lenders),

 

97

---

Table of Contents

which would allow the Company to mitigate the impact of short-term fluctuations in market interest rates. In the event of an increase in interest rates, the Company may take further actions to mitigate its exposure. The Company cannot guarantee, however, that the actions that it may take to mitigate this risk will be feasible or if these actions are taken, that they will be effective.

 

98

---

Table of Contents

DESCRIPTION OF LAMAR REIT CAPITAL STOCK

The following summarizes the material terms of Lamar REIT common stock, Lamar REIT Series AA preferred stock and undesignated preferred stock as will be set forth in the Lamar REIT charter (the amended certificate of incorporation of Lamar REIT) and which will govern the rights of Lamar REIT common stock, Lamar REIT Series AA preferred stock and undesignated preferred stock if the merger agreement is adopted by Lamar Advertising’s stockholders and the merger is thereafter completed. A copy of the form of the Lamar REIT charter is attached as Annex B-1 to this proxy statement/prospectus. While we believe that the following description covers the material terms of Lamar REIT’s capital stock, the description may not contain all of the information that is important to you. We encourage you to read carefully this entire document, the Lamar REIT charter and the other documents we refer to for a more complete understanding of Lamar REIT’s capital stock following the merger.

Authorized Capital

The Lamar REIT charter authorizes Lamar REIT to issue up to 500 million shares of capital stock consisting of 362.5 million shares of Class A common stock, par value $0.001 per share, 37.5 million shares of Class B common stock, par value $0.001 per share, and 100 million shares of undesignated preferred stock, par value $0.001 per share, of which 5,720 shares are designated Series AA preferred stock.

Lamar REIT Common Stock

When issued as contemplated in the merger agreement, the Lamar REIT Class A common stock and the Lamar REIT Class B common stock will be validly issued, fully paid and non-assessable. Under Delaware law, stockholders generally are not personally liable for a corporation’s acts or debts.

Voting Rights. The Lamar REIT Class A common stock and the Lamar REIT Class B common stock will have the same rights and powers, except that a share of Lamar REIT Class A common stock will entitle the holder to one vote and a share of Lamar REIT Class B common stock will entitle the holder to ten votes. Except as required by Delaware law, the Lamar REIT Class A common stock, Lamar REIT Class B common stock and Lamar REIT Series AA preferred stock will vote together as a single class. Generally, all matters to be voted on by stockholders must be approved by a majority (or by a plurality in the case of election of directors) of the votes entitled to be cast by all shares of Lamar REIT common stock and Lamar REIT Series AA preferred stock present in person or by proxy. Under Delaware law, the affirmative vote of the holders of a majority of the outstanding shares of any class of common stock is required to approve any amendment to the certificate of incorporation that would increase or decrease the par value of that class, or modify or change the powers, preferences or special rights of the shares of any class so as to affect that class adversely. The Lamar REIT charter, however, will allow for amendments to increase or decrease the number of authorized shares of Lamar REIT Class A common stock or Lamar REIT Class B common stock without a separate vote of either class.

Conversion of Lamar REIT Class B Common Stock. Each share of Lamar REIT Class B common stock will be convertible at the option of its holder into one share of Lamar REIT Class A common stock at any time. In addition, each share of Lamar REIT Class B common stock will convert automatically into one share of Lamar REIT Class A common stock upon the sale or other transfer of a share of Lamar REIT Class B common stock to a person who, or entity which, is not a Permitted Transferee. “Permitted Transferees” include (1) a descendant of Kevin P. Reilly, Sr.; (2) a spouse or surviving spouse (even if remarried) of any individual named or described in (1) above; (3) any estate, trust, guardianship, custodianship, curatorship or other fiduciary arrangement for the primary benefit of any one or more of the individuals named or described in (1) and (2) above; and (4) any corporation, partnership, limited liability company or other business organization controlled by and substantially all of the interests in which are owned, directly or indirectly, by any one or more of the individuals and entities named or described in (1), (2) and (3) above. Furthermore, each share of Lamar REIT Class B common stock will convert automatically into one share of Lamar REIT Class A common stock (i) in the event that the number

 

99

---

Table of Contents

of outstanding shares of Lamar REIT Class B common stock falls below 10% of the total number of outstanding shares of Lamar REIT Class A common stock and Lamar REIT Class B common stock taken together or (ii) under certain circumstances, in the event there is a violation, with respect to the Lamar REIT Class B common stock, of the ownership limits contained in the Lamar REIT charter. See the section entitled “Restrictions on Ownership and Transfer “ below.

