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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER
SEPTEMBER 30, 1998 333-59137
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TRI-STATE OUTDOOR MEDIA GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
KANSAS 48-1061763
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3416 Highway 41 South
Tifton, GA 31794
(Address of Principal Executive Offices) (Zip Code)
800-732-8261
(Registrant's telephone number, including area code)
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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 / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date. As of September 30, 1998,
there were issued and outstanding 200 shares of the registrant's Common Stock,
par value $10.00 per share.
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Interim Financial Statements
Balance Sheets at September 30,
1998 and December 31,1997(unaudited) ............. 1
Statements of Operations for the
Three and the Nine months ended
September 30, 1998 and 1997(unaudited) ........... 2
Statements of Cash Flows for the Nine months
ended September 30, 1998 and 1997(unaudited)...... 3
Notes to the Interim Financial Statements
(unaudited)....................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................. 13
Item 2. Changes in Securities and Use of Proceeds......... 13
Item 3. Defaults upon Senior Securities................... 13
Item 4. Submission of Matters to a Vote of Security
Holders........................................... 13
Item 5. Other Information................................. 13
Item 6. Exhibits and Reports on Form 8-K.................. 14
SIGNATURES................................................ 15
(i)
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRI-STATE OUTDOOR MEDIA GROUP, INC.
BALANCE SHEETS
(in thousands, except share or per share amounts)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash ........................................................................... $ 1,339 $ 132
Restricted cash ................................................................ 10,629 --
Accounts receivable, net of allowance for doubtful accounts 1998 $316 ;1997 $186 2,484 1,429
Supplies ....................................................................... 465 316
Prepaid production costs ....................................................... 612 432
Prepaid site leases ............................................................ 1,380 1,012
Prepaid commissions, current portion ........................................... 422 193
Other current asset ............................................................ 319 211
--------- ---------
Total current assets ..................................................... 17,650 3,725
--------- ---------
Property and Equipment, net ....................................................... 60,254 33,083
--------- ---------
Other Assets
Intangible assets, net ......................................................... 44,747 14,421
Prepaid commissions, long-term portion ......................................... 273 242
Deferred taxes ................................................................. 6,254 2,533
Other .......................................................................... 143 102
--------- ---------
51,417 17,298
--------- ---------
$ 129,321 $ 54,106
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
Current Liabilities
Current portion of long-term debt .............................................. $ 7,000 $ --
Accounts payable ............................................................... 1,294 246
Accrued interest ............................................................... 4,064 504
Accrued expenses ............................................................... 100 18
Deferred revenue ............................................................... 387 99
Due to SGH Holdings, Inc ....................................................... 125 125
--------- ---------
Total current liabilities ................................................ 12,970 992
Long-Term Debt
Long-term debt, net of current portion (Note 2) ................................ 110,721 57,998
--------- ---------
Total liabilities ........................................................ 123,691 58,990
--------- ---------
Commitments and Contingencies
Stockholder's Equity (Deficiency)
Common stock, par value, $10 per share;
authorized 10,000 shares; issued and outstanding, 200 shares ............... 2 2
Paid-in capital ................................................................ 16,165 25
Accumulated deficit ............................................................ (10,537) (4,911)
--------- ---------
Total Stockholder's Equity (Deficiency) 5,630 (4,884)
--------- ---------
$ 129,321 $ 54,106
========= =========
</TABLE>
See notes to financial statements.
