U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1999
-------------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OF 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 small business issuer 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)
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 June 30, 1999, 4,322,949 shares of the issuer's common stock were
outstanding.
This report contains 12 pages.
<PAGE>
OBIE MEDIA CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS
May 31, November 30,
1999 1998
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 78,409 $ 326,140
Accounts receivable, net 6,835,552 6,719,218
Prepaids and other current assets 1,674,176 1,156,061
Deferred income taxes 758,832 758,832
---------------- ----------------
Total current assets 9,346,969 8,960,251
PROPERTY AND EQUIPMENT, NET 10,846,089 10,493,174
GOODWILL, NET 7,425,899 7,696,394
OTHER ASSETS, NET 523,260 497,512
---------------- ----------------
$28,142,217 $27,647,331
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $2,466,444 $1,511,276
Line of credit 2,825,092 1,414,877
Accounts payable 1,187,229 780,268
Accrued expenses 911,013 2,674,287
Income taxes payable 145,344 299,090
Deferred revenue 1,550,542 1,247,470
---------------- ----------------
Total current liabilities 9,085,664 7,927,268
DEFERRED INCOME TAXES 783,502 783,502
LONG-TERM DEBT, LESS CURRENT PORTION 11,720,144 13,354,395
---------------- ----------------
Total liabilities 21,589,310 22,065,165
---------------- ----------------
MINORITY INTEREST IN SUBSIDIARY 35,424 35,424
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, 4,322,949 and 4,315,728 shares
issued and outstanding, respectively 6,952,905 6,851,053
Options issued for common stock 211,763 211,763
Foreign currency translation (1,843) -
Accumulated deficit (645,342) (1,516,074)
---------------- ----------------
Total shareholders' equity 6,517,483 5,546,742
---------------- ----------------
$28,142,217 $27,647,331
================ ================
</TABLE>
See accompanying notes
<PAGE>
OBIE MEDIA CORPORATION
Consolidated Statements of Income
<TABLE>
<CAPTION>
Quarter Ended May 31, Six Months Ended May 31,
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Transit advertising $8,549,308 $3,573,776 $14,574,216 $6,398,688
Outdoor advertising 1,451,664 1,412,918 2,813,393 2,757,853
Less - Agency commissions (1,031,326) (448,531) (1,657,735) (799,016)
-------------- --------------- -------------- ---------------
Net revenues 8,969,646 4,538,163 15,729,874 8,357,525
OPERATING EXPENSES:
Direct advertising expenses 6,275,871 2,764,939 11,296,100 5,262,902
General and administrative 1,151,126 765,202 2,311,728 1,453,568
Contract settlement - - (885,941) -
Start-up costs 190,103 25,313 295,782 43,553
Depreciation and amortization 367,173 176,241 722,896 353,680
-------------- --------------- -------------- ---------------
Operating income 985,373 806,468 1,989,309 1,243,822
OTHER (INCOME) EXPENSE:
Interest expense 284,412 165,064 561,885 331,242
Minority interest in subsidiary - 28,439 - 32,201
-------------- --------------- -------------- ---------------
Income before income taxes 700,961 612,965 1,427,424 880,379
PROVISION FOR INCOME TAXES 266,109 232,927 556,692 334,544
-------------- --------------- -------------- ---------------
NET INCOME $434,852 $380,038 $870,732 $545,835
============== =============== ============== ===============
Earnings per share:
Basic $0.10 $0.09 $0.20 $0.13
Diluted $0.10 $0.09 $0.20 $0.13
See accompanying notes
</TABLE>
<PAGE>
OBIE MEDIA CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended May 31,
------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $870,732 $ 545,835
Depreciation and amortization 722,896 353,680
Contract settlement (335,941) -
Minority interest in subsidiary - 32,201
Changes in assets and liabilities (1,416,731) (611,324)
-------------- -------------
Net cash provided by (used in) operating activities (159,044) 320,392
-------------- -------------
CASH FLOWS FROM INVESTING:
Capital expenditures (810,713) (603,253)
Other (21,108) -
-------------- -------------
Net cash used in investing activities (831,821) (603,253)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 16,221 -
Net borrowings on lines of credit 1,410,215 589,548
Checks outstanding in excess of cash deposits 54,812
Payments on long-term debt (679,083) (420,319)
Other (2,376) 58,820
-------------- -------------
Net cash provided by financing activities 744,977 282,861
