U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED February 28, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ______________TO________________
Commission File Number 000-21623
OBIE MEDIA CORPORATION
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(Exact name of registrant as specified in its charter)
OREGON 93-0966515
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4211 West 11th Ave., Eugene, Oregon 97402
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(Address of principal executive offices)
541-686-8400 FAX 541-345-4339
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(Issuer's telephone number)
Indicate by check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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 1, 2003, 5,908,577 shares of the issuer's common stock were
outstanding.
OBIE MEDIA CORPORATION
FORM 10-Q
INDEX
PART I- FINANCIAL INFORMATION PAGE
- ----------------------------- ----
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of February 28, 2003 (unaudited)
and November 30, 2002 2
Unaudited Condensed Consolidated Statements of Operations for the three month
periods ended February 28, 2003 and 2002 3
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended February 28, 2003 and 2002 4
Notes to the Condensed Consolidated Financial Statements (unaudited) 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 15
ITEM 4. Controls and Procedures 15
PART II - OTHER INFORMATION
- ---------------------------
ITEM 5. Submission of Matters to Vote of Security Holders 15
ITEM 6. Exhibits and Reports on Form 8-K 15
ITEM 7. Certifications 16
1
OBIE MEDIA CORPORATION
Condensed Consolidated Balance Sheets
ASSETS
February 28, November 30,
2003 2002
(Unaudited)
------------------ ----------------
CURRENT ASSETS:
Cash $ 851,307 $ 1,815,886
Accounts receivable, net 5,856,787 7,327,681
Prepaids and other current assets 5,537,481 4,990,859
Deferred income taxes 1,736,007 1,732,395
------------------ ----------------
Total current assets 13,981,582 15,866,821
Property and equipment, net 15,608,179 15,864,193
Goodwill, net 5,448,552 5,448,552
Other assets 874,160 947,322
------------------ ----------------
$35,912,473 $38,126,888
================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 15,700,693 $ 2,847,311
Working capital revolver 2,980,483 2,980,483
Accounts payable 408,908 283,075
Accrued transit fees 581,017 1,102,519
Accrued expenses 796,218 737,698
Unearned revenue 765,242 767,637
---------------- ----------------
Total current liabilities 21,232,561 8,718,723
Deferred income taxes 1,578,590 1,573,729
Long-term debt, less current portion 4,046,628 17,707,306
---------------- ----------------
Total liabilities 26,857,779 27,999,758
---------------- ----------------
Shareholders' equity:
Preferred stock, without par value; 10,000,000 shares
authorized, no shares issued or outstanding
Common stock, without par value; 20,000,000 shares
Authorized, 5,908,577 shares issued and outstanding at
February 28, 2003 and November 30, 2002 17,272,128 17,272,128
Other comprehensive income (loss) (24,474) 5,350
Accumulated deficit (8,192,960) (7,150,348)
---------------- ----------------
Total shareholders' equity 9,054,694 10,127,130
---------------- ----------------
$35,912,473 $38,126,888
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
OBIE MEDIA CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended February 28,
-------------------------------
2003 2002
REVENUES:
Outdoor advertising $1,674,329 $1,672,678
Transit advertising 7,023,231 7,893,612
------------- -------------
Net revenues 8,697,560 9,566,290
OPERATING EXPENSES:
Production and installation 1,362,084 1,606,748
Transit and outdoor occupancy 3,624,092 3,901,483
Selling 1,795,519 2,454,808
General and administrative 1,832,937 1,971,720
Depreciation and amortization 468,952 547,377
------------- -------------
Operating (loss) (386,024) (915,846)
OTHER EXPENSE:
Interest expense 543,998 315,895
------------- -------------
(Loss) from continuing operations
before income taxes (930,022) (1,231,741)
PROVISION FOR (BENEFIT FROM) INCOME TAXES
------------- -------------
(LOSS) FROM CONTINUING OPERATIONS (930,022) (1,231,741)
DISCONTINUED OPERATIONS:
(Loss) from discontinued operations (112,590) (289,220)
------------- -------------
(112,590) (289,220)
------------- -------------
NET (LOSS) ($1,042,612) ($1,520,961)
============= =============
Basic net (loss) per share:
(Loss) from continuing operations ($0.16) ($0.21)
(Loss) from discontinued operations ($0.02) ($0.05)
Net (loss) per share ($0.18) ($0.26)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
OBIE MEDIA CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended February,
----------------------------------
2003 2002
---------------- ----------------
Cash Flows From Operating Activities:
Net loss ($1,042,612) ($1,520,961)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 416,069 539,762
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,470,894 2,774,661
Prepaid and other assets (477,072) (287,727)
Deferred income taxes 4,861 762
Increase (decrease) in:
Accounts payable 125,833 (637,977)
Other current liabilities (465,377) (1,824,821)
---------------- ----------------
Net cash generated by (used in) operating activities 32,596 (956,301)
---------------- ----------------
Cash Flows From Investing Activities:
Capital expenditures (160,055) (445,527)
---------------- ----------------
Net cash used in investing activities (160,055) (445,527)
---------------- ----------------
Cash Flows From Financing Activities:
Net borrowing on line of credit - 610,000
Borrowings of long-term debt - 800,000
Payments on long-term debt (807,296) (64,900)
---------------- ----------------
Net cash provided by (used for) financing activities (807,296) 1,345,100
---------------- ----------------
Effect of exchange rate changes on cash (29,824) 8,953
---------------- ----------------
Net increase (decrease) in cash (964,579) (47,775)
Cash, beginning of period 1,815,886 404,473
---------------- ----------------
Cash, end of period $851,307 $356,698
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim financial statements have been prepared by Obie Media
Corporation ("Obie" or the "Company") without audit. In the opinion of
management, the accompanying condensed unaudited financial statements contain
all adjustments necessary to present fairly the financial position of the
Company as of February 28, 2003 and November 30, 2002, and the results of
operations and cash flows of the Company for the three months ended February 28,
2003 and 2002, as applicable. The condensed consolidated financial statements
include the accounts of the Company and its subsidiaries, and all significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as permitted by rules and regulations
of the Securities and Exchange Commission. The organization and business of the
Company, accounting policies followed by the Company and other information are
contained in the notes to the Company's financial statements filed as part of
the Company's November 30, 2002 Form 10-K. This quarterly report should be read
in conjunction with such annual report.
2. CONTRACT TERMINATION
On December 5, 2001 the Company received notice from the Chicago
Transit Authority (CTA) that it was terminating the Company's transit
advertising agreement effective as of that date. The Company and the CTA had
been disputing settlement of 2001 transit fees in light of the nature of the
early termination and a shortage of advertising space made available to the
Company, and the parties entered into an agreement effective May 28, 2002
resolving all of the outstanding issues.
The agreed upon fee for the 2001 contract year has been settled at $17
million, substantially less than the original contracted guaranteed payment of
$21.8 million. As of May 31, 2002, approximately $7.5 million had been paid to
the CTA, and an additional $1.5 million was paid on June 1, 2002. The balance is
payable in substantially equal monthly payments of $116,080 beginning June 1,
2002 and ending May 1, 2007, with an additional $1.0 million balloon payment due
January 1, 2004. The monthly payments are without interest through May 2003, and
include a 5% interest charge thereafter. These periodic deferred payments have
been valued using a junior unsecured discount rate of 15%, resulting in a
present value of $6.1 million, the balance of which is included within long-term
debt in the accompanying balance sheet. The result is a present value of $15.1
for the settlement. The cost of the settlement is covered by previous accruals,
including an accrual which the Company established in the third quarter of
fiscal 2001.
3. DEBT AGREEMENTS
The Company's credit arrangements with US Bank include a $13.8 million
term loan revolver and a $4.5 million working capital revolver, both maturing
December 15, 2003, which are collateralized by substantially all of the assets
of the Company. The term loan revolver limits decrease quarterly through the
maturity date. Interest rates are at U.S. Bank's prime rate plus 3.75%. The
effective rate on the term loan and working capital revolvers at February 28,
2003 was 7.75%. Amounts outstanding under the working capital revolver amounted
to $2,980,483 at February 28, 2003. Because the Company's bank debt agreements
expire in December 2003, all of the outstanding debt has been classified as
current. The Company expects to replace these credit arrangements with
another(s) which will contain terms and conditions typical for the media
industry. Negotiations with other lenders are in process. If the Company is
unable to obtain new financing it may have an adverse effect on the business.