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TRI-STATE OUTDOOR MEDIA GROUP, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share or per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues ................................................. $ 5,280 $ 3,669 $ 14,693 $ 8,084
-------- -------- -------- --------
Operating expenses:
Direct operating expenses ................................ 2,063 1,268 5,242 2,587
General and administrative ............................... 876 708 2,342 1,704
Depreciation and amortization ............................ 2,091 612 6,118 1,836
-------- -------- -------- --------
5,030 2,588 13,702 6,127
-------- -------- -------- --------
Operating income ................................. 250 1,081 991 1,957
-------- -------- -------- --------
Other income (expense):
Interest expense ......................................... (2,883) (1,393) (7,081) (2,525)
Other income (expense) ................................... 133 2 225 (49)
-------- -------- -------- --------
Total other income (expense) ..................... (2,750) (1,391) (6,856) (2,574)
-------- -------- -------- --------
Loss before income tax benefit and extraordinary
loss on early extinquishment of debt ............. (2,500) (310) (5,865) (617)
Income tax benefit ........................................... 981 117 2,328 246
-------- -------- -------- --------
Loss before extraordinary loss on early
extinguishment of debt ........................... (1,519) (193) (3,537) (371)
Extraordinary loss on early extinguishment of
debt (net of income taxes of $1,393) ............. -- -- (2,089) --
-------- -------- -------- --------
Net loss .................................... $ (1,519) $ (193) $ (5,626) $ (371)
======== ======== ======== ========
Basic loss per common share:
Loss before extraordinary loss on early
extinguishment of debt ........................... $ (7,595) $ (965) $(17,685) $ (1,855)
Extraordinary loss on early extinguishment of debt -- -- (10,445) --
-------- -------- -------- --------
Net loss .................................... $ (7,595) $ (965) $(28,130) $ (1,855)
======== ======== ======== ========
Weighted common shares outstanding ........................... 200 200 200 200
======== ======== ======== ========
</TABLE>
See notes to financial statements.
2
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TRI-STATE OUTDOOR MEDIA GROUP, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ........................................................ $ (5,626) $ (371)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ................................ 6,118 1,836
Deferred income tax benefit .................................. (3,721) (246)
Loss on early extinguishment of debt ......................... 2,089 --
Accrued interest added to principal .......................... 834 904
Accrued interest on pledged securities ....................... (145) --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable ........................................ (1,027) (525)
Supplies and prepaid production costs ...................... (329) (49)
Prepaid site leases ........................................ (256) (768)
Prepaid commissions ........................................ (208) (142)
Other assets ............................................... (206) (203)
Increase (decrease) in:
Accounts payable ........................................... 1,241 192
Accrued interest ........................................... 3,560 552
Accrued expenses ........................................... 82 128
Deferred revenue ........................................... (6) 31
--------- ---------
Net cash provided by operating activities .............. 2,400 1,339
--------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment .............................. (6,754) (2,265)
Acquisitions .................................................... (53,653) (34,306)
Purchase of securities held for investment ...................... (7,965) --
Proceeds from securities held for investment .................... 7,965 --
Purchase of pledged securities .................................. (10,484) --
--------- ---------
Net cash used in investing activities .................. (70,891) (36,571)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of senior subordinated notes ............. 100,000 --
Deferred financing costs ........................................ (6,058) (1,637)
Borrowings under long-term debt agreement ....................... 37,793 35,050
Proceeds from revolver borrowings ............................... 2,000 7,511
Payments on revolver borrowings ................................. (4,950) (5,888)
Principal payments on long-term debt ............................ (59,087) --
Increase in due to SGH Holdings, Inc ............................ -- 125
--------- ---------
Net cash provided by financing activities ............. 69,698 35,161
--------- ---------
Net increase (decrease) in cash ........................ 1,207 (71)
CASH
Beginning ....................................................... 132 133
--------- ---------
Ending .......................................................... $ 1,339 $ 62
========= =========
Supplemental cash flow information:
Cash payments for interest ...................................... $ 3,520 $ 1,973
========= =========
Supplemental schedule of non-cash investing and financing activities:
Conversion of subordinated debentures to preferred stock ........ $ 16,140 $ --
========= =========
</TABLE>
See notes to financial statements.
3
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Notes to Interim Financial Statements
(Unaudited)
NOTE 1
BASIS OF REPRESENTATION
The accompanying unaudited financial statements of Tri-State Outdoor Media
Group, Inc., (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.
