SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1998.
Commission file number 000-22713
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OUTDOOR COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 38-3286430
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
512 TAYLOR STREET, CORINTH, MISSISSIPPI 38834
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (601) 286-3334
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of April 30, 1998 there were issued and outstanding 8,417.72 shares of
the registrant's Class A Common Stock, par value $0.01 per share, and 3,689.28
shares of the registrant's Class B Common Stock, par value $0.01 per share.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at March 31,
1998 (unaudited) and June 30, 1997......................... 1
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997 (unaudited)
and the Nine Months Ended March 31, 1998 and 1997
(unaudited)................................................ 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and 1997 (unaudited)...... 4
Notes to Condensed Consolidated Financial Statements....... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 17
Item 2. Changes in Securities and Use of Proceeds.................. 17
Item 6. Exhibits and Reports on Form 8-K........................... 17
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OUTDOOR COMMUNICATIONS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, June 30,
1998 1997
------------ ------------
Assets (unaudited)
-------
Current assets:
Cash and cash equivalents $ 1,137,836 $ 1,712,827
Trade accounts receivable, less allowance for doubtful
accounts of $354,395 at March 31, 1998 and
$317,914 at June 30, 1997 6,613,323 7,253,391
Refundable income taxes 200,058 616,100
Prepaid rent expense 2,028,436 1,805,431
Other assets 1,283,560 978,023
Deferred income taxes 420,785 438,967
------------ ------------
Total current assets 11,683,998 12,804,739
------------ ------------
Property and equipment, net 61,021,474 55,786,503
Intangible assets, less accumulated amortization 83,091,162 72,239,682
Deferred financing costs (net of accumulated
amortization of $352,230 at March 31, 1998 and
$797,622 at June 30, 1997) 5,015,546 4,240,033
Other assets 418,378 605,899
------------ ------------
Total assets $161,230,558 $145,676,856
============ ============
See accompnaying notes to condensed consolidated financial statements.
-1-
March 31, June 30,
1998 1997
------------ ------------
Liabilities and Stockholders' Equity (Deficit) (unaudited)
----------------------------------------------
Current liabilities:
Current installments of long-term debt $ 5,876,875 $ 5,876,875
Trade accounts payable 871,658 760,257
Income taxes payable - 615,418
Accrued salaries, wages and benefits 731,258 1,187,104
Accrued interest 1,274,954 541,895
Other accrued expenses 1,233,187 491,848
Deferred advertising revenues and non-compete income 386,913 405,500
------------ ------------
Total current liabilities 10,374,845 9,878,897
------------ ------------
Long-term debt:
Credit facility, excluding current installments 34,400,000 115,650,000
Senior subordinated notes 105,000,000 -
Subordinated debt - 22,425,000
Deferred income taxes 2,657,981 4,070,180
Preferred interests of a subsidiary 5,483,616 -
Accrued interest - 1,671,666
Deferred non-compete income, less current portion - 26,667
------------ ------------
Total liabilities 157,916,442 153,722,410
------------ ------------
Stockholders' equity (deficit):
Series A preferred stock, $0.01 par value. Authorized
300,000 shares; issued and outstanding 186,220.93
shares at March 31, 1998 (liquidation preference of
$20,018,750) 1,862 -
Undesignated preferred stock, $0.01 par value.
Authorized 4,700,000 shares; none issued and
outstanding at March 31, 1998 - -
Class A common stock, $0.01 par value. Authorized
10,000 shares; issued and outstanding 8,385.72
shares at March 31, 1998 and June 30, 1997 84 84
Class B common stock, $0.01 par value. Authorized
10,000 shares; issued and outstanding 3,689.28 shares
at March 31, 1998 and June 30, 1997 37 37
Additional paid-in capital 22,431,707 3,811,475
Accumulated deficit (19,119,574) (11,857,150)
------------ ------------
Total stockholders' equity (deficit) 3,314,116 (8,045,554)
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity (deficit) $161,230,558 $145,676,856
============ ============
See accompanying notes to condensed consolidated financial statements.