5
The Company has an arrangement with Travelers Casualty & Surety Company
of America ("Travelers"), to bond the CTA settlement as well as to provide other
bonds required by the Company. The Company and Travelers have entered into a
security agreement whereby Travelers maintains a second secured position on
certain of the Company's assets, subordinate to the security arrangements with
US Bank or any other replacement primary lender.
4. ACCOUNTING FOR GOODWILL
In accordance with the adoption of SFAS No. 142, goodwill amortization
was discontinued as of December 1, 2002. We completed our first phase impairment
analysis during the quarter ended February 28, 2003 and found no instances of
impairment. Goodwill at February 28, 2003 and November 30, 2002 amounted to
$5,448,552, net of accumulated amortization of $2,181,571. Summarized below are
the effects on our net loss and per share data if we had followed the
amortization provisions of SFAS No. 142:
For the three months ended February 28,
2003 2002
------------ ------------
Reported net loss ($1,042,612) ($1,520,961)
Addback goodwill amortization - 125,595
------------ ------------
Adjusted net loss ($1,042,612) ($1,395,366)
============ ============
Basic and diluted net loss per share:
Reported net loss ($0.18) ($0.26)
Goodwill amortization - 0.02
------------ ------------
Adjusted net loss ($0.18) ($0.24)
============ ============
5. INCOME TAXES
The Company utilized all of its federal loss carryback benefits during
fiscal 2001, and has net operating loss carryforwards of approximately $7.0
million. A valuation allowance has been provided for the tax benefit of the
operating loss carryforward and other deferred tax items. This results in no
income tax provision for the quarters ended February 28, 2003 and 2002
respectively.
6. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated using the weighted average
number of common shares outstanding for the period and diluted EPS is calculated
using the weighted average number of common shares and dilutive common
equivalent shares outstanding. The following is a reconciliation of the basic
and diluted shares used in the per share calculation:
6
Three Months Ended
February 28,
------------------------
2003 2002
--------- ---------
Basic shares (weighted average) 5,908,577 5,908,577
Dilutive effect of stock options - -
--------- ---------
Diluted shares (weighted average) 5,908,577 5,908,577
--------- ---------
At February 28, 2003 and 2002 the Company had options outstanding
covering 670,181 and 673,736 shares, respectively, of the Company's common stock
that were not considered in diluted EPS since they would have been antidilutive
for the three months ended February 28, 2003 and 2002, respectively.
7. DISCONTINUED OPERATIONS
Effective during its fiscal year ended November 30, 2002, the Company
adopted Statements of Financial Accounting Standards No. 144 and No. 146
"Accounting for the Impairment of Long-Lived Assets" (SFAS 144) and "Accounting
for Costs Associated with Exit or Disposal Activities" (SFAS 146).
Pursuant to these pronouncements, the Company has classified as
"Discontinued Operations" the results of operations and any exit costs
associated with expired or terminated transit district contracts that were not
renewed with the Company. As a result, the Company exited these markets and has
no further involvement. The US transit districts included in Discontinued
Operations are: Chicago, San Antonio, Cincinnati, and Kitsap. The Canadian
transit districts included are: Pickering, Whitby, Cambridge and St. Catharines.
Results of operations for these transit districts for the comparable quarter in
fiscal 2002 have been reclassified to Discontinued Operations for comparability
purposes.
Net revenues and the components of net loss related to the discontinued
operations were as follows:
Three months ended February 28
2003 2002
---------- ----------
Net revenues $ 202,287 $ 355,440
========== ==========
Loss from discontinued operations before
Income taxes ($112,590) ($289,220)
Income tax benefit - -
---------- ----------
Net loss from discontinued operations ($112,590) ($289,220)
========== ==========
7
8. NEW ACCOUNTING PRONOUNCEMENTS
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets". SFAS No. 144 supercedes Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS No. 144 applies to all long-lived
assets (including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations -- Reporting
the Effects of Disposal of a Segment of a Business". SFAS No. 144 develops one
accounting model for long-lived assets that are to be disposed of by sale. SFAS
No. 144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less the cost to sell. SFAS
144 is effective for fiscal years beginning after December 15, 2001, however,
earlier adoption is permitted. The Company early adopted the provisions of SFAS
No. 144 in Fiscal 2002 and has recorded the results of operations from transit
markets that it has exited as discontinued operations.