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 September 30, 1998 are not necessarily indicative of the
results to be expected for the year ending December 31, 1998. Although the
Company believes that the disclosures are adequate to make the information
presented not misleading, these financial statements should be read in
conjunction with the financial statements for the fiscal year ended December 31,
1997 and notes thereto included in the Company's registration statement on Form
S-4 (as defined herein).
NOTE 2
FINANCINGS
On May 20, 1998, the Company completed the private offering (the "Offering") of
$100 million aggregate principal amount of 11% Senior Notes (the "Senior Notes")
pursuant to an indenture (the"Indenture") between the Company and IBJ Schroder
Bank & Trust Company, as trustee (the "Trustee"). The Senior Notes were
originally issued and sold by the Company in a transaction that was exempt from
registration under the Securities Act of 1933, as amended. The Senior Notes
mature on May 15, 2008 and are senior unsecured obligations of the Company
ranking pari passu with all existing and future unsubordinated debt of the
Company and will be effectively subordinated to all of the Company's secured
debt, to the extent of the assets securing such debt. The Company incurred
approximately $4.7 million of costs associated with the issuance of the Senior
Notes.
The Senior Notes bear interest at 11% per annum. Interest is payable
semi-annually on each May 15 and November 15, commencing on November 15, 1998,
to holders of record on the close of business on the immediately preceding May 1
and November 1. The Company was required to purchase approximately $10.4 million
of U.S. government securities and pledge them as security for the first two
interest payments on the Senior Notes.
Obligations under the Senior Notes are not secured.
The Senior Notes may be redeemed at the option of the Company, in whole or in
part, at any time and from time to time on or after May 15, 2003 at the
redemption prices declining ratably from
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105.5% of the principal amount on May 15, 2003 to 100.0% on and after May 15,
2006, plus in each case accrued interest to the applicable redemption date.
The Indenture contains certain covenants, including, but not limited to,
covenants and limitations of the following: (i) the incurrence of additional
debt; (ii) restricted payments; (iii)asset dispositions; (iv) transactions with
affiliates; (v) dividend and other payment restrictions affecting subsidiaries;
(vi) liens; and (vii) the merger, consolidation or sale of assets of the
Company. In addition, subsidiaries of the Company may, in the future, be
required to guarantee payment of the Senior Notes.
Upon a change of control of the Company, each holder of Senior Notes may require
the Company to repurchase all or a portion of such holder's Senior Notes at a
purchase price equal to 101% of the principal amount thereof plus accrued
interest, to the date of purchase.
The Company acquired substantially all of the assets of Tri-State Systems , Inc.
("TSS") on June 12, 1997. In order to finance this acquisition, the Company
entered into a $45.0 million amended and restated credit facility (the "Original
Credit Facility") with The First National Bank of Chicago ("First Chicago"), as
agent for a syndicate of lenders. On February 27, 1998, the Company amended and
restated the Original Credit Facility in order to increase the credit thereunder
to $62.5 million (the "Senior Credit Facility"). In addition, at that time, SGH
Holdings, Inc. ("Holdings"), the parent corporation of the Company, sold $10.0
million of bridge notes (the "Bridge Notes") to affiliates of the Initial
Purchasers in the Offering, Prudential Securities Incorporated and First Chicago
Capital Markets, Inc. Holdings loaned the proceeds of this sale to the Company.
The proceeds of the Bridge Notes, together with a portion of borrowings under
the Senior Credit Facility, were used to fund the Unisign acquisition. The
Company used a portion of the net proceeds from the Offering to repay all
outstanding borrowings under the Senior Credit Facility, which was thereupon
terminated, and to repay in full the loan from Holdings, which, in turn, repaid
the Bridge Notes. The Company also used a portion of the net proceeds from the
sale of the Senior Notes to repay all outstanding borrowings under the Company's
Senior Credit Facility, which was thereupon terminated.