-2-
OUTDOOR COMMUNICATIONS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Gross revenues $14,634,688 $11,858,981 $45,165,228 $35,105,189
Less agency commissions 1,299,787 1,120,283 4,112,877 3,363,915
----------- ----------- ----------- -----------
Net revenues 13,334,901 10,738,698 41,052,351 31,741,274
----------- ----------- ----------- -----------
Operating expenses:
Direct operating expenses 4,646,236 3,717,651 13,826,106 10,330,816
Selling, general, and administrative 3,852,826 3,085,250 11,406,468 8,502,570
Depreciation and amortization 3,498,695 3,582,451 10,268,854 7,256,820
----------- ----------- ----------- -----------
Total operating expenses 11,997,757 10,385,352 35,501,428 26,090,206
----------- ----------- ----------- -----------
Operating income 1,337,144 353,346 5,550,923 5,651,068
Interest expense (3,260,773) (2,761,278) (9,635,629) (7,597,020)
Gain (loss) on disposal of equipment 7,082 (94,926) (81,420) (94,816)
Other income (expense), net (274,355) 71,003 (349,691) 147,365
Expenses written off related to proposed
equity offering - - (148,506) -
----------- ----------- ----------- -----------
Loss before income taxes and
extraordinary item (2,190,902) (2,431,855) (4,664,323) (1,893,403)
Income tax benefit (1,062,033) (649,601) (77,971) (439,605)
----------- ----------- ----------- -----------
Loss before extraordinary (1,128,869) (1,782,254) (4,586,352) (1,453,798)
item
Extraordinary loss from early
extinguishment of debt, net of
income tax benefit of $1,710,931 - - (2,676,072) -
----------- ----------- ----------- -----------
Net loss $(1,128,869) $(1,782,254) $(7,262,424) $(1,453,798)
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
-3-
OUTDOOR COMMUNICATIONS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
March 31,
-----------------------------------
1998 1997
------------- ------------
Net cash provided by operating activities $ 6,897,966 $ 4,674,010
------------- ------------
Cash flows from investing activities:
Purchase of Jennings Outdoor, Inc. and Jennings Media
Services, LLC (14,159,837) -
Purchase of Skoglund Communications, Inc. and Skoglund
Communications of St. Cloud, Inc. - (21,246,850)
Purchase of Outdoor West of Tennessee - (11,802,444)
Purchase of other companies (6,690,124) (8,417,714)
Capital expenditures (4,616,771) (2,293,566)
Deferred acquisition costs (475,893) (1,478,222)
Proceeds from sale of equipment 87,444 -
------------- ------------
Net cash used in investing activities (25,855,181) (45,238,796)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of senior subordinated notes 105,000,000 -
Borrowings under long-term debt agreement 41,050,000 52,300,000
Repayment of long-term debt (122,300,000) (7,100,000)
Deferred financing costs (5,367,776) (1,728,268)
Proceeds from issuance of subordinated notes - 325,000
Proceeds from issuance of common stock - 175,000
Payments on obligation under non-compete agreement - (100,000)
------------- ------------
Net cash provided by financing activities 18,382,224 43,871,732
------------- ------------
Net (decrease) increase in cash and cash equivalents (574,991) 3,306,946
Cash and cash equivalents at beginning of the period 1,712,827 1,259,441
------------- ------------
Cash and cash equivalents at end of the period $ 1,137,836 $ 4,566,387
============= ============
Supplemental cash flow disclosures:
Cash paid for interest $ 9,129,772 $ 5,917,804
Cash paid for income taxes 189,280 57,196
Supplemental noncash financing activities:
Preferred stock issued in exchange for subordinated
debt including accrued interest of $1,332,093 $ 18,622,093 $ -
Preferred interests issued in exchange for subordinated
debt including accrued interest of $348,616 5,483,616 -
See accompanying notes to condensed consolidated financial statements.
-4-
OUTDOOR COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine months ended March 31, 1998 and 1997
(Unaudited)
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements of
Outdoor Communications, Inc. and subsidiaries, (the Company) have been prepared
in conformity with generally accepted accounting principles and with the
instructions for Form 10-Q and Rule 10-01 of Regulation S-X as they apply to
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. All significant intercompany transactions
have been eliminated in consolidation. The consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Special Financial Report on Form 10-K
for the fiscal year ended June 30, 1997. Certain 1997 financial statement
amounts have been reclassified to conform to the 1998 presentation.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of financial position
and results of operations have been included. The operating results for the
nine month period ended March 31, 1998 are not necessarily indicative of the
results to be expected for the year ending June 30, 1998.