Dividends. Subject to applicable law and rights, if any, of the holders of any outstanding series of preferred stock or any class or series of stock having a preference over Lamar REIT common stock with respect to the payment of dividends, dividends may be declared and paid on the Lamar REIT common stock from time to time and in amounts as the board of directors of Lamar REIT may determine. If the merger is approved by our stockholders and thereafter completed, and if we thereafter elect to become a REIT, we currently intend to continue the payment of regular quarterly cash dividends. Any such dividends will be paid on all shares of Lamar REIT common stock outstanding at the time of such payment. See the section entitled “Distribution Policy.”

Liquidation Rights. Upon the liquidation, dissolution or winding up of Lamar REIT, whether voluntarily or involuntarily, the holders of Lamar REIT common stock will be entitled to share ratably in all assets available for distribution after payment in full to creditors and payment in full to holders of any class of preferred stock then outstanding of any amount required to be paid to them. Neither the merger, consolidation or business combination of Lamar REIT with or into any other entity in which our stockholders receive capital stock and/or other securities (including debt securities) of the surviving entity (or the direct or indirect parent entity thereof), nor the sale, lease or transfer by us of any part of our business and assets, nor the reduction of our capital stock, will be deemed to be a voluntary or involuntary liquidation, dissolution or winding up.

Other Provisions. The Lamar REIT common stock will be redeemable in the manner and on the conditions permitted under Delaware law and as may be authorized by the board of directors. Holders of Lamar REIT common stock will have no right to subscribe to new issuances of Lamar REIT common stock. Any outstanding shares of Lamar REIT Class A common stock or Lamar REIT Class B common stock that Lamar subdivides by stock split or recapitalization, or combines by reverse stock split or otherwise, will be subdivided or combined on an equal basis.

Lamar REIT Series AA Preferred Stock

The Lamar REIT charter authorizes 100 million shares of undesignated preferred stock, 5,720 shares of which will be designated Series AA Preferred Stock. When issued as contemplated in the merger agreement, the Lamar REIT Series AA preferred stock will be validly issued, fully paid and non-assessable.

Voting Rights. Holders of Lamar REIT Series AA preferred stock will be entitled to one vote per share and will generally be entitled to vote on all matters to be voted on by the holders of Lamar REIT common stock, including the election of directors.

Rank. The Lamar REIT Series AA preferred stock will rank senior to the Lamar REIT common stock with respect to dividends and upon the dissolution or liquidation of Lamar REIT.

Dividends. Holders of shares of Lamar REIT Series AA preferred stock will be entitled to receive, when, as and if declared by the board of directors out of funds legally available to make such payments, cash dividends at a rate of $15.95 per share per quarter. Dividends will accrue and accumulate from the date of issuance of the shares.

Liquidation Rights. Upon the voluntary or involuntary dissolution or liquidation of Lamar REIT, the holders of Lamar REIT Series AA preferred stock will be entitled to receive, before any payment may be made or any assets distributed to the holders of Lamar REIT common stock, the sum of $638 per share and any dividends accrued and unpaid on the stock. Upon any dissolution or liquidation, whether voluntary or involuntary, if the assets distributed among the holders of the Lamar REIT Series AA preferred stock are insufficient to permit the

 

100

---

Table of Contents

payment to a stockholder of the full preferential amounts to which they are entitled, then all of Lamar REIT’s assets to be distributed upon dissolution or liquidation will be distributed to the holders of Lamar REIT Series AA preferred stock before any distribution to holders of Lamar REIT common stock. Neither the merger, consolidation or business combination of Lamar REIT with or into any other entity in which our stockholders receive capital stock and/or other securities of the surviving entity (or the direct or indirect parent entity thereof), nor the sale, lease or transfer by us of any part of our business and assets, nor the reduction of our capital stock, will be deemed to be a voluntary or involuntary liquidation, dissolution or winding up.

Additional Lamar REIT Preferred Stock

Under Delaware law and the Lamar REIT charter, Lamar REIT will be able to issue additional shares of undesignated preferred stock from time to time, in one or more classes or series, as authorized by the board of directors, generally without the approval of the stockholders.