-------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,843) -
-------------- -------------
NET DECREASE IN CASH (247,731) -
CASH, BEGINNING OF PERIOD 326,140 -
-------------- -------------
CASH, END OF PERIOD $78,409 $ -
============== =============
SUPPLEMENTAL DISCLOSURE:
Issuance of stock to employee benefit plan $85,928 -
Note issued to acquire advertising structures - $ 698,000
Interest capitalized 7,979 6,142
Cash Paid for Interest 475,778 326,650
Cash Paid for Taxes 892,909 -
See accompanying notes
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim financial statements have been prepared by Obie Media
Corporation (the "Company") without audit. In the opinion of management, the
accompanying unaudited financial statements contain all adjustments necessary to
present fairly the financial position of the Company as of May 31, 1999, and the
results of operations and cash flows of the Company for the three and six months
ended May 31, 1999 and 1998, 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, 1998 Form 10-KSB. This quarterly report should be
read in conjunction with such annual report. Operating results for the six
months ended May 31, 1999 are not necessarily indicative of the results that may
be expected for any future period.
2. Contract Settlement
We have a contract to provide advertising sales services to the Tri-County
Metropolitan Transit District ("Tri-Met") in Portland, Oregon, which, by its
terms, was scheduled to expire in June 2001. We originally began serving Tri-Met
in January 1994, pursuant to a five-year agreement, which was later extended for
an additional two years. The Federal Transit Administration ("FTA"), which
provides substantial monies to transit districts, has taken the position that
transit advertising contracts may not exceed five years in length. At the
request of the FTA, Tri-Met and we agreed that our agreement with Tri-Met would
terminate on June 30, 1999. However, Tri-Met has informed us that our agreement
with it will now terminate on July 30, 1999 or 10 days after notification by
Tri-Met of its award of a new agreement, whichever is later. In December 1998,
Tri-Met agreed pursuant to a settlement agreement to compensate us for early
termination of the existing contract. Under the terms of the settlement
agreement, we received a one-time cash payment and related financial benefits
which resulted in a pre-tax gain of $886,000 during the first quarter of fiscal
1999. The agreement further provides that we will sell to Tri-Met for $80,000
the transit benches on which we sell advertising. If we are not successful in
obtaining the new Portland contract, we will receive additional lesser cash
payments and other financial benefits, and will receive for a period of up to
one year 20% of the net billings received from unexpired advertising contracts
which extend beyond June 30, 1999.
3. Long Term Borrowings
The Company's Term Loan Agreement contains certain covenants including
maintenance of a cash flow leverage ratio and cash flow coverage. The Company
was in compliance with these covenants as of May 31, 1999.
<PAGE>
4. Earnings Per Share
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the periods and diluted earnings per share
is computed using the weighted average number of common shares and dilutive
common equivalent shares outstanding. All share and per-share information has
been adjusted to give retroactive effect to an 11-for-10 stock split which
occurred in November 1998. The following is a reconciliation of the basic and
diluted shares used in the per share calculations:
<TABLE>
Quarter Ended Six Months Ended
May 31, May 31,
---------------------------------------------------
1999 1998 1999 1998
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Basic shares (weighted average) 4,322,574 4,241,032 4,321,951 4,241,032
Dilutive effect of stock options 74,266 72,980 94,313 69,792
------------ ------------ ----------- ------------
Diluted shares 4,396,840 4,314,012 4,416,264 4,310,824
============ ============ =========== ============
</TABLE>
5. Newly Issued Financial Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive
Income" ("SFAS 130"). This statement establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. The objective of SFAS 130 is to report a measure
of all changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners. The
Company adopted SFAS 130 during the first quarter of fiscal 1999. Comprehensive
income did not differ materially from currently reported net income in the
periods presented.