Property and Equipment
- ----------------------
Major categories of property, plant, and equipment at March 31, 1998 and June
30, 1997 were as follows:
Estimated March 31, June 30,
Life (Years) 1998 1997
------------ ----------- -----------
(unaudited)
Land -- $ 1,670,626 $ 1,610,126
Building and improvements 10-25 1,481,293 1,469,852
Advertising structures 8-15 66,808,650 57,910,710
Leasehold improvements 2-20 1,083,734 872,674
Equipment 3-10 4,938,673 4,317,355
Construction in progress -- 368,541 102,666
----------- -----------
76,351,517 66,283,383
Less accumulated depreciation 15,330,043 10,496,880
----------- -----------
Net property and equipment $61,021,474 $55,786,503
=========== ===========
-5-
OUTDOOR COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, Continued
Intangible Assets
- ------------------
Intangible assets at March 31, 1998 and June 30, 1997 consist of the following:
Estimated March 31, June 30,
Life (Years) 1998 1997
------------ ----------- -----------
(unaudited)
Covenants not to compete 4-10 $ 8,780,667 $ 8,495,667
Goodwill 20-25 60,794,046 46,619,981
Customer lists 8 28,218,644 26,833,154
----------- -----------
97,793,357 81,948,802
Less accumulated amortization 14,702,195 9,709,120
----------- -----------
$83,091,162 $72,239,682
=========== ===========
Public Offering of Senior Subordinated Notes
- --------------------------------------------
On August 15, 1997, the Company completed a Public Note Offering (the Offering)
of $105 million aggregate principal amount of 9.25% subordinated notes due
August 15, 2007 (the Notes). Net proceeds of the Offering, after deduction of
associated expenses, were approximately $100.3 million. Accrued interest on the
Notes is payable in semi-annual installments on each February 15 and August 15,
commencing February 15, 1998. The Notes are redeemable at the Company's option,
in whole or in part, at any time on or after August 15, 2002 in accordance with
a prepayment premium as described in the indenture governing the Notes. Other
prepayments may occur prior to August 15, 2000 based on certain limitations as
described in the indenture governing the Notes.
The Notes are fully and unconditionally guaranteed, on a senior subordinated
basis, as to payment of principal, premium, if any, and interest, jointly and
severally by all of the Company's direct and indirect subsidiaries. Separate
financial statements of the Company's subsidiaries have not been presented
because (a) such guarantor subsidiaries have jointly and severally guaranteed
the notes on a full and unconditional basis, (b) the aggregate assets,
liabilities, earnings and equity of the guarantor subsidiaries are substantially
equivalent to the assets, liabilities, earnings and equity of the parent on a
consolidated basis and (c) the Company has not presented separate financial
statements and other disclosures concerning the subsidiary guarantors because
management has determined that such information is not material to investors.
New Credit Facility
- -------------------
Simultaneous to the Offering, the Company entered into a new $150 million senior
credit facility (New Credit Facility) with The Chase Manhattan Bank and a
syndicate consisting of various other financial institutions (collectively, the
New Bank). The New Credit Facility consists of a Revolving Loan Commitment (the
New Revolver) of $110 million and a Term Loan Commitment for $40 million
(collectively the New Borrowings). The New Revolver matures on December 21,
2004 and the Term Loan Commitment matures on June 30, 2005. The New Credit
Facility provides for annual reductions in the New Revolver and amortization of
the term loan facility. Collateral includes a first lien on all tangible and
intangible property of the Company, assignment of all leases, and guaranties by
the Company's subsidiaries.
-6-
OUTDOOR COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, Continued
The New Credit Facility enables the Company to borrow funds at a rate equal to
2.25% plus LIBOR or 1.0% over the New Bank's base rate, as defined. The New
Credit Facility also enables the Company to realize a lower interest rate if its
leverage ratio meets certain levels as stipulated in the Credit Facility. For
the quarter ended March 31, 1998, the average interest rate under the New Credit
Facility was 8.04%. Accrued interest is payable in quarterly installments on
March 31, June 30, September 30, and December 31. The Credit Facility also
requires payment of a commitment fee of 0.375% per annum, which may be reduced
based on the Company's leverage ratio, on the daily average aggregate unutilized
commitment from the Bank. Accrued commitment fees are due quarterly on March
31, June 30, September 30, and December 31.