Subject to limitations prescribed by Delaware law and the Lamar REIT charter and bylaws, the board of directors will be able to fix the number of shares constituting each class or series of Lamar REIT preferred stock and the designations, powers, preferences and other rights of that series as well as the qualifications, limitations or restrictions on those powers, preferences and rights. These may include provisions concerning voting, redemption, dividends, dissolution or the distribution of assets, conversion or exchange, and any other subjects or matters the board of directors or duly authorized committee may fix by resolution.

The board of directors could authorize the issuance of shares of preferred stock with terms and conditions that could have the effect of discouraging a takeover or other transaction that holders of some, or a majority, of the shares might believe to be in their best interests or in which holders of some, or a majority, of the shares might receive a premium for their shares over the then-market price of the shares.

The specific terms and conditions that may be determined by the board of directors include:

 

•

whether the shares of the series are redeemable, and if so, the prices at which, and the terms and conditions on which, the shares may be redeemed, including the date or dates upon or after which the shares shall be redeemable and the amount per share payable in case of redemption;

 

•

whether shares of the series will be entitled to receive distributions and, if so, the distribution rate on the shares, any restriction, limitation or condition upon the payment of the distributions, whether distributions will be cumulative, and the dates on which distributions are payable;

 

•

any preferential amount payable upon shares of the series in the event of voluntary or involuntary liquidation, dissolution or winding up of Lamar REIT;

 

•

whether the shares of the series are convertible, or exchangeable for, shares of Lamar REIT Class A common stock or for any other class or classes of stock, or any other securities of Lamar REIT, and if so, the terms and conditions of such conversion or exchange, including price or rates of conversion at which, and the terms and conditions on which, the shares of the series may be converted or exchanged into other securities;

 

•

terms and conditions of the purchase or sinking fund provisions, if any, for the purchase or redemption of shares of the series;

 

•

the distinctive designation of each series and the number of shares that will constitute the series;

 

•

the voting power, if any, of shares of the series; and

 

•

any other specific terms, preferences, rights, limitations or restrictions of the preferred stock.

For a description of additional provisions of the Lamar REIT charter that may have the effect of delaying, deferring or preventing a change in control of Lamar REIT, see the section entitled “Comparison of Rights of Stockholders of Lamar Advertising and Lamar REIT — Anti-Takeover Effect of Certain Provisions of the Lamar REIT Charter and Bylaws.”

 

101

---

Table of Contents

Restrictions on Ownership and Transfer

In order for us to qualify as a REIT under the Code, our stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year (other than the first year for which an election to be a REIT has been made). Also, not more than 50% of the value of the outstanding shares of our stock (after taking into account certain options to acquire shares of stock) may be owned, directly or indirectly or through application of certain attribution rules by five or fewer “individuals” (as defined in the Code to include certain entities such as private foundations) at any time during the last half of a taxable year (other than the first taxable year for which an election to be a REIT has been made).

The Lamar REIT charter contains restrictions on the ownership and transfer of our stock that are intended to assist us in complying with these requirements. The relevant sections of the Lamar REIT charter provide that, subject to the exceptions described below, no person or entity may actually own or be deemed to own by virtue of the applicable constructive ownership provisions more than 5% of the outstanding shares of our common stock (based on the total combined number of Lamar REIT Class A common stock and Lamar REIT Class B common stock), excluding any shares of our stock that are not treated as outstanding for federal income tax purposes. We refer to these restrictions as the “ownership limitation provisions.”

The Lamar REIT charter further prohibits:

 

•

any person from owning shares of our stock if such ownership would result in our failing to qualify as a REIT for federal income tax purposes; and

 

•

any person from transferring shares of our stock if such transfer would result in shares of our stock being beneficially owned by fewer than 100 persons (determined under the principles of Section 856(a)(5) of the Code, generally without reference to any rules of attribution).

In establishing the ownership limitations the board of directors considered the relative values of the Class A common stock and the Class B common stock and the value of the Company’s stock owned by the Reilly family, including Kevin P. Reilly, Jr., Sean E. Reilly and their affiliates. The board of directors established a separate share ownership limitation for the Permitted Transferees (as defined above) that allows them, subject to certain limitations, to own actually and by virtue of the applicable constructive ownership provisions no more than 19% of the outstanding shares of our common stock and, during the second half of any taxable year other than our first taxable year as a REIT, no more than 33% in value of the aggregate of the outstanding shares of all classes and series of our stock, in each case excluding any shares of our stock that are not treated as outstanding for federal income tax purposes. In determining the foregoing values estimates the board of directors, among other things, consulted with an independent nationally recognized valuation advisor.