On June 28, 2002, the FASB adopted Statement of Financial Accounting
Standards No. 146 ("SFAS 146"), "Accounting for Exit or Disposal Activities",
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. SFAS 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The Company
early adopted the provisions of SFAS No. 146 in Fiscal 2002 and has recorded
exit costs relating to contract terminations resulting from its exit of certain
transit markets in accordance with the provisions of SFAS 146. These costs have
been recorded as a component of discontinued operations in accordance with SFAS
144.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, ("SFAS No. 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FAS 123." SFAS No. 148 amends
Statement of Financial Accounting Standards No. 123, ("SFAS No. 123")
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures about
the method of accounting for stock-based employee compensation and the effect of
the method used on reported results. Finally, SFAS No.148 amends APB Opinion No.
28, "Interim Financial Reporting," to require disclosure about those effects in
interim financial information. The amendments to the transition and disclosure
provisions is effective for fiscal years ending after December 15, 2002. The
amendment to Opinion 28 is effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002. We
are currently evaluating the impact of SFAS No. 148. We will adopt the
disclosure provisions of SFAS No. 148 in our Form 10-Q for the quarter ending
May 31, 2003 and in our Annual Report on Form 10-K for the year ending November
30, 2003.
9. RECLASSIFICATIONS
Certain amounts previously reported in the Company's financial
statements as of February 28, 2002 have been reclassified to conform to the
current fiscal year presentation and did not impact shareholders' equity or
reported net loss.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes certain forward-looking statements
that involve a number of risks and uncertainties. Obie's actual results could
differ materially from the forward-looking statements. Factors that could cause
or contribute to such differences include: failure to conclude favorable
negotiations on pending transactions with existing transit agency partners or to
successfully assimilate expanded operations; potential impairments of liquidity
or capital resources; inability to generate sufficient advertising revenues to
meet contractual guarantees; inability to renew existing lending arrangements as
they expire; potential for cancellation or interruption of contracts with
governmental agencies; a further decline in the demand for advertising in the
areas where we conduct our business, or a deterioration of business conditions
generally in those areas; slower than expected acceptance of our innovative
display products; competitive factors, including increased competition and price
pressures; changes in the seasonality of our business; and changes in regulatory
or other external factors; as well as those factors listed from time to time in
Obie's SEC reports, including, but not limited to, the factors discussed in this
quarterly report. You should recognize that these forward-looking statements,
which speak only as of the date of this quarterly report, reflect management's
expectations based on information available as of that date; you should not
construe our forward-looking statements as assurances of future performance. We
do not intend to update our forward-looking statements except as required by
law.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results
of operations following are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgements that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.
We believe that the estimates, assumptions and judgements involved
in the accounting policies described below have the greatest potential impact on
our financial statements, so we consider these to be our critical accounting
policies. Because of the uncertainty inherent in these matters, actual results
could differ from the estimates we use in applying the critical accounting
policies. Certain of these critical accounting policies affect working capital
account balances, including the reserve for uncollectible accounts receivable
and deferred income taxes. These policies require that we make estimates in the
preparation of our financial statements as of a given date. However, since our
business cycle is relatively short, actual results related to the estimates
relative to uncollectible accounts receivable are generally known within the six
month period following the financial statement date. Thus, these policies
generally affect only the timing of reported amounts across two to three
quarters. The estimate of deferred tax assets may affect reported amounts beyond
that time period.
Within the context of these critical accounting policies, we are
not currently aware of any reasonably likely events or circumstances which would
result in materially different amounts being reported.
RECOGNITION OF REVENUE
Revenue from advertising contracts is recognized ratably over the
contract term, and the estimated cost components of a contract (cost of the
advertising space and the costs of producing and installing advertising copy)
are deferred and matched against the periodic recognition of revenue on
essentially a straight-line basis. This method also necessitates the recognition
of an unearned revenue liability for billings to customers for time periods
beyond the end of the current accounting cycle.
9
DISCONTINUED OPERATIONS
Effective during its fiscal year ending November 30, 2002, the
Company adopted Statements of Financial Accounting Standards No. 144 and No. 146
"Accounting for the Impairment of Long-Lived Assets" (SFAS 144) and "Accounting
for Costs Associated with Exit or Disposal Activities" (SFAS 146).