As a result of the early extinguishment of the Senior Credit Facility, the
Company was required to record an extraordinary loss of $3.5 million ($2.1
million net of income tax effect) including the estimated fair value of the
interest rate swap agreements because they no longer met the criteria to be
accounted for as a hedge. The Company recorded a liability of $400,000 in May
1998 related to this. In September 1998, the Company settled the interest rate
swap agreements for $658,000.
In May 1998, the Company's sole shareholder, Holdings, converted approximately
$16.1 million in subordinated debt to paid-in capital of the Company.
In conjunction with the Unisign, Inc. ("Unisign") acquisition, (see note 3), the
Company borrowed $10 million from Holdings. This borrowing was subordinate to
the Company's senior debt and bore interest at the London interbank offered Rate
("LIBOR") plus 4.75% (10.4% at March 2, 1998). The borrowings were due on demand
and were repaid with the proceeds from the sale of the Senior Notes.
5
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The Company entered in a credit agreement with First Chicago (the "Credit
Facility") on the close of business on September 18, 1998 which was used to
finance the acquisition of substantially all of the outdoor advertising assets
of Western Outdoor Advertising Co. ("Western"). The Credit Facility consists of
a Facility A Promissory Note for $14,000,000, Facility B standby Letter of
Credit for $1,250,000 in connection with the Unisign acquisition, and a Facility
C Revolving Loan for $4,000,000 for working capital and general corporate
purposes. The Promissory Note matures and the Letter of Credit and Revolver
terminate on September 30, 2000.
The Credit Facility enables the Company to borrow funds at a rate equal to the
alternate base rate, as defined by the Credit Facility, calculated on the number
of days elapsed on the basis of a 360-day year. The Company also has the option
of paying interest on loan advances at the Eurodollar Rate, as defined. On
September 30, 1998, the effective interest rate was 10.5% for Facility A and
Facility C.
The Credit Facility contains certain affirmative covenants that must be complied
with on a continuing basis. In addition, the 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 Credit
Facility. The Credit Facility also requires the Company to maintain certain
financial ratios.
The Company was required to pay a commitment fee of $385,000 and an additional
$288,750 is required if Facility A has not been repaid in full and Facility B
has not been fully cash collateralized or repaid in full by March 31, 1999. In
addition, Holdings will be required to issue warrants in March 1999 to purchase
5% of its common stock at $.001 per share which warrants will be exercisable if
any loans under Facility A, B and C are not repaid in full by September 30, 1999
and the letter of credit evidenced by Facility B is not fully cash
collateralized or terminated by September 30, 1999.
The borrowings under the Credit Facility are collateralized by substantially all
of the Company's assets, including all leases, permits and other intangible
assets, and other collateral, as well as by a pledge from Holdings of its stock
in the Company. In addition, the Company must maintain key man life insurance on
the president of the Company in the aggregate amount of $2,500,000. The
insurance policies are assigned to First Chicago.
The Company has the right to prepay the borrowings in whole or in part, without
premium or penalty, as stipulated in the Credit Facility.
The Company filed a Registration Statement on Form S-4, as amended (the "S-4"),
in connection with an offer to exchange the Senior Notes for 11% Senior Notes
due 2008 which were registered under the Securities Act pursuant to the S-4.The
S-4 was declared effective on November 5, 1998.
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NOTE 3.
ACQUISITIONS
On June 12, 1997, the Company acquired substantially all of the assets of TSS
for a total acquisition cost of $32.0 million.
Effective March 2, 1998, the Company acquired substantially all the outdoor
advertising assets of Unisign for a total acquisition cost of approximately
$22.0 million, including the assumption of certain capital leases aggregating
approximately $727,000. Cash consideration paid was $21.1 million. As a result
of this acquisition, the Company acquired display faces in Kentucky, West
Virginia and Ohio. This acquisition was a new market acquisition.
The Company entered into a purchase commitment with Unisign on March 2, 1998 for
the construction of outdoor advertising structures for $1,250,000. At that time,
the Company also provided a standby letter of credit agreement in the amount of
$1,250,000 with Unisign expiring April 6, 2000. The Company does not believe it
is practical to estimate the fair value of the letter of credit and does not
believe exposure to loss is likely.