A person or entity that would have acquired actual, beneficial or constructive ownership of our stock but for the application of the ownership limitation provisions or any of the other restrictions on ownership and transfer of our stock discussed below, and, if appropriate in the context, any person or entity that would have been the record owner of such shares, is referred to as a “prohibited owner.”

The applicable constructive ownership rules under the Code are complex and may cause stock owned actually or constructively by a group of related individuals and/or entities to be treated as owned constructively by one individual or entity. As a result, the acquisition of less than 5% in the number of shares of our common stock (or the acquisition of an interest in an entity that owns, actually or constructively, our stock) by an individual or entity could nevertheless cause that individual or entity, or another individual or entity, to own, constructively or beneficially, in excess of the applicable ownership limits described above.

The Lamar REIT charter provides that, upon request, the board of directors will, prospectively or retroactively, waive the ownership limitation provisions with respect to a particular stockholder, and establish a different ownership limit for the stockholder, unless the board of directors determines in its sole judgment that such stockholder’s increased ownership could result in any of our rental income failing to qualify as such for REIT

 

102

---

Table of Contents

testing purposes as a result of the “related party tenant” rules that apply to REITs. In granting such waiver, the board of directors may also require the stockholder receiving such waiver to make certain representations, warranties and covenants related to our ability to qualify as a REIT. In addition, the Lamar REIT charter provides that the board of directors may waive the ownership limitation provisions in circumstances where a stockholder’s ownership could result in rental income failing to qualify as such for REIT testing purposes, provided that the board of directors determines that receipt of such income would not adversely affect our ability to qualify as a REIT.

As a condition of such waiver, the board of directors may require an opinion of counsel or IRS ruling, in either case in form and substance satisfactory to the board of directors, in its sole and absolute discretion, in order to determine or ensure our status as a REIT and such representations and undertakings as are reasonably necessary to make the determinations above.

Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our stock that will or may violate the ownership limitation provisions or any of the other restrictions on ownership and transfer of our stock described above must give written notice immediately to us or, in the case of a proposed or attempted transaction, provide us at least 15 days prior written notice, and provide us with such other information as we may request in order to determine the effect of such transfer on our status as a REIT.

The ownership limitation provisions and other restrictions on ownership and transfer of our stock described above will not apply if the board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.

Pursuant to the Lamar REIT charter, if any purported transfer of our stock or any other event otherwise would result in any person violating the ownership limitation provisions or such other limitation as established by the board of directors or would result in our failing to qualify as a REIT, then that number of shares in excess of the ownership limit or causing us to fail to qualify as a REIT (rounded up to the nearest whole share) will be automatically transferred to, and held by, a trust for the exclusive benefit of one or more charitable organizations selected by us. However, if any purported violation applies to a holder (actual or constructive) of shares of Class B common stock, generally before the application of any trust transfer provisions the number of shares of Class B common stock sufficient to cure or prevent the ownership limitation violation (rounded up to the nearest whole share) will be automatically converted into shares of Class A common stock. The prohibited owner will have no rights in shares of our stock held by the trustee. The automatic transfer will be effective as of the close of business on the business day prior to the date of the purported transfer or other event that results in the transfer to the trust. Any dividend or other distribution paid to the prohibited owner, prior to our discovery that the shares had been automatically transferred to a trust as described above, must be repaid to the trustee upon demand for distribution to the beneficiary of the trust. If the transfer to the trust as described above is not automatically effective, for any reason, to prevent violation of the applicable ownership limit or other charter restriction or our failing to qualify as a REIT, then the Lamar REIT charter provides that the transfer of shares resulting in such violation will be void. If any transfer of our stock would result in shares of our stock being beneficially owned by fewer than 100 persons (determined under the principles of Section 856(a)(5) of the Code, generally without reference to any rules of attribution), then any such purported transfer will be automatically void and of no force or effect and the intended transferee will acquire no rights in the shares.