Effective in its fiscal year ending November 30, 1999, the Company will be
required to adopt SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 changes current practice under SFAS No. 14 by
establishing a new framework on which to base segment reporting (referred to as
the "management" approach) and also requires interim reporting of segment
information. Management does not expect that the impact of adoption of this
pronouncement will be material to the Company's financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for all derivative instruments.
SFAS No. 133 was to be effective for fiscal years beginning after June 15, 1999.
In June 1999, the FASB issued SFAS No. 137 as an amendment to SFAS No.133 and
deferred the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company currently has no derivative instruments and, therefore,
the adoption of SFAS 133 will have no impact on the Company's financial position
or results of operations.
<PAGE>
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. The Company's actual results could
differ materially from the forward-looking statements. Factors that could cause
or contribute to such differences include: a decline in the demand for
advertising in the areas where the Company conducts its business; a
deterioration of business conditions generally in such areas; slower that
expected acceptance of the Company's innovative display products; competitive
factors, including increased competition and price pressures; changes in
regulatory or other external factors; failure to successfully conclude
negotiations on pending transactions or to successfully assimilate expanded
operations, inability to generate advertising revenues to meet contractual
guarantees, and cancellation or interruption of contracts with governmental
agencies, as well as those factors listed from time to time in the Company's
filings with the SEC, including, but not limited to, the factors discussed in
Exhibit 99.1 filed in connection with the Company's Annual Report of Form 10-KSB
for the year ended November 30, 1998, and the factors discussed in the Risk
Factors section of the Company's Registration Statement of Form S-1, as amended,
filed with the SEC on May 26, 1999 which are incorporated herein by reference.
New Transit Contracts
During the six months ended May 31, 1999, we began operating transit
advertising displays on more than 600 additional vehicles. In January 1999, we
began operating transit advertising displays for transit districts in Madison,
Wisconsin; Spokane, Washington; and London, Ontario (representing a total of
approximately 500 vehicles). In February 1999, we began operating transit
advertising displays for a transit district in Yakima, Washington (representing
approximately 20 vehicles). In April 1999, we entered into a transit advertising
agreement with Gray Line of Victoria (covering approximately 80 vehicles) under
which we began operating in May 1999. Also in April 1999, we began operating
transit advertising displays for St. Catharines, a transit district in Ontario,
Canada (representing approximately 50 vehicles). In May 1999, we began operating
displays for a transit district in Niagara Falls, Ontario (covering
approximately 25 vehicles).
Comparison of the Six Months Ended May 31, 1999 and 1998
Gross revenues increased $8.2 million, or 89.9%, to $17.4 million for the
six months ended May 31, 1999 from $9.2 million for the same period in fiscal
1998. This increase was principally due to transit advertising revenues
associated with the operations of P & C Media ("P & C") (which we acquired in
September 1998), as well as the addition of new districts, including British
Columbia (which we began operating in August 1998) and Austin, Texas (which we
began operating in June 1998). Transit revenues increased $8.2 million, or
127.8%, to $14.6 million for the six months ended May 31, 1999 from $6.4 million
for the same period in fiscal 1998. Outdoor advertising revenues were $2.8
million in each of the six months periods ended May 31, 1999 and 1998. Agency
commissions increased $859,000, or 107.5%, to $1.7 million for the six months
ended May 31, 1999 from $799,000 for the same period in fiscal 1998. As a
percentage of gross revenues, agency commission increased to 9.5% for the six
months ended May 31, 1999 from 8.7% for the same period in fiscal 1998. The
increase in agency discounts, in both dollar amounts and as a percentage of
gross revenues, is primarily due to the large proportion of agency business in
our new markets. As a result of the foregoing reasons, net revenues increased
$7.4 million, or 88.2%, to $15.7 million for the six months ended May 31, 1999
from $8.4 million for the same period in fiscal 1998.