Pursuant to these pronouncements, the Company has classified as "
Discontinued Operations" the results of operations and any exit costs associated
with transit district contracts that were targeted for exit. As a result the
Company has no further involvement with these markets. The US transit districts
included in Discontinued Operations are: Chicago, San Antonio, Cincinnati, and
Kitsap. The Canadian transit districts included are: Pickering, Whitby,
Cambridge and St. Catharines. Results of operations for these transit districts
for 2002 have been reclassified to Discontinued Operations for comparability
purposes.
RESERVE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE
We make ongoing estimates relating to the collectiblity of our
accounts receivable and maintain a reserve for estimated losses resulting from
the inability of our customers to make required payments. In determining the
amount of the reserve, we consider our historical level of credit losses, the
aging spread of accounts at the date the estimate is made, trends in the overall
media economy, and general business conditions. Historically, losses from
uncollectible accounts have exceeded our reserves in the last two years by
approximately $525,000 in fiscal 2002 and $1.4 million in fiscal 2001. This was
due primarily to the softening in the advertising industry and overall economic
conditions. Since we cannot predict future changes in the financial stability of
our customers, actual future losses from uncollectible accounts may differ from
our estimates. If the financial condition of our customers were to deteriorate,
resulting in their inability to make payments, a larger reserve might be
required. In the event that a smaller or larger reserve was appropriate, we
would record a credit or charge to administrative expense in the period in which
we made such a determination.
INCOME TAXES
We record valuation allowances against our deferred tax assets,
when necessary, in accordance with SFAS No. 109, Accounting for Income Taxes.
Realization of deferred tax assets (such as net operating loss carryforwards) is
dependent on future taxable earnings and is therefore uncertain. At least
quarterly, we assess the likelihood that our deferred tax asset balance will be
recovered from future taxable income. To the extent that we believe recovery is
unlikely, we establish a valuation allowance against our deferred tax assets
increasing our income tax expense in the period such determination is made. An
increase in the valuation allowance would result in a charge to income tax
expense. A decrease in the valuation allowance would result in a reduction to
income tax expense.
On an interim basis, we estimate what our effective tax rate will
be for the full fiscal year and record a quarterly income tax provision in
accordance with the anticipated annual rate. As the fiscal year progresses we
continually refine our estimate based upon actual events and earnings during the
year. This continual estimation process periodically results in a change to our
expected tax rate for the fiscal year. When this occurs, we adjust the income
tax provision during the quarter in which the change in estimate occurs so that
the year-to-date provision is in accordance with the annual anticipated rate.
PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS
Property, plant and equipment, including buildings, equipment, and
computer hardware and software is recorded at cost (including, in some cases,
the cost of internal labor) and is depreciated over estimated useful lives.
Changes in circumstances (such as technological advances or changes to our
business operations) can result in differences between the actual and estimated
useful lives. In those cases were we determine that the useful life of a
long-lived asset should be shortened, we increase depreciation expense over the
remaining estimated useful life to depreciate the asset to its salvage value.
10
In accordance with SFAS No. 142, goodwill amortization was discontinued
as of December 1, 2002. We completed our first phase impairment analysis during
the quarter ended February 28, 2003 and found no instances of impairment.
Goodwill at February 28, 2003 and November 30, 2002 amounted to $5,448,552, net
of accumulated amortization of $2,181,571.
OTHER CONTINGENCIES
In the ordinary course of business, we are involved in legal
proceedings involving contractual, employment relationships and a variety of
other matters. We record contingent liabilities resulting from claims against us
when it is probable that a liability has been incurred and the amount of the
loss is reasonably estimable. We disclose contingent liabilities when there is a
reasonable possibility that the ultimate loss will exceed the recorded
liability. Estimating probable losses requires analysis of multiple factors, in
some cases including judgements about the potential actions of third party
claimants and courts. Therefore, actual losses in any future period are
inherently uncertain. Currently, we do not believe that any of our pending legal
proceedings or claims will have a material impact on our financial position or
results of operations. However, if actual or estimated probable future losses
exceed our recorded liability for such claims, we would record additional
charges as other expense during the period in which the actual loss or change in
estimate occurred.