The trustee must sell the shares to a person or entity designated by the trustee who could own the shares without violating the ownership limitation provisions or other restrictions on ownership and transfer of our stock; provided that the right of the trustee to sell the shares will be subject to the rights of any person or entity to purchase such shares from the trust that we establish by an agreement entered into prior to the date the shares are transferred to the trust. Upon such sale, the trustee must distribute to the prohibited owner an amount equal to the lesser of: (a) the price paid by the prohibited owner for the shares (or, if the prohibited owner did not give value for the shares in connection with the transfer or other event that resulted in the transfer to the trust (e.g., a gift, devise or other such transaction), the fair market value of such shares on the day of the transfer or other event

 

103

---

Table of Contents

that resulted in the transfer of such shares to the trust), and (b) the sales proceeds (net of commissions and other expenses of sale) received by the trustee for the shares. The trustee may reduce the amount payable to the prohibited owner by the amount of any dividends or other distributions paid to the prohibited owner and owed by the prohibited owner before our discovery that the shares had been transferred to the trust and that is owed by the prohibited owner to the trustee. Any net sales proceeds in excess of the amount payable to the prohibited owner will be immediately paid to the charitable beneficiary, together with any dividends or other distributions thereon. In addition, if prior to discovery by us that shares of our stock have been transferred to the trust, such shares of stock are sold by a prohibited owner, then such shares shall be deemed to have been sold on behalf of the trust and, to the extent that the prohibited owner received an amount for or in respect of such shares that exceeds the amount that such prohibited owner was entitled to receive, such excess amount shall be paid to the trustee upon demand. The prohibited owner has no rights in the shares held by the trustee.

The trustee will be designated by us and will be unaffiliated with us and with any prohibited owner. Prior to the sale of any shares by the trust, the trustee will receive, in trust for the charitable beneficiary, all dividends and other distributions paid by us with respect to such shares and may also exercise all voting rights with respect to such shares for the exclusive benefit of the charitable beneficiary.

Subject to Delaware law, effective as of the date that the shares have been transferred to the trust, the trustee shall have the authority, at the trustee’s sole discretion:

 

•

to rescind as void any vote cast by a prohibited owner prior to our discovery that the shares have been transferred to the trust; and

 

•

to recast the vote in accordance with the desires of the trustee acting for the benefit of the beneficiary of the trust.

However, if we have already taken irreversible corporate action, then the trustee may not rescind and recast the vote.

If the board of directors determines in good faith that a proposed transfer or other event has taken place that would violate the restrictions on ownership and transfer of our stock set forth in the Lamar REIT charter, the board of directors will take such action as it deems advisable in its sole discretion to refuse to give effect to or to prevent such transfer, including, but not limited to, causing us to redeem shares of stock, refusing to give effect to the transfer on our books or instituting proceedings to enjoin the transfer.

Following the end of each REIT taxable year, every owner of 5% or more (or such lower percentage as required by the Code or the regulations promulgated thereunder) of the outstanding shares of any class or series of our stock must give written notice to us stating the name and address of such owner, the number of shares of each Class And series of our stock that the owner beneficially owns and a description of the manner in which the shares are held. Each such owner also must provide us with any additional information that we request in order to determine the effect, if any, of the person’s actual or beneficial ownership on our qualification as a REIT and to ensure compliance with the ownership limitation provisions. In addition, any person or entity that is an actual owner, beneficial owner or constructive owner of shares of our stock and any person or entity (including the stockholder of record) who is holding shares of our stock for an actual owner, beneficial owner or constructive owner must, on request, disclose to us such information as we may request in good faith in order to determine our qualification as a REIT and comply with requirements of any taxing authority or governmental authority or to determine such compliance.

Any certificates representing shares of our stock will bear a legend referring to the restrictions on ownership and transfer of our stock described above.

These restrictions on ownership and transfer could delay, defer or prevent a transaction or a change of control of the Company that might involve a premium price for our common stock that our stockholders believe to be in their best interest.

 

104

---

Table of Contents

Section 203 of the Delaware General Corporation Law

We are and will be subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns (or, in certain cases, within three years prior, did own) 15% or more of the corporation’s voting stock constituting total voting power. Under Section 203, a business combination between us and an interested stockholder is prohibited unless it satisfies one of the following conditions: (1) the board of directors must have previously approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder or (2) on consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced (excluding, for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder), shares owned by (a) persons who are directors and also officers and (b) employee stock plans, in certain instances) or (3) the business combination is approved by the board of directors and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least 662/3% of the outstanding voting stock which is not owned by the interested stockholder.