Direct advertising expenses increased $6.0 million, or 114.6%, to $11.3
million for the six months ended May 31, 1999 from $5.3 million for the same
period in fiscal 1998. This increase was primarily the result of activities
required to support an increased level of business. Direct advertising expenses
increased, as a percentage of gross revenues, from 57.5% for the first six
months of fiscal 1998 to 65.0% for the same period in fiscal 1999, primarily due
to the faster growth of the transit advertising business, where costs,
especially occupancy costs, are higher than in the outdoor advertising business.
<PAGE>
General and administrative expenses increased $858,000, or 59.0%, to $2.3
million for the six months ended May 31, 1999 from $1.5 million for the same
period in fiscal 1998. The increase resulted primarily from the increased costs
of administering new transit districts, including districts under contract with
P & C. General and administrative expenses, as a percentage of gross revenues,
decreased to 13.3% for the six months ended May 31, 1999 from 15.9% for the same
period in fiscal 1998.
During the six months ended May 31, 1999, we recognized a one-time pre-tax
gain of $886,000 associated with our contract settlement with Tri-Met. (See Note
2 to our consolidated financial statements.)
In anticipation of the termination of our transit district agreement,
Tri-Met solicited proposals for the operation of the Portland transit district
by means of a competitive bidding process. We were not awarded the right to
continue to operate in Portland in that bidding process. The results of that
initial process were contested and Tri-Met requested submission of new
proposals. We submitted a revised bid to Tri-Met in response. Tri-Met is in the
process of selecting the new operator under the contract to be awarded.
Start-up costs increased to $296,000 for the six months ended May 31, 1999
from $44,000 for the same period in fiscal 1998, primarily due to our increased
response to requests for proposals for transit district contracts. Start-up
costs include expenses incurred in new markets prior to the time the Company
begins its sales operations, as well as costs incurred in competing for transit
district contracts. These costs vary depending on the number and size of transit
districts that become available for proposal during the period and our success
in obtaining new contracts.
Depreciation and amortization expenses increased $369,000, or 104.4%, to
$723,000 for the six months ended May 31, 1999 from $354,000 for the same period
in fiscal 1998, primarily due to the amortization of goodwill associated with
the P & C acquisition as well as our investments in equipment in new markets and
our upgrading of computer capabilities in our existing markets. We are
amortizing goodwill of $7.8 million from the P & C acquisition over 15 years
using the straight-line method of amortization.
Due to the above factors, operating income increased $745,000, or 59.9%, to
$2.0 million for the six months ended May 31, 1999 from $1.2 million for the
same period in fiscal 1998.
Interest expense increased $231,000, or 69.6%, to $562,000 for the six
months ended May 31, 1999 from $331,000 for the same period in fiscal 1998,
primarily due to the indebtedness incurred in connection with the acquisition of
P & C.
Provision for income taxes increased $222,000, or 66.4%, to $557,000 for
the six months ended May 31, 1999 from $335,000 for the same period in fiscal
1998. The increase in the provision for income taxes is greater, in percentage
terms, than the increase in income before income taxes due to increased
operations in higher tax rate jurisdictions, including Canada.
As a result of the foregoing factors, net income increased $325,000, or
59.5%, to $871,000 for the six months ended May 31, 1999 from $546,000 for the
same period in fiscal 1998.