The Company purchased on July 14, 1998 certain assets of an outdoor advertising
company with approximately 244 advertising displays located in Georgia. The
purchase price was $3.0 million.
On July 23, 1998, the Company purchased certain assets of an outdoor advertising
company with approximately 50 advertising displays located in Georgia. The
purchase price was $1.2 million.
On September 18, 1998, the Company acquired substantially all of the outdoor
advertising assets of Western for a total acquisition cost of approximately
$26.8 million. As a result of this acquisition, the Company acquired 2439
display faces in 19 states concentrated in Iowa, Texas, Nebraska, Missouri,
Oklahoma and Kansas. The Company would classify this acquisition as a fill-in
acquisition. The company had existing operations in 11 of the 19 states served
by Western. The Company entered into the Credit Facility and borrowed $16
million to finance this acquisition.
The Company has entered into various other purchase agreements since year-end
aggregating $1.1 million.
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The assets acquired and liabilities assumed subsequent to year end and related
acquisition costs incurred in conjunction with this acquisition were as follows
(in thousands):
<TABLE>
<CAPTION>
UNISIGN WESTERN OTHERS TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current assets .................................. $ 220 $ 360 $ 38 $ 618
Property and equipment and other long term assets 9,105 11,657 2,639 23,401
Goodwill ........................................ 10,185 12,194 2,210 24,589
Other intangible assets ......................... 2,490 2,539 399 5,428
Assumed liabilities ............................. (727) (163) (9) (899)
Acquisition costs ............................... (200) (189) (177) (566)
-------- -------- -------- --------
$ 21,073 $ 26,398 $ 5,100 $ 52,571
======== ======== ======== ========
</TABLE>
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
"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 "Risk Factors" discussion in the Company's S-4. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues. Net revenues increased 43.9% to $5.3 million for the three months
ended September 30, 1998 from $3.7 million for the three months ended September
30, 1997. Most of this increase was the result of the acquisition of Unisign,
completed in March 1998. This and other acquisitions accounted for approximately
$1.3 million of the period-to-period revenue growth.
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Direct operating expenses. Direct operating expenses (which include sales, lease
and production expense) increased to $2.1 million for the third quarter of 1998
from $1.3 million for the comparable period in 1997. Most of this increase was
the result of the acquisition of Unisign, completed in March 1998. Sales expense
increased as a percentage of net revenues from 8.4% in the third quarter of 1997
to 9.0% in 1998. Lease expense increased as a percentage of net revenues from
15.0% in the third quarter of 1997 to 16.7% in 1998, due to higher lease cost
assumed in the TSS acquisition, attributed to prime interstate highway
locations. Production expense increased as a percentage of net revenues from
11.2% in the third quarter of 1997 to 13.3% in 1998, due to production costs
associated with the shorter-term contracts assumed in the TSS and Unisign
acquisitions.
General and administrative expenses. General and administrative expenses
increased by 23.7% to $876,000 for the quarter ended September 30, 1998 from
$708,000 in 1997, but decreased as a percentage of net revenues to 16.6% from
19.3%. The decrease in general and administrative expense as a percentage of net
revenues was due to increased operating leverage provided by higher net revenues
from the Unisign and TSS acquisitions over relatively fixed general and
administrative expenses. The Company was able to reduce Unisign's and TSS's
general and administrative expenses through reductions in executive
compensation, and in management, art, and accounting personnel.
Depreciation and amortization expense. Depreciation and amortization expense
increased to $2.1 million for the three month period ended September 30, 1998
from $612,000 in 1997 due primarily to the Unisign and TSS acquisitions.
Interest expense. Interest expense increased to $2.9 million for the three month
period ended 1998 from $1.4 million for the comparable period in 1997. This
increase was primarily the result of additional debt incurred in connection with
the financing of the Unisign and TSS acquisitions, as well as the issuance of
the Senior Notes in May 1998.