Transfer Agent and Registrar

The transfer agent and registrar for Lamar REIT Class A common stock is the American Stock Transfer & Trust Company, LLC, 6201 15th Avenue, Brooklyn, NY 11219, telephone number (718) 921-8124.

 

105

---

Table of Contents

COMPARISON OF RIGHTS OF STOCKHOLDERS OF LAMAR ADVERTISING AND LAMAR REIT

The following describes some of the differences between the current rights of stockholders of Lamar Advertising and the rights of stockholders of Lamar REIT after the merger, and also summarizes certain provisions of Delaware law, the Lamar Advertising charter, the Lamar Advertising bylaws, the Lamar REIT charter, and the Lamar REIT bylaws. This summary may not contain all the information that is important to you. We encourage you to carefully read the Lamar Advertising charter, the Lamar Advertising bylaws, the Lamar REIT charter and the Lamar REIT bylaws. For information on how to obtain the Lamar Advertising charter and Lamar Advertising bylaws, see “Additional Information.” A copy of the forms of the Lamar REIT charter and Lamar REIT bylaws are attached as Annex B-1 and Annex B-2, respectively, to this proxy statement/prospectus.

General

If the merger is completed, holders of shares of Lamar Advertising common stock will obtain the right to receive a number of shares of Lamar REIT common stock equal to, and in exchange for, the same number and class of shares of Lamar Advertising common stock then owned, and holders of Lamar Advertising Series AA preferred stock will obtain the right to receive a number of shares of Lamar REIT Series AA preferred stock equal to, and in exchange for, the same number of shares of Lamar Advertising Series AA preferred stock then owned. As a holder of Lamar Advertising common stock and Lamar Advertising Series AA preferred stock, your rights are governed by Delaware law, the Lamar Advertising charter and the Lamar Advertising bylaws. If the merger is completed, your rights as a holder of Lamar REIT common stock and Lamar REIT Series AA preferred stock will be governed by Delaware law, the Lamar REIT charter and the Lamar REIT bylaws. Generally, except as described below, and except that the Lamar REIT charter will include restrictions on ownership and transfer, the Lamar REIT charter and the Lamar REIT bylaws will be the same in all material respects as the current Lamar Advertising charter and Lamar Advertising bylaws, which currently govern your rights as a Lamar stockholder.

The Lamar REIT charter and Lamar REIT bylaws will contain provisions that could have the effect of delaying, deferring or preventing a transaction or a change in control of Lamar REIT by means of a tender offer, proxy contest or otherwise that might involve a premium price for holders of shares of Lamar REIT common stock or otherwise be in our stockholders’ best interests. See the section entitled “Anti-Takeover Effect of Certain Provisions of the Lamar REIT Charter and Bylaws.”

Amendment of Charter and Bylaws

Lamar Advertising. The Lamar Advertising charter may be amended by Lamar Advertising in the manner prescribed by Delaware law. Under Delaware law, the affirmative vote of the holders of a majority of the outstanding shares of any class of common stock is required to approve any amendment to the certificate of incorporation that would increase or decrease the par value of that class, or modify or change the powers, preferences or special rights of the shares of any class so as to affect that class adversely. The Lamar Advertising charter, however, allows for amendments to increase or decrease the number of authorized shares of Class A common stock or Class B common stock without a separate vote of either class. The Lamar Advertising bylaws provide that the bylaws may be altered, amended or repealed or new bylaws may be adopted by (i) the affirmative vote of a majority of the directors present at any regular or special meeting of the board of directors at which a quorum is present or (ii) the affirmative vote of a majority of the votes represented by the shares of the stockholders constituting a quorum present at any regular meeting of the stockholders, or at any special meeting of the stockholders, provided that notice of such alteration, amendment, repeal or adoption of new bylaws have been stated in the notice of such special meeting.

Lamar REIT. The amendment provisions of the Lamar REIT charter and the Lamar REIT bylaws are identical in all material respects to the amendment provisions of the Lamar Advertising charter and the Lamar Advertising bylaws.