Comparison of the Three Months Ended May 31, 1999 and 1998
Gross revenues increased $5.0 million, or 100.6%, to $10.0 million for the
three months ended May 31, 1999 from $5.0 million for the same period in fiscal
1998. This increase was principally due to transit advertising revenues
associated with the operations of P & C, as well as the addition of new
districts, including British Columbia and Austin, Texas. Transit revenues
increased $5.0 million, or 139.2%, to $8.5 million for the three months ended
May 31, 1999 from $3.6 million for the same period in fiscal 1998. Outdoor
<PAGE>
advertising revenues increased to $1.5 million for the three months ended May
31, 1999 from $1.4 million for the same period in fiscal 1998. Agency
commissions increased $583,000, or 129.9%, to $1.0 million for the three months
ended May 31, 1999 from $449,000 for the same period in fiscal 1998. As a
percentage of gross revenues, agency commission increased to 10.3% for the three
months ended May 31, 1999 from 9.0% for the same period in fiscal 1998. The
increase in agency discounts, in both dollar amounts and as a percentage of
gross revenues, is primarily due to the large proportion of agency business in
our new markets. As a result of the foregoing reasons, net revenues increased
$4.4 million, or 97.6%, to $9.0 million for the three months ended May 31, 1999
from $4.5 million for the same period in fiscal 1998.
Direct advertising expenses increased $3.5 million, or 127.0%, to $6.3
million for the three months ended May 31, 1999 from $2.8 million for the same
period in fiscal 1998. This increase was primarily the result of activities
required to support an increased level of business. Direct advertising expenses
increased, as a percentage of gross revenues, to 62.8% for the three months
ended May 31, 1998 from 55.4% for the same period in fiscal 1999, primarily due
to the faster growth of the transit advertising business, where costs,
especially occupancy costs, are higher than in the outdoor advertising business.
General and administrative expenses increased $386,000, or 50.4%, to $1.2
million for the three months ended May 31, 1999 from $765,000 for the same
period in fiscal 1998. The increase resulted primarily from the increased costs
of administering new transit districts, including districts under contract with
P & C. General and administrative expenses, as a percentage of gross revenues,
decreased to 11.5% for the three months ended May 31, 1999 from 15.3% for the
same period in fiscal 1998.
Start-up costs increased to $190,000 for the three months ended May 31,
1999 from $25,000 for the same period in fiscal 1998; primarily due to our
increased response to requests for proposals for transit district contracts.
Start-up costs include expenses incurred in new markets prior to the time the
Company begins its sales operations, as well as costs incurred in competing for
transit district contracts. These costs vary depending on the number and size of
transit districts that become available for proposal during the period and our
success in obtaining new contracts.
Depreciation and amortization expenses increased $191,000, or 108.3%, to
$367,000 for the three months ended May 31, 1999 from $176,000 for the same
period in fiscal 1998, primarily due to the amortization of goodwill associated
with the P & C acquisition as well as our investments in equipment in new
markets and our upgrading of computer capabilities in our existing markets. We
are amortizing goodwill of $7.8 million from the P & C acquisition over 15 years
using the straight-line method of amortization.
Due to the above factors, operating income increased $179,000, or 22.2%, to
$985,000 for the three months ended May 31, 1999 from $806,000 for the same
period in fiscal 1998.
Interest expense increased $119,000, or 72.3%, to $284,000 for the three
months ended May 31, 1999 from $165,000 for the same period in fiscal 1998,
primarily due to the indebtedness incurred in connection with the acquisition of
P & C.
Provision for income taxes increased $33,000, or 14.2%, to $266,000 for the
three months ended May 31, 1999 from $233,000 for the same period in fiscal
1998.
As a result of the foregoing factors, net income increased $55,000, or
14.4%, to $435,000 for the three months ended May 31, 1999 from $380,000 for the
same period in fiscal 1998.
<PAGE>
Liquidity and Capital Resources
We have historically satisfied our working capital requirements with cash
from operations and revolving credit borrowings. Our working capital at May 31,
1999 and November 30, 1998 was $261,000 and $1.0 million, respectively. The
decrease in working capital is primarily the result of capital expenditures and
payments on long-term debt, which were funded from borrowings on our line of
credit.