RECENT DEVELOPMENTS
Effective February 19, 2001 Obie entered into a new financing
arrangement with U.S. Bank. The arrangement provided for a $16.0 million term
line maturing in August of 2007, and a $6.0 million working capital line of
credit available for general purposes. These credit facilities are secured by
substantially all of the assets of Obie and its subsidiaries. Obie used the term
revolver to refinance all of its then-existing debt, including the previously
outstanding line of credit.
On February 25, 2003 U.S. Bank and Obie agreed to a revised credit
facility which included a reduction in the working capital line of credit to
$4.5 million, modified financial ratio covenants, and reduced principal payment
requirements during fiscal 2003. $1.5 million was available under the working
capital line of credit as of February 28, 2003. The revised agreement extends
the term of the credit facility through December 15, 2003 when both the term
revolver and working capital credit line expire. The credit facility requires
the execution and delivery of definitive transaction documentation and Obie's
continued compliance with the revised covenants. Because the debt agreements
expire in December 2003, all of the outstanding debt has been classified as
current. The Company expects to replace these credit arrangements with
another(s) which will contain terms and conditions typical for the media
industry. Negotiations with other lenders are in process.
Effective December 1, 2002 we formed a new wholly owned subsidiary,
Select Media, Inc. under which our national sales organization will operate. The
accounts of Select Media, Inc. have been consolidated with the accounts of the
Company.
The Company has an arrangement with Travelers Casualty & Surety Company
of America ("Travelers"), to bond the CTA settlement as well as to provide other
bonds required by the Company. The Company and Travelers have entered into a
security agreement whereby Travelers maintains a second secured position on
certain of the Company's assets, subordinate to the security arrangements with
US Bank or any other replacement primary lender.
11
COMPARISON OF THE THREE MONTHS ENDED FEBRUARY 28, 2003 AND 2002
RESULTS OF CONTINUING OPERATIONS
REVENUES. Obie's revenues are derived from sales of advertising on out-of-home
advertising displays, primarily on transit vehicles under transit district
agreements and on outdoor advertising displays we own or operate. Revenues are a
function of both the occupancy of these display spaces and the rates we can
charge. We focus our sales efforts on maximizing occupancy levels while
maintaining rate integrity in our markets. Net revenues for the three months
ended February 28, 2003 decreased $869,000, or 9.1%, to $8.7 million in 2003
from $9.6 million for the same period in fiscal 2002. Transit net revenues
decreased $870,000 or 11.0% to $7.0 million for the three month period in fiscal
2003 from $7.9 million for the same period of fiscal 2002. The decrease was due
primarily to continuing weaknesses in the advertising economy principally in the
northeastern United States markets. Outdoor net revenues was unchanged at $1.7
million in the three month periods in fiscal 2003 and 2002.
PRODUCTION AND INSTALLATION EXPENSES. These expenses relate primarily to the
production of transit advertising content and the installation of the content on
transit vehicles, benches and shelters. Also included is the cost of billboard
content and installation. Production and installation expenses decreased
approximately $245,000, or 15.2% to $1.4 million in fiscal 2003 from $1.6
million in fiscal 2002. The Company's production activities are primarily
related to the transit advertising part of our business, and therefore declined
relative to the decline in transit net revenues. Also, cost containment measures
enacted in the third and fourth quarters of fiscal 2002 impacted the first
quarter of fiscal 2003.
TRANSIT AND OUTDOOR OCCUPANCY EXPENSES. These expenses include fees paid to
transit authorities and lease payments to landowners for billboard sites. Under
Obie's transit agreements, we typically guarantee to pay the transit district
the greater of a minimum stated amount or a percentage of the advertising
revenues generated by our use of the district's vehicles. Occupancy expense for
outdoor structures includes the cost of illuminating outdoor displays and
property taxes on the outdoor advertising structures. Transit and outdoor
occupancy expenses decreased approximately $277,000 or 7.1% to $3.6 million in
the first quarter of fiscal 2003 from $3.9 million in the same period of fiscal
2002. The decrease is primarily due to lower transit fee accruals related to
reduced transit revenues for the quarter as noted above.