Income taxes. The Company recorded a $981,000 income tax benefit for the three
months ended September 30, 1998 due to losses resulting from the increase in
interest expense and depreciation and amortization.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenues. Net revenues increased 81.8% to $14.7 million for the nine months
ended September 30, 1998 from $8.1 million for the nine months ended September
30, 1997. Most of this increase was the result of the acquisition of Unisign,
completed in March 1998, and TSS, completed in June 1997. These and other
acquisitions accounted for approximately $5.8 million of the period-to-period
revenue growth.
Direct operating expenses. Direct operating expenses (which include sales, lease
and production expense) increased to $5.2 million for the nine month period
ending September 30, 1998 from $2.6
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million for the comparable period in 1997. Most of this increase was the result
of the acquisition of Unisign, completed in March 1998, and TSS, completed in
June 1997. Sales expense decreased as a percentage of net sales from 8.4% in the
nine month period ending September 30, 1997 to 8.1% in 1998, due to increased
operating leverage in the sales force. Lease expense increased as a percentage
of net revenues from 13.9% in the nine month period ending September 30, 1997 to
15.5% in 1998, due to higher lease cost assumed in the TSS acquisition,
reflecting the higher costs of TSS's interstate highway locations. Production
expense increased as a percentage of net revenues from 9.8% in the nine month
period ending September 30, 1997 to 12.1% in 1998, due to production costs
associated with the shorter-term contracts assumed in the TSS and Unisign
acquisitions.
General and administrative expenses. General and administrative expenses
increased by 37.4% to $2.3 million for the nine month period ended September 30,
1998 from $1.7 million in 1997, but decreased as a percentage of net revenues to
15.9% from 21.1%, respectively. The decrease in general and administrative
expense as a percentage of net revenues was due to increased operating leverage
provided by higher net revenues from the Unisign and TSS acquisitions over
relatively fixed general and administrative expenses. In addition, the Company
was able to reduce Unisign's and TSS's general and administrative expenses
through a reduction of executive compensation, and the elimination of the
general manager and art and accounting personnel.
Depreciation and amortization expense. Depreciation and amortization expense
increased to $6.1 million for the nine month period ended September 30, 1998
from $1.8 million in 1997 due primarily to the Unisign and TSS acquisitions.
Interest expense. Interest expense increased to $7.1 million for the nine month
period ended September 30,1998 from $2.5 million for the comparable period in
1997. This increase was primarily the result of additional debt incurred in
connection with the financing of the Unisign and TSS acquisitions, as well as
the issuance of the Senior Notes in May 1998.
Income Taxes. The Company recorded a $2.3 million income tax benefit for the
nine month period ended September 30, 1998 due to losses resulting from the
increase in interest expense, depreciation, and amortization.
Extraordinary Loss. Effective May 20, 1998, the proceeds from the Offering were
used, in part, for the early extinguishment of the outstanding debt related to
the Senior Credit Facility. Accordingly, the Company recorded an extraordinary
loss of $3.5 million related to the early retirement of debt ($2.1 million, net
of income taxes of $1.4 million). The extraordinary loss was comprised of
deferred financing fees of $3.1 million and a $400,000 unrealized loss resulting
from the early extinguishment of the interest rate swap agreements used to
change the fixed/variable interest rate mix of the debt portfolio to reduce the
Company's aggregate risk to movements in interest rates. The fair market value
to the swap agreements were not previously recognized in the financial
statements since they were accounted for as a hedge. With the extinguishment of
the debt, the swap agreements are no longer hedge transactions and therefore the
related unrealized loss can no longer be deferred.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied its cash requirements with cash from
operations, revolving credit borrowings and other long-term debt financing and
sales of assets. Its acquisitions have been financed primarily with borrowed
funds.
On May 20, 1998, the Company successfully completed the Offering. Net proceeds
to the Company, after underwriting discounts, from the Offering totaled $95.3
million.