The New Credit Facility contains certain warranties and affirmative covenants
that must be complied with on a continuing basis. In addition, the New Credit
Facility contains certain restrictive covenants which, among other things,
restrict the Company from incurring additional debt and liens on assets, limits
the amount of capital expenditures during any fiscal year, and prohibits the
consolidation, merger or sale of assets, or issuance of common stock except as
permitted by the New Credit Facility. The New Credit Facility also requires the
Company to maintain certain financial ratios.
Under the terms of the New Credit Facility, the subsidiaries are restricted in
their ability to make distributions to the Company to distributions necessary to
enable the Company to make interest payments due under the New Credit Facility
and make federal income tax payments. The indenture governing the Notes
provides that the Company will not, and will not permit any of the subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction of any kind on the
ability of the subsidiaries to make distributions to the Company with certain
limited exceptions including the restrictions under the New Credit Facility
described in the preceding sentence.
As of March 31, 1998, borrowings under the New Revolver totaled $34.4 million.
The Company has the right to prepay the Borrowings in whole or in part, without
premium or penalty, as stipulated in the New Credit Facility.
Preferred Stock
- ---------------
In July 1997, the Company entered into an agreement, effective June 30, 1997,
with the Company's Series A and B subordinated debt holders to exchange such
notes and accrued and unpaid interest through June 30, 1997 thereon, for Series
A preferred stock and/or preferred interest in OCIH LLC (OCIH) (the Debt
Conversion).
-7-
OUTDOOR COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, Continued
The Board of Directors has authorized 5,000,000 shares of preferred stock, par
value $0.01 per share, of which 300,000 shares are designated Series A (Series A
Preferred Stock) and 4,700,000 shares are undesignated (Undesignated Preferred
Stock). Upon the closing of the Public Note Offering on August 15, 1997,
186,220.93 shares of Series A Preferred Stock were issued in exchange for
subordinated notes and the related unpaid and accrued interest thereon through
June 30, 1997, totaling $17,290,000 and $1,332,093, respectively, resulting in a
corresponding increase in stockholders' equity of $18,622,093. Additionally,
$5,135,000 of subordinated notes and $348,616 of unpaid and accrued interest
thereon through June 30, 1997 were assigned by certain subordinated note holders
to OCIH in exchange for all of the preferred interests of OCIH.
No dividends will be declared or paid on the common stock during any year unless
the full amount of accrued dividends on the Series A Preferred Stock has been
paid. Upon declaration, the holders of the Series A Preferred Stock are
entitled to cumulative cash dividends of $10 per annum, per share.
In the event of liquidation or dissolution of the Company, the holders of the
Series A Preferred Stock are entitled to receive a preferential amount equal to
$100 per share of the issued and outstanding Series A Preferred Stock and a
further preferential amount equal to all declared and unpaid dividends thereon.
The liquidation amount of $20.0 million as of March 31, 1998 includes $1.4
million of cumulative preferred dividends. This liquidation value will be paid
before the payment or distribution of any assets of the Company to the holders
of the common stock.
Abandoned Equity Offering
- -------------------------
The Company abandoned plans for an initial public offering of its common stock
during July 1997. As a result, the Company has recognized approximately
$149,000 of expense in the first quarter of fiscal year 1998, due to the write
off of costs incurred related to the abandoned offering.
Extraordinary Loss
- ------------------
Effective August 15, 1997, the proceeds from the Offering were used for the
early extinguishment of the outstanding debt related to the prior credit
facility. As a result, deferred financing fees of $4,387,003 were written off
and have been recorded as an extraordinary loss.
Earnings Per Share
- ------------------
An earnings per share calculation has not been presented because the Company is
closely held by a private investor group and, accordingly, earnings per share is
not required or meaningful.
Acquisitions
- ------------
On October 2, 1997, the Company acquired the stock of Jennings Outdoor, Inc. and
the assets of Jennings Media Services, L.L.C. for a cash payment of $14.2
million of which $14 million was financed through the New Credit Facility. As a
result of this acquisition, the Company acquired approximately 740 display faces
in Alabama. The acquisitions have been accounted for by the purchase method and
the unaudited condensed consolidated financial statements include the operating
results of each business from the date of acquisition.