SELLING EXPENSES. Sales expenses consist primarily of employment and
administrative expenses associated with our sales force. These expenses
decreased $659,000, or 26.9% to $1.8 million for the three month period in
fiscal 2003 from $2.5 million in the same period in fiscal 2002. The reduction
is related both to the decrease in transit net revenues, and to realizing more
fully the impact of cost containment measures enacted throughout the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses include
costs related to individual markets, as well as corporate expenses. Expenses
related to individual markets include expenses for the personnel and facilities
required to administer that market and neighboring markets. Corporate general
and administrative expenses represent personnel and facilities costs for Obie
Media's executive offices and centralized staff functions which include
accounting, marketing, human resources and technology management.
General and administrative expenses decreased approximately $139,000 or 7.0%, to
$1.8 million in the three month period of fiscal 2003 from $2.0 million in the
same period of fiscal 2002. The decrease was due primarily to personnel
reductions in marketing, human resources and the business office at the
corporate headquarters that were implemented in the final two quarters of fiscal
2002. These reductions impacted the first quarter of 2003.
12
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
decreased approximately $78,000, or 14.3%, to $469,000 in the three months ended
February 28, 2003 as compared to $547,000 for the same period in fiscal 2002.
The decrease is related almost entirely to the fact that effective at the
beginning of fiscal year 2003 we have adopted the provisions of SFAS No. 142 and
no longer amortize goodwill.
OPERATING INCOME. Due to the events and factors discussed above we experienced
an operating loss of $386,000 in the three month period ended February 28, 2003,
compared to an operating loss of $916,000 in the same period of fiscal 2002.
INTEREST EXPENSE. Interest expense increased $228,000, or 72.2%, to $544,000 for
the three month period in fiscal 2003 from $316,000 for the comparable period of
fiscal 2002. The increase was due primarily to the amortization of the discount
on the Chicago Transit Authority settlement in the three month period of fiscal
2003, of which there was none in the comparable period of fiscal 2002.
PROVISION FOR INCOME TAXES. The Company accounted for all available loss
carryback refunds in the fiscal 2001 provision for income taxes. The Company has
substantial loss carryforwards, against which valuation allowances have been
provided. Therefore, there is no provision for income taxes (benefit) in either
the first quarter of fiscal 2003 or 2002.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Due to the items and factors discussed
above we experienced a loss of $930,000 in the three month period in fiscal 2003
as compared to a loss of $1.2 million for the same period in fiscal 2002.
RESULTS OF DISCONTINUED OPERATIONS
Most transit arrangements include a provision that a certain percentage of net
revenues be shared with the transit authorities (transit fees) on a revenue
sharing basis (a certain percentage to the transit authority, the balance
retained by Obie), but often with minimum payment requirements. Agreements that
contain large minimum transit fee payment guarantees significantly hinder Obie's
ability to manage its operating expenses in weak economic environments. These
high minimum payment requirements have prompted the Company to negotiate
modifications to such contracts, negotiate or effect early terminations to such
contracts, or exit such markets at the end of the contract terms.
As discussed above, discontinued operations contain the operating results, net
of income taxes, for transit markets from which we have exited. The discontinued
operations for the three month period of both fiscal 2003 and 2002 include the
operations of San Antonio, Texas, Cincinnati, Ohio (transit), and the Ontario,
Canada markets described above.
NET LOSS
Due to the items and factors discussed above, Obie realized a net loss of $1.0
million during the first three months of fiscal 2003, compared to a net loss of
$1.5 million in the same period of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied our working capital requirements
with cash from operations and revolving credit borrowings. Our working capital
at February 28, 2003 was a negative $7.3 million as compared to a positive $7.2
million at November 30, 2002. This decrease is due primarily to the fact that
the bank debt classified as long-term at November 30, 2002 has been classified
as current at February 28, 2003, pending completion of the refinancing process.
Acquisitions and capital expenditures, primarily for the construction of new
outdoor advertising displays, digital printing equipment and technology related
assets have been financed primarily with borrowed funds. At February 28, 2003,
Obie had outstanding borrowings of $22.7 million, of which $16.8 million was
pursuant to credit agreements with US Bank, $209,000 pursuant to the agreement
to acquire the minority interest in O. B. Walls in 2002, and $5.7 million
relative to the settlement of the Chicago Transit Authority dispute. The
Company's indebtedness is collateralized by substantially all of its assets. At
13
February 28, 2003, available borrowing capacity under the line of credit, based
on collateralized accounts, was approximately $1.5 million.