 

106

---

Table of Contents

Meeting of Stockholders; Right to Call Special Meetings; Action by Written Consent

Lamar Advertising. Under the Lamar Advertising bylaws, annual meetings of stockholders are to be held at a date and time as determined by the board of directors or by an officer designated by the board of directors. Special meetings of the stockholders may be called at any time by the president or by a majority of the board of directors. At any meeting of stockholders, only business that was properly brought before the meeting will be conducted. The Lamar Advertising bylaws provide that any action required or permitted by Delaware to be taken at any annual or special meeting may be taken without a meeting by the written consent of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on such action were present and voted.

Lamar REIT. The provisions of the Lamar REIT bylaws with respect to the meetings of stockholders, the right to call special meetings and action by written consent are identical in all material respects to the provisions of the Lamar Advertising bylaws, except that the Lamar REIT bylaws provide that the board of directors may postpone or reschedule any previously scheduled annual or special meeting of the stockholders.

Advance Notice Requirement of Director Nominations and Stockholder Proposals

Lamar Advertising. The Lamar Advertising bylaws establish an advance notice procedure for stockholders to make nominations of candidates for directors or bring other business before a stockholder meeting. Nominations for persons as directors may be made only by or at the direction of the board of directors or by any stockholder who is a stockholder of record at the time of giving of notice who is entitled to vote in the election of directors if the stockholder timely complies with the notice procedures set forth in the Lamar Advertising bylaws. The stockholder’s written notice also must set forth certain information regarding the stockholder and the nominee and certain other information as set forth in the Lamar Advertising bylaws. To be timely, with respect to the regularly scheduled annual meeting, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of Lamar Advertising (i) no later than 75 days in advance of the anniversary of the date of the previous year’s annual meeting; (ii) in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed to more than 30 days before or after such anniversary date, no later than 45 days in advance of the current year’s annual meeting if at least 60 days notice or prior public disclosure of the annual meeting is given or made or (iii) if neither (i) nor (ii) apply, 15 days following the day on which notice of the date of the current year’s annual meeting was mailed or public disclosure of the date of such annual meeting is first made by Lamar Advertising.

Stockholder proposals, other than nominations of persons for election as directors, may be made by a stockholder (i) who is a stockholder of record at the time of the giving of notice, (ii) who is entitled to vote at the meeting, (iii) who has given timely notice of the business in writing to the secretary of Lamar Advertising and (iv) such business is properly brought forth before the meeting, in accordance with the bylaws. The stockholder’s written notice also must set forth a brief description of the business desired to be brought before the meeting and certain other information as set forth in the Lamar Advertising bylaws. To be timely, as described above, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of Lamar Advertising (i) in the case of the annual meeting only, no later than 75 days in advance of the anniversary of the date of the previous year’s annual meeting; (ii) in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed to more than 30 days before or after such anniversary date, no later than 45 days in advance of the current year’s annual meeting or a special meeting if at least 60 days notice or prior public disclosure is given or made or (iii) if neither (i) nor (ii) apply, 15 days following the day on which notice of the date of the current year’s annual meeting or the special meeting was mailed or public disclosure of the date of such annual meeting or special meeting is first made by Lamar Advertising.

Lamar REIT. The provisions of the Lamar REIT bylaws with respect to the advance notice requirement of stockholder proposals and director nominations are identical in all material respects to the provisions of the Lamar Advertising bylaws, except that the Lamar REIT bylaws set forth different requirements for a

 

107

---

Table of Contents

stockholder’s notice, including nominations for persons as directors, to be considered timely. Under the Lamar REIT bylaws, to be timely, a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of Lamar REIT (i) in the case of an annual meeting only, not earlier than the 120th day and not later than the close of business on the 90th day prior to the anniversary date of the prior year’s annual meeting or (ii) if there was no annual meeting in the prior year, or the date of the current year’s annual meeting is more than 30 days before or more than 70 days after the anniversary date of the prior year’s annual meeting, or if clause (i) does not apply, not earlier than the 120th day prior to the date of the current year’s annual meeting or a special meeting and not later than the close of business on the later of the 90th day prior to the date of such annual or special meeting or the date 10 days after the day on which notice of the date of the current year’s annual meeting or the special meeting was mailed or public disclosure was made.

Number and Election of Directors; Vacancies; Removal

Lamar Advertising. The Lamar Advertising bylaws provide that the business and affairs of Lamar Advertising will be managed by the board of directors, which must consist of not less than one director, none of whom needs to be a stockholder.