-8-
OUTDOOR COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, Continued
The Company also consummated five smaller acquisitions consisting of
approximately 349 display faces during the nine months ended March 31, 1998 for
aggregate cash payments of $6.7 million. The acquisitions have been accounted
for using the purchase method.
New Accounting Pronouncements
- -----------------------------
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
which will require the Company to disclose, in financial statement format, all
non-owner changes in equity. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Adoption of this standard is not expected to
have a material impact on disclosures in the Company's financial statements.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", which established a new accounting principle for
reporting information about operating segments in annual financial statements
and interim financial reports. It also established standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997.
The Company is currently evaluating the applicability of this standard.
However, the Company does not expect a material impact on disclosures in the
Company's financial statements.
Commitments and Contingencies
- -----------------------------
In July 1997, the Company and a prospective seller agreed to terminate a
contract for the Company to purchase the assets of an outdoor advertising
company. The Company tendered a deposit in the form of a letter of credit in the
amount of $1.0 million in connection with the proposed purchase. After
termination of the purchase contract, the Company and the prospective seller
each made claims to the deposit. Pursuant to the contract, the prospective
seller filed for arbitration before the Center for Public Resources seeking an
order permitting it to draw upon the letter of credit. In March 1998, the
Company and prospective seller reached a settlement agreement pursuant to which
the Company paid to the prospective seller $0.5 million in satisfaction of all
claims. This payment is reflected in other expenses in the condensed
consolidated statements of operations for the three and nine month periods ended
March 31, 1998.
-9-
OUTDOOR COMMUNICATIONS, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, Continued
Long-Term Incentive Compensation Plan
- -------------------------------------
In February 1998, the Company adopted the 1998 Stock Option and Incentive Plan.
As part of the plan, stock options on 621 shares of common stock were granted to
senior management with exercise prices ranging from $6,023 to $6,626 per share.
The options vest over a five year period with none being currently exercisable.
The Company accounts for its stock option plan under the provisions of Statement
of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense, over the vesting
period, the fair value of all stock-based awards on the date of grant. SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 under which, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeds the exercise price.
The Company has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations contain "forward-looking" information (as
defined in the Private Securities Litigation Reform Act of 1995). The words
"believe," "expect," "anticipate," "intend," "estimate," "assume" and other
similar expressions which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward-looking
statements. Reliance should not be placed on forward-looking statements because
they involve known and unknown risks, uncertainties and other factors, which are
in some cases beyond the control of the Company and may cause the actual
results, performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied by
such forward-looking statements.
For further discussion identifying other important factors that could cause
actual results to differ materially from those anticipated in forward-looking
statements, see the Company's SEC filings, particularly the "Risk Factors"
discussion in the Company's Registration Statement on Form S-1 (No. 333-28489)
which was declared effective on August 12, 1997. Such factors include risks to
the Company presented by financial leverage, government regulation with respect
to zoning, restrictions on outdoor advertising by the tobacco industry,
competition and general economic conditions.
The Company was formed in April 1996 to acquire the operations of its
subsidiaries OCI (N) Corp. ("OCI North") and OCI (S) Corp. ("OCI South").
Unless otherwise indicated, references to the Company in the following
discussion refer to the consolidated operations of the Company and its
subsidiaries.
RESULTS OF OPERATIONS
Nine Months Ended March 31, 1998 Compared To The Nine Months Ended March 31,
1997.
The Company's net revenues increased $9.4 million, or 29.3%, to $41.1
million for the nine months ended March 31, 1998 compared to $31.7 million in
net revenues for the nine months ended March 31, 1997. This increase was
primarily due to revenues from acquisitions completed during the twelve-month
period ended March 31, 1998 and increased rates. Occupancy levels declined
slightly compared to the same period in 1997, as anticipated, due in part to the
absence of revenues related to the 1996 Olympics in the Company's Georgia and
Birmingham divisions.
The Company's direct operating expenses increased $3.5 million, or 33.8%,
to $13.8 million for the nine months ended March 31, 1998 compared to $10.3
million in direct operating expenses for the nine months ended March 31, 1997.