The Company used a portion of the proceeds of the Offering to repay all
borrowings and accrued interest under the Senior Credit Facility, which totaled
$57.4 million, whereupon the Senior Credit Facility was terminated. The Company
used the proceeds of the Offering to repay the $10.0 million loan, plus $232,000
of accrued interest, from Holdings. Additionally, in conjunction with the
Offering, $16.1 million of subordinated intercompany promissory notes including
accrued interest of $3.2 million thereon due to Holdings were converted into
stockholder's equity.
On May 20, 1998, the Company put in place a $3.0 million credit facility used
principally to fund potential obligations on outstanding letters of credit that
expire May 20, 2000. The facility was terminated upon the consummation of the
Credit Facility.
Net cash provided by operating activities increased to $2.4 million for the
first nine months of 1998 from $1.3 million for the first nine months of 1997.
Net cash provided by operating activities reflects the Company's net loss
adjusted for non-cash items and net changes in working capital components. The
Company had working capital of $4.7 million as of September 30, 1998, compared
to working capital of $2.7 million as of December 31, 1997.
The Company entered into the Credit Facility on the close of business on
September 18,1998 which was used to finance the acquisition of Western. The
Credit Facility consists of a Facility A Promissory Note for $14,000,000,
Facility B standby Letter of Credit for $1,250,000 in connection with the
Unisign acquisition, and a Facility C Revolving Loan for $4,000,000 for working
capital and general corporate purposes. The Facility A Promissory Note matures
and the Facility B standby Letter of Credit and the Facility C Revolving Loan
terminates on September 30, 2000. As of September 30, 1998 the Company had
$2,000,000 available on the Facility C Revolving Loan.
The Credit Facility enables the Company to borrow funds at a rate equal to the
alternate base rate, as defined by the Credit Facility, calculated on the number
of days elapsed on the basis of a 360-day year. The Company also has the option
of paying interest on loan advances at the Eurodollar Rate, as defined in the
credit agreement. On September 30, 1998, the effective interest rate was 10.5%
for the Facility A and Facility C.
The Credit Facility contains certain affirmative covenants that must be complied
with on a continuing basis. In addition, the Credit Facility contains certain
restrictive covenants which, among other things, restrict the Company from
incurring additional debt and liens on assets, limits the
11
<PAGE> 14
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 Credit Facility. The Credit Facility also requires the Company
to maintain certain financial ratios.
The Company was required to pay a commitment fee of $385,000 and an additional
$288,750 is required if Facility A has not been repaid in full and Facility B
has not been fully cash-collateralized or repaid in full by March 31, 1999. In
addition, Holdings will be required to issue warrants in March 1999 to purchase
5% of its common stock at $.001 per share which warrants will be exercisable if
any loans under Facility A, B and C are not repaid in full by September 30, 1999
and the letter of credit evidenced by Facility B is not fully
cash-collateralized or terminated by September 30, 1999.
The borrowings under the Credit Facility are collateralized by substantially all
of the Company's assets, including all leases, permits and other intangible
assets, and other collateral, as well as by a pledge from Holdings of its stock
in the Company. In addition, the Company must maintain key man life insurance on
the president of the Company in the aggregate amount of $2,500,000. The
insurance policies are assigned to First Chicago. The Company has the right to
prepay the borrowings in whole or in part, without premium or penalty, as
stipulated in the Credit Facility.
On September 18, 1998, the Company acquired substantially all of the outdoor
advertising assets of Western with 2,439 display faces in 19 states concentrated
in Iowa, Texas, Nebraska, Missouri, Oklahoma and Kansas. The Company would
classify this acquisition as a fill-in acquisition. The Company had existing
operations in 11 of the 19 states served by Western. The total acquisition cost
was $26.8 million. The Company borrowed $16 million under the Credit Facility to
finance this acquisition.