Net cash used in operating activities was $159,000 during the six months
ended May 31, 1999 compared to net cash provided by operating activities of
$320,000 during the same period in fiscal 1998. The decrease from the first six
months of fiscal 1998 to the first six months of fiscal 1999 was primarily due
to reductions in liabilities for transit district fees and income taxes, which
were partially offset by increases in accounts payable and deferred revenue.
Net cash used in investing activities was $832,000 and $603,000 during the
six months ended May 31, 1999 and 1998, respectively. These expenditures were
principally related to the cost of building outdoor advertising displays,
upgrading our computer capabilities and capital expenditures related to opening
new offices.
Net cash provided by financing activities was $745,000 and $283,000 during
the six months ended May 31, 1999 and 1998, respectively, which was primarily
the result of borrowings under the our operating line of credit offset by
payments of long-term debt. As of May 31, 1999, we had borrowings on this line
of credit of $2.8 million and available borrowing capacity, based on
collateralized accounts, of $1.2 million.
We expect to pursue a policy of continued growth through obtaining new
transit district agreements, acquiring out-of-home advertising companies or
assets and constructing new outdoor advertising displays. We intend to finance
our future expansion activities using a combination of internal and external
sources. We believe that internally generated funds and funds available for
borrowing under our bank credit facilities will be sufficient to satisfy all
debt service obligations and to finance our existing operations, including
anticipated capital expenditures, but excluding possible acquisitions, for the
next twelve months. We may require additional debt or equity financing in the
event of possible future acquisitions, if any, or if we obtain significant new
transit advertising agreements.
In May 1999, we filed a registration statement with the Securities and
Exchange Commission to register for sale to the public 1,750,000 shares of our
common stock (assuming no exercise of the underwriters' overallotment option),
including 1,000,000 shares to be offered by us. The proposed offering price for
the shares has not yet been determined. If completed, we intend to use the
proceeds from the sale received by us to repay bank borrowings, including
borrowings used to finance the acquisition of P & C. There can be no assurance
that the offering will be completed.
Seasonality
Obie Media's revenues and operating results historically have fluctuated by
season. Typically, our results of operations are strongest in the fourth quarter
and weakest in the first quarter of our fiscal year ending November 30. Our
transit advertising operations are more seasonal than our outdoor advertising
operations because our outdoor advertising display space, unlike our transit
advertising display space, is and has been sold nearly exclusively by means of
12-month contracts. We believe that the seasonality of our revenues and
operating results will increase as our transit advertising operations continue
to expand more rapidly than our 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 we have taken to implement our growth
strategy, have contributed to fluctuations in our periodic operating results.
These fluctuations likely will continue. Accordingly, our results of operations
in any period may not be indicative of the results to be expected for any future
period.
<PAGE>
Market Risk
We have not entered into derivative financial instruments. We may be
exposed to future interest rate changes on our debt. We do not believe that a
hypothetical 10% change in interest rates would have a material effect on
our cash flows.
Year 2000 Compliance
The Year 2000 problem is the result of the inability of some computers and
computer software programs to accurately recognize, for dates after 1999, dates
which are often expressed as a two-digit number. The inability to accurately
recognize date information could adversely affect computer operations and
calculations or cause computer systems and computer-dependent mechanical systems
not to operate at all.
We are in various stages of assessing our internal technical and
non-technical systems to ascertain whether they are Year 2000 compliant. After
conducting certain tests, we have identified one information processing system
that is not Year 2000 compliant and have determined that the cost of replacing
or updating the system should not exceed $25,000. We believe that our
information processing systems used in financial reporting and record-keeping,
and the majority of our incidental software systems, are Year 2000 compliant or
can be made compliant on a timely basis without material cost. We are in the
process of phasing out all of our personal computer workstations that are not
Year 2000 compliant. We do not believe that a material number of workstations
will need to be replaced. We have only generally assessed our other
non-technical systems, including copiers and facsimile machines, in order to
identify systems that are not Year 2000 compliant.