Operating expenses attributed to the Skoglund companies, acquired by the Company
on October 31, 1996, Outdoor West of Tennessee, acquired by the Company on March
31, 1997 and the Jennings companies,
-11-
acquired by the Company on October 1, 1997, accounted for $2.7 million of the
increase in direct operating expenses. The remaining $0.8 million of the
increase was directly related to operating expenses associated with in-market
acquisitions and normal inflationary cost increases.
The Company's selling, general and administrative expenses increased $2.9
million, or 34.2%, to $11.4 million for the nine months ended March 31, 1998
compared to $8.5 million in selling, general and administrative expenses for the
nine months ended March 31, 1997. Increased selling, general and administrative
expenses attributable to the Skoglund companies, Outdoor West of Tennessee and
the Jennings companies, accounted for $1.6 million of this increase. The
remaining $1.3 million of the increase was due to costs generated by in-market
acquisitions, increases in corporate overhead and normal inflationary cost
increases.
The Company's depreciation and amortization expense increased $3.0 million,
or 41.5%, to $10.3 million for the nine months ended March 31, 1998 compared to
$7.3 million in depreciation and amortization expense for the nine months ended
March 31, 1997. This increase was a result of the acquisitions previously
discussed which were completed in the last twelve months.
The Company's operating expenses, excluding depreciation and amortization,
as a percentage of net revenues for the nine months ended March 31, 1998
increased to 61.5% compared to operating expenses, excluding depreciation and
amortization, as a percentage of net revenues of 59.3% for the nine months ended
March 31, 1997.
The Company's interest expense increased $2.0 million, or 26.8%, to $9.6
million for the nine months ended March 31, 1998 compared to $7.6 million in
interest expense for the nine months ended March 31, 1997. The increase is
attributable to debt incurred as a result of acquisitions completed during the
twelve months ending March 31, 1998.
During the nine months ended March 31, 1998 the Company recognized an
extraordinary loss of $2.7 million, net of an income tax benefit of $1.7
million. This loss was due to the write-off of deferred financing costs related
to its previous credit facility which was refinanced in August of 1997.
As a result of the foregoing factors, the Company's net loss for the nine
months ended March 31, 1998 was $7.3 million as compared to $1.5 million of net
loss for the nine months ended March 31, 1997.
-12-
Three Months Ended March 31, 1998 Compared To The Three Months Ended March 31,
1997
The Company's net revenues increased $2.6 million, or 24.2%, to $13.3
million for the three months ended March 31, 1998 compared to $10.7 million in
net revenues for the three months ended March 31, 1997. This increase was
primarily due to revenues from acquisitions completed during the twelve-month
period ended March 31, 1998.
The Company's direct operating expenses increased $0.9 million, or 25.0%,
to $4.6 million for the three months ended March 31, 1998 compared to $3.7
million in direct operating expenses for the three months ended March 31, 1997.
Operating expenses attributed to Outdoor West of Tennessee and the Jennings
companies, accounted for $0.7 million of the increase in direct operating
expenses. The remaining $0.2 million of the increase was directly related to
operating expenses associated with in-market acquisitions and normal
inflationary cost increases.
The Company's selling, general and administrative expenses increased $0.8
million, or 24.9%, to $3.9 million for the three months ended March 31, 1998
compared to $3.1 million in selling, general and administrative expenses for the
three months ended March 31, 1997. Increased selling, general and
administrative expenses attributable to Outdoor West of Tennessee and the
Jennings companies, accounted for $0.4 million of this increase. The remaining
$0.4 million of the increase was due to costs generated by in-market
acquisitions, increases in corporate overhead and normal inflationary cost
increases.
The Company's depreciation and amortization expense decreased $0.1 million,
or 2.3%, to $3.5 million for the three months ended March 31, 1998 compared to
$3.6 million in depreciation and amortization expense for the three months ended
March 31, 1997. This decrease was due primarily to longer amortization lives of
deferred financing costs associated with the Senior Subordinated Notes.
The Company's operating expenses, excluding depreciation and amortization,
as a percentage of net revenues for the three months ended March 31, 1998
increased to 63.7% compared to operating expenses, excluding depreciation and
amortization, as a percentage of net revenues of 63.3% for the three months
ended March 31, 1997.