The Company funded one year of cash interest expense under the Senior Notes with
the net proceeds of the Offering. Following the disbursement of all of the funds
in the escrow account in May 1999, a substantial portion of the Company's cash
flow will be devoted to interest payments on the Notes. See "Unaudited Pro Forma
Financial Statements" in the S-4.
The Company believes that its cash from operations, together with amounts
available for borrowing under the Credit Facility, will be sufficient to satisfy
its cash requirements, including anticipated capital expenditures, for at least
the next several years. However, in the event these cash sources are
insufficient to satisfy its cash requirements, including as a result of future
acquisitions, the Company may require additional debt or equity. There can be no
assurance that additional debt or equity financing will be available on terms
satisfactory to the Company, if at all, or that the Company will be able to
incur such additional debt under the terms of the Senior Notes.
12
<PAGE> 15
YEAR 2000 ISSUE
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 issue. Based on the
review of its computer systems, management does not believe there will be any
material impact to the Company's financial position or results of operations.
Based upon a preliminary review, the Company believes that the Year 2000 issue
will not have a material impact on the operations of any of its significant
suppliers.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The Company entered into the Credit Facility with First Chicago on the close of
business on September 18, 1998 which was used to finance the acquisition of
Western. The Credit Facility consists of a Facility A Promissory Note for
$14,000,000, Facility B standby Letter of Credit for $1,250,000 in connection
with the Unisign acquisition, and a Facility C Revolving Loan for $4,000,000 for
working capital and general corporate purposes. The Facility A Promissory Note
matures and the Facility B Letter of Credit and the Facility C Revolving Loan
terminates on September 30, 2000.
The Credit Facility enables the Company to borrow funds at a rate equal to the
alternate base rate, as defined by the Credit Facility, calculated on the number
of days elapsed on the basis of a 360-day year. The Company also has the option
of paying interest on loan advances at the Eurodollar Rate, as defined in the
credit agreement. On September 30, 1998, the effective interest rate was 10.5%
for Facility A and Facility C.
The Credit Facility contains certain affirmative covenants that must be
complied with on a continuing basis. In addition, the 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
13
<PAGE> 16
of assets, or issuance of common stock except as permitted by the Credit
Facility. The Credit Facility also requires the Company to maintain certain
financial ratios.
The Company was required to pay a commitment fee of $385,000 at closing
and an additional $288,750 is required if Facility A has not been repaid in full
and Facility B has not been fully cash- collateralized or repaid in full by
March 31, 1999. In addition, Holdings will be required to issue warrants in
March 1999 to purchase 5% of its common stock at $.001 per share warrants which
will be exercisable if any loans under Facility A, B and C are not repaid in
full by September 30, 1999 and the letter of credit evidenced by Facility B is
not fully cash-collateralized or terminated by September 30, 1999.
The borrowings under the Credit Facility are collateralized by
substantially all of the Company's assets, including all leases, permits and
other intangible assets, and other collateral, as well as by a pledge from
Holdings of its stock in the Company. In addition, the Company must maintain
keyman life insurance on the president of the Company in the aggregate amount of
$2,500,000. The insurance policies are assigned to First Chicago. The Company
has the right to prepay the borrowings in whole or in part, without premium or
penalty, as stipulated in the Credit Facility.
On September 18, 1998, the Company acquired substantially all of the
outdoor advertising assets of Western with 2,439 display faces in 19 states
concentrated in Iowa, Texas, Nebraska, Missouri, Oklahoma and Kansas. The
Company would classify this acquisition as a fill-in acquisition. The Company
had existing operations in 11 of the 19 states served by Western.
The total acquisition cost was $26.8 million.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A. Exhibits
27. Financial Data Schedule
B. No reports on Form 8K were filed for the quarter ended September 30,
1998.
14
<PAGE> 17
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.
Tri-State Outdoor Media Group, Inc.
November 23, 1998 /s/Sheldon G. Hurst
-------------------------------------
Sheldon G. Hurst
Chairman and Chief Executive Officer
November 23, 1998 /s/ William G. McLendon
-------------------------------------
William G. McLendon
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
15
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