We have engaged the services of a full-time information processing manager
to, among other duties, assist in identifying any Year 2000 issues that may
arise in our technical and non-technical systems and implement any necessary
modifications. We intend to be Year 2000 compliant by November 30, 1999.
We have only generally assessed our relationships with third parties whose
inability to achieve timely Year 2000 compliance could have a material adverse
effect on our financial condition or results of operations. These third parties
are primarily transit districts, advertising agencies, vendors, banks, utilities
and freight companies whose failure to achieve timely Year 2000 compliance could
delay customer orders for our services, delay receipt of payments by customers
for services rendered and disrupt other aspects of our operations. We expect to
continue to evaluate Year 2000 issues with regard to our material relationships
with third parties through 1999. Certain of such third parties are subject to
stringent regulations which mandate that they achieve timely Year 2000
compliance. We do not believe that the commodities and services upon which we
rely are of a kind or nature which is particularly sensitive to Year 2000
issues. In addition, we believe that our diversified customer and supplier base
should prevent one or a few of our vendors' or customers' failure to be Year
2000 compliant from having a material adverse effect on our financial condition
or results of operations.
We have yet to determine the total estimated cost of our Year 2000
compliance program. Expenditures through May 31, 1999 are immaterial. We do not
expect that Year 2000 compliance will have a material adverse effect on us. We
believe that a reasonably likely worst case scenario as to the effect on us of
the Year 2000 compliance issue is that several of our large customers fail to
become Year 2000 compliant, thus delaying their advertising orders and reducing
our revenues.
We have not developed a contingency plan in the event we or any of the
third parties with which we have a material relationship fail to achieve timely
Year 2000 compliance. We may develop a Year 2000 contingency plan depending on
the results of our internal and external assessment of Year 2000 issues. We will
continue to update our assessment of our Year 2000 readiness as we receive
updated information from our Year 2000 compliance program.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The former operator of transit advertising displays for the Bi-State
Development Agency of the Missouri-Illinois Metropolitan District ("Bi-State")
in metropolitan St. Louis (including St. Clair County, Illinois), Heard
Communications, Inc., doing business as Gateway Outdoor Advertising ("Gateway"),
is contesting both judicially and administratively Bi-State's award of the
transit advertising agreement for St. Louis to us. We began operating under such
agreement in July 1999.
In the judicial proceeding before the United States District Court for
the Eastern District of Missouri commenced June 30, 1999, Gateway seeks a
declaratory judgment and an injunction prohibiting Bi-State from performing
under the contract. We have intervened in the proceeding as a defendant.
Gateway's challenge is primarily based on its claim that its final bid documents
relating to the contract were mishandled after being sent to Bi-State in late
April 1999. The court denied a motion by Gateway for a temporary restraining
order which would have delayed the award of the contract to us.
In the administrative proceeding before Bi-State commenced July 2,
1999, Gateway alleges that its bid guaranteed greater minimum revenue to
Bi-State over the term of the St. Louis contract than did our bid and protests
Bi-State's award of the contract to us. In each of the above actions, among
other remedies, Gateway seeks to have our contract with Bi-State terminated and
bidding for the St. Louis contract reopened. These actions are in preliminary
stages. We intend to vigorously defend against termination of our St. Louis
contract.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27)Financial Data Schedule*
(b) No reports on Form 8-K were filed by the Company during the six months ended
May 31, 1999.
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* Incorporated by reference to Amendement No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-79367) filed July 13, 1999.
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 July 15, 1999 By: /s/ James W. Callahan
James W. Callahan
Chief Financial Officer
Date July 15, 1999 By: /s/ Michael E. Hubbard
Michael E. Hubbard
Corporate Controller