The Company's interest expense increased $0.5 million, or 18.1%, to $3.3
million for the three months ended March 31, 1998 compared to $2.8 million in
interest expense for the three months ended March 31, 1997. The increase was
due to debt incurred as a result of acquisitions completed during the twelve
months ending March 31, 1998.
As a result of the foregoing factors, the Company's net loss for the three
months ended March 31, 1998 was $1.1 million as compared to $1.8 million of net
loss for the three months ended March 31, 1997.
-13-
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its working capital requirements
with cash from operations and revolving credit borrowings. Its acquisitions
have been financed primarily with borrowed funds.
On August 15, 1997, the Company successfully completed a public offering
(the "Offering") of $105,000,000 aggregate principal amount of its 9 1/4% Senior
Subordinated Notes due 2007 (the "Notes") and entered into a new secured credit
facility (the "New Credit Facility") pursuant to which the Company may borrow up
to $150 million. Net proceeds to the Company, after underwriting discounts,
from the Offering totaled $100.3 million. In addition, holders of the Company's
subordinated notes exchanged such notes, together with accrued but unpaid
interest thereon, for shares of the Company's Series A Preferred Stock, par
value $0.01 per share, or Series A Preferred Interests of the Company's OCIH LLC
subsidiary. The proceeds from the Financing Plan were used by the Company to
repay all outstanding amounts under its then-existing facility.
The New Credit Facility consists of an immediately available revolving line
of credit facility providing for borrowings of up to $110.0 million and a $40.0
million term loan facility that, upon the request of the Company, will become
available subject to the approval of the lenders under the New Credit Facility.
At March 31, 1998, the outstanding borrowings under the New Credit Facility were
$34.4 million. The New Credit Facility is secured by all of the assets and
capital stock of OCI North, OCI South and OCIH LLC. Permitted borrowings under
the New Credit Facility are subject to various conditions, including the
attainment of certain performance measures by the Company.
The Company's growth since its formation in April 1996 has been facilitated
by strategic acquisitions that have substantially increased the Company's
inventory of advertising display faces. The Company currently operates
approximately 14,700 advertising displays in 12 midwestern and southeastern
states. The Company intends to continue its growth by pursuing an aggressive
acquisition strategy emphasizing acquisitions in new markets as well as those
currently served by the Company. In the past, its acquisitions have been funded
by borrowings under its credit facilities. To finance future acquisitions, the
Company will likely be required to borrow under the New Credit Facility. In
addition, the Company may require additional debt or equity financing. There
can be no assurance that such additional sources of funding will be available on
terms acceptable to the Company.
The Company's primary sources of cash are net cash generated from operating
activities and borrowings under the New Credit Facility. The Company's net cash
provided from operations increased $2.2 million, or 47.6%, to $6.9 million for
the nine months ended March 31, 1998 compared to $4.7 million for the nine
months ended March 31, 1997. Net cash used in investing activities was $25.9
million for the nine months ended March 31, 1998, resulting primarily from
acquisitions and capital expenditures. Net cash provided by financing activities
was $18.4 million for the nine months ended March 31, 1998, resulting primarily
from net borrowings under the New Credit Facility and the Notes.
-14-
The Company made capital expenditures of $4.6 million during the nine
months ended March 31, 1998 compared to $2.3 million during the nine months
ended March 31, 1997.
Under the terms of the New Credit Facility, the Subsidiaries are restricted
in their ability to make distributions to the Company to distributions necessary
to enable the Company to make interest payments due under the Notes and tax
payments. The indenture pursuant to which the Notes were issued (the
"Indenture") provides that the Company will not, and will not permit any of its
subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of the Company's subsidiaries to make distributions to the
Company with certain limited exceptions including the restrictions under the New
Credit Facility described in the preceding sentence. The agreement governing
the New Credit Facility contains a number of covenants that are more restrictive
than those contained in the Indenture, including covenants requiring the Company
to maintain certain financial ratios that become more restrictive over time.
The Company believes that its cash from operations, together with available
borrowings under the New Credit Facility, will be sufficient to satisfy its cash
requirements, including anticipated capital expenditures, for the foreseeable
future. However, in the event that cash from operations, together with available
funds under the New Credit Facility, are insufficient to satisfy cash
requirements, the Company may require additional indebtedness to finance its
operations including, without limitation, additional acquisitions. There can be
no assurance that such additional debt will be available or that the Company
will be able to incur such additional debt.