Obie's net cash provided by operating activities was $33,000 during the
three months ended February 28, 2003 as compared to net cash used in operating
activities of $956,000 for the same period in fiscal 2002. The change between
periods was primarily due to lower payments on transit contracts.
Net cash used in investing activities was $160,000 and $446,000 during
the three months ended February 28, 2003 and 2002, respectively. The amounts
spent on billboard upgrades and on other equipment was approximately the same in
both fiscal year periods. In the three month period of fiscal 2002 we also
purchased our third large format digital production printer, which accounted for
the majority of the difference.
Net cash used in financing activities was $807,000 for the three month
period ended February 28, 2003 as compared to net cash provided of $1.3 million
in the same period of fiscal 2002. The decrease was primarily the result of
reduced utilization of the working capital credit line and of increased
term-debt principal payments during the first three months of fiscal 2003 as
compared to the comparable period in fiscal 2002.
Effective February 19, 2001 Obie entered into a new financing
arrangement with U.S. Bank. The arrangement provided for a $16.0 million term
line maturing in August of 2007, and a $6.0 million working capital line of
credit available for general purposes. These credit facilities are secured by
substantially all of the assets of Obie and its subsidiaries. Obie used the term
revolver to refinance all of its then-existing debt, including the previously
outstanding line of credit. Principal payments on the term revolver began in the
third quarter of fiscal 2002. On February 25, 2003 U.S. Bank and Obie agreed to
a revised credit facility which included a reduction in the working capital line
of credit to $4.5 million, modified financial ratio covenants and a reduction of
principal payment requirements for fiscal 2003. The revised agreement extends
the term of the credit facility through December 15, 2003 when both the term
revolver and working capital credit line expire. The revised credit facility
requires the execution and delivery of definitive transaction documentation and
Obie's continued compliance with the revised covenants. The Company expects to
replace these credit arrangements with another(s) which will contain terms and
conditions typical for the media industry. Negotiations with other lenders are
in process.
We expect to pursue a policy of measured growth through obtaining
favorable new transit district agreements, acquiring out-of-home advertising
companies or assets and constructing new outdoor advertising displays. We intend
to finance future expansion activities using a combination of internal and
external sources. We believe that internally generated funds and funds available
for borrowing under bank credit facilities will be sufficient to satisfy all
debt service obligations, to finance existing operations, including anticipated
capital expenditures, but excluding possible acquisitions, through fiscal 2003.
Future acquisitions by Obie, if any, may require additional debt or equity
financing.
SEASONALITY
Obie's revenues and operating results historically have fluctuated by
season, generally following the advertising trends in our major transit markets.
Typically, results of operations are strongest in the fourth quarter and weakest
in the first quarter of our fiscal year which ends on November 30. Transit
advertising operations are more seasonal than outdoor advertising operations as
the Company's outdoor advertising display space, unlike its transit advertising
display space, is and has been sold nearly exclusively by means of 12-month
contracts. The Company believes that the seasonality of revenues and operating
results will increase if transit advertising operations continue to expand more
rapidly than outdoor advertising operations. This seasonality, together with
fluctuations in general and regional economic conditions and the timing and
expenses related to acquisitions, the obtaining of new transit agreements and
other actions that have been taken to implement the Company's growth strategy,
have contributed to fluctuations in periodic operating results. These
fluctuations likely will continue. Accordingly, results of operations in any
period may not be indicative of the results to be expected for any future
period.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-days prior to the filing of this quarterly report, we
carried out an evaluation, under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in this quarterly
report.
There have been no significant changes in our internal controls or in
other factors which could significantly affect internal controls subsequent to
our most recent evaluation of our internal controls.
PART II - OTHER INFORMATION
ITEM 5. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for vote during the three
months ended February 28, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) No reports on Form 8-K were filed by the Company during the three months
ended February 28, 2003.
15
Signature
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Obie Media Corporation
Date April 5, 2003 By: /s/ GARY F. LIVESAY *
-------------------
Gary F. Livesay
Vice President - Chief Financial Officer
* Signing on behalf of the registrant as
principal financial and accounting officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gary F. Livesay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Obie Media Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 5, 2003
By: /s/ Gary F. Livesay
Vice President
Chief Financial Officer
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian B. Obie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Obie Media Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 5, 2003
By: /s/ BRIAN B. OBIE
President
Chief Executive Officer