The number of directors may be increased at any time, such increase to be effective immediately unless otherwise specified in the resolution, by vote of a majority of the directors then in office. Directors must be elected at each annual meeting of stockholders by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present to hold office until the next annual meeting of stockholders and until the election and qualification of their respective successors. Election of directors need not be by written ballot.

The Lamar Advertising bylaws provide that, unless and until filled by the stockholders and except as otherwise provided by the Lamar Advertising charter, any vacancy on the board of directors, including one created by an increase in the number of directors and an unfilled vacancy resulting from the removal of any director, will be filled by a majority vote of the directors then in office, even if less than a quorum, or by a sole remaining director. Under the DGCL, directors may be removed with or without cause, by the stockholders. The vacancy or vacancies created by the removal of a director may be filled by the stockholders at the meeting held for the purpose of removal, or if not so, by the directors as described above.

Lamar REIT. The provisions of the Lamar REIT bylaws with respect to the number and election of directors, vacancies and removal are identical in all material respects to the provisions of the Lamar Advertising bylaws.

Forum Selection Clause

Lamar Advertising. The Lamar Advertising charter does not contain a forum selection clause.

Lamar REIT. The Lamar REIT charter provides that unless Lamar REIT consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for:

 

•

any derivative action or proceeding brought on behalf of Lamar REIT;

 

•

any action asserting a claim of breach of a fiduciary duty owed by any of Lamar REIT’s directors, officers, or employees to Lamar REIT or its stockholders;

 

•

any action asserting a claim against Lamar REIT arising pursuant to any provision of the DGCL, Lamar REIT’s charter or Lamar REIT’s bylaws; or

 

•

any action asserting a claim against Lamar REIT that is governed by the internal affairs doctrine.

The Lamar REIT charter also provides that any person or entity purchasing or otherwise acquiring any interest in capital stock of Lamar REIT capital stock will be deemed to have notice of and to have consented to this forum selection provision. However, it is possible that a court could find our forum selection provision to be inapplicable or unenforceable.

 

108

---

Table of Contents

Anti-Takeover Effect of Certain Provisions of the Lamar REIT Charter and Bylaws

Certain provisions of the Lamar REIT charter, described below, as well as the ability of the board of directors to issue additional classes and shares of preferred stock and to set voting rights, preferences and other terms of the preferred stock, could delay, defer, or prevent a transaction or a change in control of Lamar REIT that might involve a premium for holders of Lamar REIT common stock or might otherwise be in their best interests.

Removal of Directors. Delaware law provides that any or all of the directors may be removed at any time, either with or without cause by a vote of our stockholders, provided, however that a vote of a majority of the shares outstanding and entitled to vote is required to effect any such removal. This provision may delay or prevent our stockholders from removing incumbent directors.

Advance Notice of Director Nominations and Stockholder Proposals. The Lamar REIT bylaws include advance notice and informational requirements and time limitations on any director nomination or proposal that a stockholder wishes to make at a meeting of stockholders. A failure to comply with these timing and informational requirements can result in a stockholder’s director nomination or proposal not being considered at a meeting of stockholders.

Ownership Limitations. Primarily to protect us against the risk of losing our status as a REIT, the Lamar REIT charter contains provisions that limit the ownership by any person or entity of shares of any class or series of our capital stock. These provisions may have the effect of inhibiting or impeding a change in control. See the section entitled “Description of Lamar REIT Capital Stock — Restrictions on Ownership and Transfer.”

 

109

---

Table of Contents

LIMITATIONS OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

DGCL. Subsection (a) of Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person’s conduct was unlawful.

Subsection (b) of Section 145 of the DGCL empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

Subsection (d) of Section 145 of the DGCL provides that any indemnification under subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of Section 145. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders.

Section 145 of the DGCL further provides that to the extent a present or former director or officer of a corporation has been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith and that such expenses may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in Section 145 of the DGCL; that any indemnification and advancement of expenses provided by, or granted pursuant to, Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; that any indemnification and advancement of expenses provided by, or granted pursuant to, Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person’s heirs, executors and administrators; and empowers the corporation to purchase and maintain insurance on behalf

 

110

---

Table of Contents

of any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liabilities under Section 145.

Section 102(b)(7) of the DGCL provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit.

Lamar REIT Charter and Bylaws. The Lamar REIT charter and bylaws include provisions which limit or eliminate the personal liability of Lamar REIT’s directors and officers to the fullest extent permitted by Section