-15-
REGULATION OF TOBACCO ADVERTISING
In June 1997, it was reported that certain cigarette manufacturers who are
defendants in numerous class-action suits throughout the United States have
reached agreement with the Attorneys General of various states for an out of
court settlement with respect to such suits. The settlement is subject to
various conditions including approval and implementing legislation by the
federal government. A reduction in outdoor advertising by the tobacco industry
would cause an immediate reduction in the Company's direct revenue from such
advertisers at least in the immediate term following the imposition of such ban
while alternate sources of advertising are secured. Such ban would also increase
the available space on the existing inventory of billboards in the outdoor
advertising industry. This could in turn result in a reduction of outdoor
advertising rates in each of the Company's outdoor advertising markets or limit
the ability of industry participants to increase rates for some period of time.
Accordingly, there can be no assurance that the Company will immediately replace
tobacco industry advertising revenue in the event of a total ban of tobacco
advertising on outdoor billboards and signs and the consequences of such ban
could have a material adverse affect on the Company.
In addition, the State of Mississippi has entered into a separate
settlement of litigation with the tobacco industry. This settlement is not
conditioned on federal government approval and provides for the elimination of
all outdoor advertising of tobacco products by February 1998 in Mississippi.
The Company operates approximately 600 outdoor advertising displays in markets
in Mississippi and approximately $0.3 million of its approximately $3.7 million
in net revenues in Mississippi for the fiscal year ended June 30, 1997 were
attributable to tobacco advertising. Further, the settlement of tobacco-related
claims and litigation in other jurisdictions may also adversely affect outdoor
advertising revenues; however, the Company does not believe that the settlement
will have a material adverse effect on the financial condition or operations of
the Company.
INFLATION
In the last three years, inflation has not had a significant impact on the
Company.
-16-
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1997, the Company and a prospective seller agreed to terminate a
contract for the Company to purchase the assets of an outdoor advertising
company. The Company tendered a deposit in the form of a letter of credit in
the amount of $1.0 million in connection with the proposed purchase. After
termination of the purchase contract, the Company and the prospective seller
each made claims to the deposit. Pursuant to the contract, the prospective
seller filed for arbitration before the Center for Public Resources seeking an
order permitting it to draw upon the letter of credit. In March 1998, the
Company and prospective seller reached a settlement agreement pursuant to which
the Company paid to the prospective seller $0.5 million in satisfaction of all
claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 1998, the Company issued options to purchase 621 shares of
Common Stock to employees of the Company pursuant to the Company's 1998 Stock
Option and Incentive Plan. The Company believes that such issuances are exempt
from the registration requirements of the Securities Act by reason of Rule 701
promulgated thereunder because the issuance of the options described was
pursuant to a written compensatory benefit plan of the Company, a copy of which
was given to each participant in the plan, and the aggregate offering price did
not exceed the limit prescribed by Rule 701.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
--------
3.1 Amended and Restated Certificates of Incorporation of the
Company (1)
3.2 By-laws of the Company (1)
-17-
10.1 Outdoor Communications, Inc. 1998 Stock Option and
Incentive Plan
27.1 Financial Data Schedule
b. Reports on Form 8-K: No reports on Form 8-K were filed by the
-------------------
Company during the period covered by this report.
---------------
(1) Incorporated by reference to the relevant exhibit to the
Company's Registration Statement on Form S-1 (333-28489) as
declared effective by the Commission on August 12, 1997.
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OUTDOOR COMMUNICATIONS, INC.
May 14, 1998 /s/ John C Stanley IV
---------------------
John C Stanley IV
Chairman and Chief Executive Officer
May 14, 1998 /s/ Ricky W. Thomas
-------------------
Ricky W. Thomas
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
Exhibit Index
-------------
EXHIBIT NUMBER DESCRIPTION
- -----------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the
Company (1)
3.2 By-laws of the Company (1)
10.1 Outdoor Communications, Inc. 1998 Stock Option and
Incentive Plan
27 Financial Data Schedule
- --------------
(1) Incorporated by reference to the relevant exhibit to the Company's
Registration Statement on Form S-1 (333-28489) as declared
effective by the Commission on August 12, 1997.